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Notwithstanding a historic national agreement on the National Finance Commission Award 2009, that came into force on July 1, 2010, disputes have started to resurface between the federal government and the federating units on some of the ‘settled’ issues.
The federal government’s move to get provincial expenditures cut through persuasive-cum-voluntary constraints to produce cash surplus and cut consolidated fiscal deficit, has yielded little results so far. It has also been asking the provinces to step up revenue generation from agriculture, real estate and services with a similar outcome.
The convincing articulation from the federal government has been that the provinces should increase their self revenue generation, stagnating at seven per cent of their total revenues to meet their rising expenditure. They get 93 per cent resources from the federal divisible pool.
At the same time, however, the federal leadership has not been successful in bringing together provincial governments for a uniform strategy to tax effectively agriculture and real estate incomes.
In one of the major departures from previous NFC awards, the federal government conceded to a provincial demand to lower collection charges it deducts from provincial share(before transfer) of divisible pool of taxes from five to one per cent. As it turned out, according to complaints by the provinces, the federal government has started deducting higher collection charges in’ violation’ of the Award.
The issue cropped up again last month at the first meeting of the reconstituted NFC when provinces formally lodged a complaint against two per cent federal collection charges.
According to minutes of the meeting circulated to the participants, finance minister Sindh Syed Murad Ali Shah pointed out that only one per cent collection charges were to be deducted by the federation under the NFC Award from the gross divisible pool “but it has been reported that federal government is deducting two per cent from income tax.”
Federal Finance Secretary Dr Waqar Masood Khan explained that as per constitution, the income tax payable on the remunerations paid out of the federal consolidated fund is not part of the divisible pool taxes and hence additional one per cent income tax is being deducted on this account.
Likewise, finance secretaries of Punjab and Khyber Pakhtunkhwa also expressed reservations over the collection of general sales tax on services and complained about the slow transfers of provincial shares. They also complained that the NFC set charges at one per cent while the federal government was deducting one per cent collection charges from divisible pool and two per cent from straight transfers.
The federal finance secretary also told the NFC members that the FBR had collected Rs328.38 billion during first three months of the current fiscal year. After deducting non-divisible pool components and collection charges, the net divisible pool taxes were worked out at Rs314.42 billion that was distributed between the federation and amongst provinces exactly in accordance with the provisions of the NFC award.
He argues that net proceeds of royalties on oil and gas, excise duty on gas and gas development surcharge had also been distributed exactly in accordance with the provisions of the NFC award and the constitution.
The federal finance secretary explained that as per NFC award, the collection charges of divisible pool taxes have been reduced from five to one per cent. “However, in case of straight transfers, it was decided that the net proceeds of royalty will be transferred as per existing practice, which in case of straight transfers was that, the net proceeds would be derived at after deducting collection charges at two per cent.”
This was challenged by Punjab and KPK. Senator Haji Adeel and Abdul Ghafoor Mirza — the private NFC members from these provinces — pointed out that they were part of the 7th NFC and were clearly of the opinion that collection charges would be at one per cent across the board.
As the issue remained unresolved, finance minister Abdul Hafeez Shaikh as NFC chairman proposed for an amicable solution to the issue through a special committee comprising four provincial finance secretaries and headed by federal finance secretary to deliberate upon the issue in the light of the NFC award and submit its findings before the NFC for a final decision.
The provinces also raised concern over delayed payments to them not only on account of their divisible pool shares but also straight transfers. For instance, KPK’s Senator Haji Adeel protested that release of arrears of net hydro profit by the federal government on a monthly basis was “contrary to the agreement on the subject.” KPK’s finance secretary said he was fully aware of the federal government’s financial constraints but demanded that the full payments for financial year 2012-13 be released in July as envisaged in the agreement.
Likewise, Punjab’s private member Abdul Ghafoor Mirza complained that the trend of cash flow towards Punjab was not up to the mark. As a result, the province had to resort to overdraft, for which the provincial government had to pay mark up to the State Bank. One of the reason for this trend, he protested, was that the banks retained government money with them unlawfully and did not transfer it to the State Bank promptly and demanded that the problem should be sorted out.
Similarly, the Sindh finance minister expressed concern over gas development surcharge data. He demanded that GDS figures should be reconciled as there was a wide difference between projected and actual GDS receipts.
“Despite repeated requests, the ministry of petroleum and natural resources was not providing complete data.” He requested the NFC chairman to direct the petroleum ministry to provide them with well-head wise data of oil and gas fields on a monthly basis.
While the provinces’ criticism continued, the federal finance minister enquired from the provinces about the efforts and their results towards “resource mobilisation, especially in the areas of agricultural income tax and real estate” because in his opinion, these two sectors represent potentially great promise for additional resources “but required strong efforts to exploit them have yet to be expended.”
He was, however, reminded by the Sindh finance minister that the Council of Common Interests (CCI) had set up a committee comprising finance and agricultural ministers to suggest proposals for harmonisation of agriculture income tax. The committee met only once, Syed Murad Ali Shah said and requested for speeding up its work as tremendous opportunities existed in boosting revenues through agricultural income tax.
The discussions so far on the agricultural income tax suggest that none of the provincial governments represented by various political parties want to attract brunt of the powerful agricultural lobbies and want a uniform tax rate and methodology for a collective responsibility. For this to happen, the federal government needs to call frequent meetings of the CCI if it really wants to tap additional sectors for revenue mobilisation.
