Unable to persuade the provinces to share Fata and security-related expenditures with the federation, Finance Minister Miftah Ismail has adopted a new approach to raise federal revenues: through an abnormal increase in levies and cess that fall outside the ambit of the Divisible Pool.
Official figures for FY2019 show that the size of the Divisible Pool (DC) is budgeted to increase by 12.71 per cent against the targeted overall federal revenue hike of 17.88pc.
The levy revenues will receive a boost from an abnormal surge in Petroleum Levy and Gas Infrastructure Development Cess (GIDC) which will together fetch Rs400 billion, up by Rs225bn from an aggregate collection of Rs185bn in the ongoing year. Both are non-DC items.
A noted tax policy consultant with access and insight into government fiscal affairs, who would not like to be identified, told this scribe that the ‘abnormal increase’ in Petroleum Levy from existing Rs3-14 per litre (average of Rs8 per litre) to Rs30 per litre “will shift revenue from the divisible pool to the non-divisible pool.”
The officials maintain that the ‘FY2019 budget has been formulated in such a way that it adversely affects the share of the provinces: it increases levies/cess that does not form part of the Divisible Pool’
Going by his own calculation, he said additional revenue of Rs130bn from this levy estimated in the budget documents was under-stated at Rs130bn, and a realistic figure works out to Rs310bn.
Talking informally, provincial revenue officials argue that this amount will not be shared with the provinces although they are responsible for public health and for protecting the environment from injuries caused by carbon emission.
The officials maintain that the ‘FY2019 budget has been formulated in such a way that it adversely affects the share of the provinces: it increases levies/cess that does not form part of the Divisible Pool.’
Competing with the FY2019 budgeted levies are taxes (particularly where straight transfers are involved) with notable stagnant or declining yields.
While revenue from the budgeted GIDC for next year has been hiked, the collection of straight transfer items in the same sector will decline. The Natural Gas Development Surcharge will decrease from Rs23bn to Rs16bn whereas the royalty on natural gas will remain stagnant.
In case of straight transfers, the entire tax revenue proceed is transferred to the respective province from where it is mobilised after deduction of a collection fee by the Federal Board of Revenue.
It is also stated that the federal government has failed to levy a federal excise duty (FED) on crude petroleum oils as provided in the Constitution, depriving the provinces, especially Sindh and KP, of their due share.
In fact a five per cent FED levied on Crude Petroleum Oils, it is argued, would have been a much better option that would not have affected the consumer price of POL products as the FED is an adjustable input tax.
Sindh has been constantly pressing the Federal government to devolve items involving straight transfers and sales tax on goods which, given the province’s experience in collecting sales tax on services, can be significantly increased at the sub-national level without disturbing the 7th NFC formula for resource distribution.
It is time to adopt a fresh approach in the discourse at the National Finance Commission with an eye on how the size of the Divisible Pool can be enlarged thereby automatically increasing share of all stakeholders.
A big chunk of the increased revenue could be shared by the cash-starved federal government which has substantially diverted development spending to finance an ever increasing security and debt servicing.
After the elections the new provincial and federal governments may endeavour to break the enduring deadlock at the NFC and finalise the much delayed ninth NFC award. They may be pushed towards a consensus agreement by the rising tide of decentralisation which is unlikely to ebb during the course of electioneering.
Yet another provincial concern is over the adverse impact of federal tax measures on mobilisation of provincial revenues. For example, it is pointed out, that the restriction on acquisition of immovable property and vehicles will adversely affect the provincial receipts on account of stamp duty, capital value tax, etc.
Instead, the Income Tax Department should investigate the purchases of assets by non-filers (recognisable by payment of higher rate of withholding tax), records.
“The restriction would encourage people to transact such deals against the power of attorney and defeat the very purpose for which it is intended,” says the tax consultant, additionally the ban also violates the fundamental rights of citizens as enshrined in Article 23 of the Constitution.
Aware of the enormous challenge the province faces in collecting income tax from a largely undocumented agriculture economy, tax experts in the Sindh government are also concerned over uncontrolled expansion of the informal economy.
Devoid of equity, tax measures designed to bring the informal sector into the tax net have over time ended as ‘revenue spinners’ while documentation of the economy largely remains an elusive goal. The federal budget FY2019 has strengthened the existing trend.
There is a need for an effective coordination between the federation and among the provinces in shaping, as far as possible, such federal tax policies whose spillover do not adversely affect the growth in overall revenues from the national economy.
Published in Dawn, The Business and Finance Weekly, May 21st, 2018