THE provinces have come under heavy fire for their unwillingness to effectively tax such untaxed and under-taxed sectors as agriculture and property since the implementation of the seventh National Finance Commission award in 2010/11.
They have also faced criticism for refusing to enforce fiscal discipline and control their expenditure.
Their inability to produce surplus to help the federal government scale down its budget deficit has irked many an official in the finance division. And their opposition, especially from Punjab, to a half hearted federal effort to implement value added tax (VAT) that resulted in the premature termination of the $11.3 billion standby arrangement (SBA) with the International Monetary Fund (IMF) has disappointed many.
Still there are people who can see a silver lining in the clouds.
“What you say is largely true. The provinces haven’t done enough to fulfill the commitment they had made at the time of the finalisation of the NFC award to draw more fiscal resources from the federal government. Taxing the people requires a trade off. No political party or government can risk forcing people to pay more taxes and losing popular support in an unstable political environment The hard and uncertain economic conditions make it more difficult,” says a retired bureaucrat who has held important positions in the federal and Punjab governments.
A Punjab Planning and Development (P&D) Department official agrees.
“It is not that the provinces have not done anything to boost their revenues. Their contribution to the overall tax revenues of the country is increasing, albeit slowly and incrementally, both in absolute terms and as percentage of the total tax revenues,” he says.
Official data for the last three fiscals shows that the provincial tax contribution grew to 5.22 per cent or Rs107 billion to the country’s overall tax revenues in the fiscal 2011/12, the second year of the current NFC award, from 3.72 per cent or Rs54.80 billion in 2009/10, the final year of the previous NFC award.
“This is a good start and shows the fiscal effort the provinces, Punjab and Sindh, are improving their tax collection and without imposing additional burden on the people hit hard by economic slowdown and rising prices,” the P&D official comments.
Further, he says, the “fiscal federalism followed by us in Pakistan does not give the provinces much room for increasing taxes. Those who say agriculture income must be taxed should realise that the large majority of farmers, particularly in Punjab, are small land holders and illiterate.” He, nevertheless, agreed that Punjab and Sindh, with large service sector, can and should expand the scope of the provincial general sales tax (GST) on services to raise their revenues in the years to come.
An economist, who has advised the Punjab government on various issues, is not happy with the lack of willingness on the part of the provinces to reduce their dependence on federal transfers.
“The official logic of raising tax revenues by improving administration and without taxing the untaxed and under taxed sectors of the economy is skewed. It can deliver to a very small extent,” he argues. He says the provincial governments must realise that they need to mobilise their resources to finance their development rather than depending on federal transfers under the NFC award.
Official data indicate that the federal transfers under the new NFC award to the provinces rose from Rs633.452 billion (or 44 per cent of total federal taxes) in 2009/10 to Rs1089.876 billion (or 56 per cent of total federal taxes) in the last financial year. In 2010/11, the federal transfers to provinces formed 61 per cent of total federal taxes, according to official data. While the federal transfers formed 72 per cent of the total provincial revenues of Rs876 billion in 2009/10, their share grew to 81 per cent in total provincial revenues of Rs1.334 trillion, reflecting their increasing dependence on money received from the divisible tax pool.
“The data shows that the provinces are not bothered about raising their own tax revenue as long as they continue to receive more money from the federal government. This is not a good for the federating units,” the economist says and adds the shortfall in the collection of federal taxes always leads to a cut in provincial development expenditure on crucial sectors like education, health, irrigation, etc.
While the provinces have done little to increase their taxes, they have substantially boosted their non-development expenditure by 54 per cent from Rs627 billion (or 4.3 per cent of GDP) to Rs968 billion (or 4.7 per cent of GDP) in a period of two years to 2011/12. The provincial development expenditure, on the other hand, has dropped to nearly 39 per cent of their current spending from 41 per cent. As a result of this, provinces posted an overall revenue deficit of Rs22.125 billion at the end of last fiscal year. Punjab showed a deficit of Rs8.961 billion, Sindh of Rs28.504 billion and Khyber Pakhtunkhwa of Rs3.740 billion. Balochistan was the only province to post a surplus of Rs1 9 billion to cut the overall provincial balance.
The deficit posted by the provinces was against the commitment of producing revenue surplus of 0.5 per cent of GDP.
“When the NFC award was being finalised and provincial share from the divisible tax pool increased, the provinces had promised to enforce fiscal discipline – increase their revenues and decrease their current expenditure. But they have failed to fulfill this commitment, which is regrettable given the fact that our tax-to-GDP (gross domestic product) ratio at less than 10 per cent is lowest in the region and budget deficit in excess of eight per cent of GDP. This is affecting our ability to undertake development, create jobs and reduce poverty.
This is not sustainable in the long run and if we want to protect the economy from unraveling the provinces will also have to contribute their share in the effort and boost their taxes,” he says.