Federation, taxes & distribution-II

There is something fundamentally wrong with the structure of distribution of taxing powers between the federation and the federating units. Before independence, the provinces had the exclusive right to levy sales tax on goods and services within their respective physical boundaries. The subject of sales tax was on the Provincial Legislative List at Serial No.48 in the Government of India Act, 1935 and was described as "Taxes on sales of goods and on advertising". In the Constitution, 1956, "tax on sales and purchases" was mentioned at serial No.26 of the Federal Legislative List, and therefore, for the first time it became a Federal subject. The position was maintained in the 1962 Constitution, which mentioned "tax on sales and purchases" in the Federal Legislative List as clause (j) at serial No.43 in the Third-Schedule. In 1973 Constitution as originally adopted 'tax on sales and purchases' was kept on Federal Legislative List at serial No.49 of Part I of the Federal Legislative List given in the Fourth Schedule. The item was, however, completely substituted by Constitution 5th Amendment Act, 1976 with effect from September 13, 1976 that read "Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed". The second half of the amended entry appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960. Through that amendment the words "consumption of goods" in the preamble were substituted by "importation, exportation, production, manufacture or consumption" [see details in WAPDA v. Collector of Central Excise and Sales Tax (2002 PTD 2077 and also in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)].

The solution is to move towards harmonised sales tax on goods and services for which there is a need to debate in public and Parliament for reaching a consensus. The total collection by imposing unified sales tax on goods and services can reach Rs. 4000 billion as against collection of around Rs. 1596.6 billion by FBR in 2019-20 through sales tax on goods and provinces cumulatively of Rs. 232 billion through sales tax on services. The additional revenue collection of nearly Rs. 2000 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per Constitution.

The issue of NFC Award vis-à-vis provisions of the 18th Amendment relating to decentralisation of fiscal powers cannot be examined in isolation. It is clear that all the federal and provincial governments have never been concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights between federation and its units that can help empowerment of masses and ensure prosperity for all.

The performance of provinces in collecting agricultural income tax is extremely appalling. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich and mighty-meagre collection of agricultural income tax-less than Rs. 3 billion by all provinces in fiscal year 2019-20-is lamentable. The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilisation in Pakistan.

(Concluded)

(The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are adjunct faculty of Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2020