Having pioneered the collection of sales tax on services with remarkable success, Sindh is seeking the transfer of royalty and sales tax on goods from the centre to the provinces.
Sales tax was a provincial subject even in British India which was run by a weak federal setup. Royalty falls in the category of ‘straight transfers’ and is collected by the Federal Board of Revenue but paid to the provinces.
If collection of royalty is devolved, it will be collected by Sindh Revenue Board instead of the FBR without any financial impact on federal finances.
Senator Saleem Mandviwalla demanded that the federal government shed its responsibility of collecting royalties on oil and gas and on sales tax on goods — a right of the provinces that is being denied even after being affirmed by the 18th Amendment
Sindh’s case is strengthened by the FBR’s lacklustre performance and its regressive ways of raising tax revenue despite the numerous reforms it undertook with the help of international lending institutions.
In a statement on Nov 3, Sindh’s private member on the National Finance Commission Senator Saleem Mandviwalla demanded that the federal government shed its responsibility of collecting royalties on oil and gas and on sales tax on goods — a right of the provinces that is being denied even after being affirmed by the 18th Amendment of the constitution.
Going by the criteria of efficiency, equity and economic growth the provinces qualify for collection and appropriation of sales tax proceeds, whether it is on goods or services. Sales tax was a provincial subject till March 31, 1952. The federal government acquired 50pc of the sales tax under the Raisman award to cope with its financial crisis.
The current formula of the distribution of resources between the federation and its affiliated units has evolved over time. But the provinces’ right on sales tax, though collected by the Federal Board of Revenue (formerly Central Board of Revenue), was implicit in all awards of the National Finance Commission. The first NFC award was based on the collection of only sales tax, income tax and export duty which was shared between the Centre and the provinces in the ratio of 20:80 as opposed to earlier 50:50 share in sales and income tax.
In the fourth award given by the National Finance Commission headed by then Federal Finance Minister Sartaj Aziz, the excise duty (a substitute for sales tax) on sugar and tobacco became a part of the federal divisible pool, but the vertical sharing formula remained unchanged.
The fifth award brought about a radical shift by recognising the right of the provinces to a share in virtually all taxes collected by the federation.
The February 1997 award enlarged the federal divisible pool which then comprised as follows: income tax, wealth tax, capital value tax, sales tax, export duties, customs duties, excise duties — excluding excise duty on gas, charged at wellhead and any other tax collected by the federation. (This became imperative because the provinces had only minor taxes with poor yields but for farm income tax with some potential which was constrained by the lack of proper infrastructure/institutions to deliver)
In addition to that, royalties on crude oil and net development surcharges on natural gas were also given to the provinces. But the share of the provinces in the federal divisible pool was reduced to 37.5pc and the federation appropriated 62.5pc of the tax revenue. This however opened the path to much great fiscal autonomy for the provinces and led to the sharp increase in share of federating units to 57.5pc in 2011-12.
While fiscal autonomy of the provinces have been enhanced by the evolving formula for resource distribution, the tax collection system remained over-centralised and needed to be devolved step by step to foster more efficiency, equity and economic growth in order to achieve maximum returns.
It was in the last NFC award that sales tax on services was transferred to the provinces whose impressive performance in this area qualifies them to take over the collection of sales tax on goods from the FBR.
In fact Sindh, mainly helped sales tax on services, has reduced its federal share by raising its own share from 10pc in FY2010 to 22pc in FY2016 in its total revenue receipts.
The ratios of various components of the current NFC formula — revenue sharing, straight transfers, and grants — though based on laudable objectives need to be reviewed critically. The top-down devolution approach coupled with a happy blend of bottom-up approach will make fiscal federalism more meaningful.
However the provinces seeking more fiscal autonomy need to recognise that right and responsibility, deeply linked to each other, cannot be separated. Implicit in autonomy is active cooperation between the federation and sub-national units on the one hand, and among the provinces on the other, to work out a common agenda and implement it.
A good feature of federalism has been the support provided by the provinces to the centre to contain consolidated fiscal deficit though it may raise questions as to why provincial budget surpluses were not utilised for development of backward areas. While seeking more resources the provinces cannot escape their responsibility to raise their institutional capacity as fast as they can, to deliver public goods.
Finally to make the evolving fiscal federalism work efficiently and prudently both the provinces and the federation should be accountable to each other.
Published in Dawn, Business & Finance weekly, November 21st, 2016