THE next year’s budget needs to be formulated within the stated objective of enforcement of devolution from federation to provinces and provinces to local governments including fiscal devolution. The ‘Devolution Plan’ envisages decentralization of political, administrative and fiscal authority to sub-national governments. But the execution of the programme has run into snags from day one. The Plan enforced from August 14, 2001 has progressed in fits and starts for a variety of factors. First, bureaucratic resistance to the reforms was not evaluated at the time of their formulation. So, the risk of minimizing measures during implementation were not incorporated in the overall strategy. Second, the Plan stipulated transfer of at least those functions from federation to provinces which constitutionally belonged to them. This did not happen.
Third, fiscal autonomy and authority that the Local Government Ordinance provides, continues to be denied to them. Fourth, the provinces have been demanding since long transfer of functions and devolution of fiscal authority from federation to provinces. Unresolved, the issue has generated friction between the federal government and provinces.
Pakistan inherited an inter–governmental fiscal framework as embodied in the 1935 Act. Under the 1935 Act and the Constitution of 1956, provinces were entrusted with considerable functional and fiscal authority. However, the Constitution of 1962 centralized all powers in the central government. An over–riding clause 2 of Article 131 provided that where the ‘national interest,’ ‘security’, economic and financial stability, “planning or co-ordination’ or ‘uniformity’ in respect of any matter in different parts of Pakistan so requires, the Central Legislature shall have power to make laws (including laws having extra-territorial operation) for the whole or any part of Pakistan with respect to any matter not enumerated in the Third Schedule”. Whatever autonomy was provided to provinces in 1956 constitution, it was subsumed by this clause of 1962 constitution.
The 1973 Constitution tried to reverse this trend but could not even restore fiscal autonomy to provinces to the extent granted by 1956 Constitution. A study titled “Devolution in Pakistan (July 2004)” conducted jointly by Asian Development Bank, Departmental of International Development of U.K and World Bank observes: “The drift is most evident in the distance between 1956 Constitution which envisaged a decentralized federation with significant provincial public spending responsibilities and revenue raising powers and the prevailing highly centralized revenue responsibilities of the federal government.”
At present, there is a significant mismatch between expenditure responsibilities and revenue generation capacity of lower tiers of the government with the provinces in aggregate depending on federal transfers for over 78 percent of their revenue”. The dependency level on federal transfers differs from province to province with Balochistan topping them all with 94.5 per cent. This is set out in the table.
Under sub-section (1) of section 116 of the Local Government Ordinance 2001, the local councils have been delegated fiscal authority on certain bases of taxation as specified in the Second Schedule. At the same time, under sub-section 1 (a) of section 120-D, a formula is laid down for vertical distribution of resources between the provincial government and local governments. The distinct features of the formula are as under:- (a) The Provincial Consolidated Fund i.e. total revenues-tax and non-tax of the province including revenues received from the federal ‘divisible pool’ and ‘straight transfer’ (revenue received on the basis of origin or collection) and capital receipts shall be bifurcated into a Provincial Retained Amount and a Provincial Allocable Amount. (b) The Provincial Allocable Amount shall not be less than the funds transferred to local governments and the establishment charges budgeted for the function of local governments (including transferred functions) in FY 2001-02 excluding transfers in lieu of octroi and Zila taxes. (c) The provincial consolidated fund shall not consist of moneys received by the Government in lieu of octroi and Zila taxes and that said money shall be added to Provincial Allocable Amount as a separate entity for allocation to local governments.
Sub-section (2) of Section 120-D also lays down a horizontal formula for distribution of Provincial Allocable Amount amongst the District Government, Tehsil or Town Municipal Administration and the Union Administration. The formula is based on four parameters namely, (a) fiscal need (b) fiscal capacity (c) fiscal effort and (d) performance.
Apart from generation of own revenues and fiscal transfers from the provincial consolidated fund, the local governments are supposed to be provided 1/6th of revenues as straight transfers by the federal government, arising from sales tax on goods.
A critical analysis of implementation status of the provisions provided in the law as in paras 5, 6 and 7 shows that federal and provincial governments continue to defy these provisions, thereby depriving the local governments of necessary fiscal resources for operationalizing their functions and improving service delivery. For example, some tax bases such as urban immoveable property tax and user charges continue to be under the control of provinces. The local governments are therefore, deprived of their autonomy to levy, administer and collect these revenues.
The study succinctly sums up the situation: “In other cases, higher levels of government have thwarted local government efforts to raise revenue. For example, after some union administrations resorted to the collection of tolls (and the defunct zila tax), the federal government required the province LGRD to vet any new local government tax plans. Despite some advantages, that oversight potentially undermines the independence or discretion of local governments”.
As for the fiscal transfers from Provincial Consolidated Fund, all provinces are in violation of section 6 of clause 120-D which had allowed the provinces to make an Interim Award only for financial year 2002-03. However, the provinces have continued to apply the Interim Award in following years instead of making a Three-Year Award as stipulated in clause 2 of section 120-G.
As if it was not enough, the provincial governments have reduced the size of Provincial Consolidated Fund for distribution of resources between provinces and local governments by deducting at source so called ‘obligatory expenditures’ from overall provincial revenues.
The third source of revenues i.e. one-sixth of sales tax on goods was stipulated as a straight transfer from federal government to local governments. But much against the decision made by the Council of Common Interest in May, 1999, it was first made part of ‘federal divisible pool’ with provinces receiving 37.5 per cent (one-sixth portion of sales tax proceeds) and the federal government retaining balance 62.5 per cent.
However, from the year 2002-03, a new mechanism has been developed under which the federal government transfers one-sixth of their share also to the provinces. In other words, federal government still retains a large proportion out of their share of 62.5 per cent received from the Divisible Pool.
The whole formula is tilted against the local governments as 2.5 out of 15 per cent of taxation rate on sales or one-sixth of the revenue from sales tax on goods was not to be treated as part of ‘divisible pool’ and was meant to be a straight transfer.
As local governments have been denied the power as provided under the law, transfers not made as per provisions of Local Government Ordinance, they have remained resource starved.
The budget 2005-06 must ensure that a beginning is made to remove vertical fiscal imbalance between federation and provinces by transferring taxation authority over such taxes as workers welfare tax, workers profit participation fund and GST on services over which the provinces have a right to set, levy administer and collect revenues under the 1973 Constitution.
At the same time, the federal budget 2005-06 should ensure straight transfer of one-sixth proceeds of revenue collections from sales tax on goods to provinces for passing on to local governments.
The National Finance Commission Award overdue for last three years, must earmark a share of 50 per cent to the provinces form ‘divisible pool’, as proposed by the president on February, 23, 2005. This 50 per cent share of provinces should be calculated without taking into account the subventions and grants made at present by the federal government to provinces from its budget. If these are reckoned for calculating 50 percent share, the gain to provinces will be just nominal say, around Rs12 billion.
As regards fiscal relations between provinces and local governments, the provisions contained in LGOs, must be applied in letter and spirit so that local governments acquire a fair degree of autonomy for performing and improving service delivery.