Dream of self-reliance

The recent reports in Press that during the fiscal year 2013-14, Federal Board of Revenue (FBR) collected only Rs 2254.5 billion and not Rs 2266 billion as claimed by the Finance Minister on various occasions, especially in his meeting with IMF, has again raised serious doubts about reliability of official data. As pointed out time and again in these columns that it is time that the Public Accounts Committee orders forensic audit of FBR's affairs to verify claims of "wonderful 16% growth" in tax collection during the last fiscal year. Even this figure of Rs 2254.5 billion includes not only blocked refunds of billions of rupees but also billions "received" as "advance not due" in order to show "higher collection".
On April 23, 2014, the Chairman FBR admitted before the Senate's Standing Committee on Finance that refunds of Rs 97 billion were due. The figure by the end of fiscal year must have been much higher. This was not the first time that FBR's Chief made such a confession. Way back in 2005, the then Chairman admitted before Public Accounts Committee that refunds worth Rs 321 billion due to banks as on 30th June, 2005 were not paid. He also admitted that collection for the financial year 2004-05 was overstated to the extent of Rs 20 billion by securing advances.
This jugglery of figures on the part of Ministry of Finance (MoF) is a national disgrace. It amounts to abuse of the system at the highest level. The allegations that top brass in MoF and FBR represent a team of skilful data manipulators, and that all of it has been done right under the noses of IMF and other donors, needs thorough probe by the Parliament. Needless to emphasise that such malpractices distort the government's image and erode the already tarnished credibility of the country.
It is an undeniable fact that in fiscal year 2013-14, the government registered huge shortfall in tax revenue generation and exceeded its sanctioned current expenditure at least by Rs 112 billion. Total current expenditure in the budget was showed at Rs 3242 billion. Original tax target of Rs 2475 billion was revised to Rs 2345 billion and finally to Rs 2275 billion. Even after blocking refunds and forcing big taxpayers to park advance of the next months, FBR could not achieve it, but strangely it claimed provisional collection at Rs 2266 billion. Even this is now proved beefed up as our worthy Finance Minister admitted before the meeting of National Finance Commission on December 8, 2014 that out of FBR's collection of Rs 2254.5 billion, provinces received Rs 1264 billion. Many allege that overstatement was a deliberate act to convince the IMF that the final revised target of Rs 2275 billion agreed with it was almost achieved.
The federal government's total revenues (both tax and non-tax) in budget 2013-14 were projected at Rs 3420 billion out of which share of provinces was estimated at Rs 1502 billion-they have actually received Rs 1264 billion. The federal expenditure under debt servicing was Rs 1154 billion, defence affairs and services was Rs 627 billion and running of civil government was Rs 275 billion. The government after admitting further shortfall of Rs 11.5 billion in FBR's tax collection cannot deny that total fiscal deficit for 2013-14 reached the mark of nearly Rs 2 trillion, meaning by, more borrowings, causing more provision under the head, debt servicing in the coming years. This is the vicious debt trap in which Ishaq Dar, like his predecessors, wants us to remain.
The burgeoning fiscal deficit is not an isolated phenomenon. It is related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, tax the rich and mighty, crackdown on parallel economy by confiscating untaxed assets, abolish unprecedented perks and benefits to the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, provide impersonal market relationships, ensure rule of law, stop 'reckless' borrowing and 'ruthless' spending. All these show the crisis of governance in Pakistan.
The most disturbing aspect of governance besides above factors is unwillingness of rulers to devolve administrative, political and fiscal powers to local self-governments despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for essential entitlements-healthcare, education, public transport, housing, clean drinking water, civil amenities, energy supply, waste management, street and road maintenance and environmental protection-guaranteed in the Constitution.
Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only seven percent-in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by federal government through levy of presumptive/minimum taxes on services under the Income Tax Ordinance, 2001 and Sales Tax Act, 1990, for example, sales tax on gas, electricity and telephone services, toll manufacturing, and excise duty on a number of services. Despite levying taxes that should have been within the domain of provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that was nearly Rs 2 trillion in fiscal year 2013-14.
We need rethinking in tax sharing powers of centre and provinces. The provinces have not been allowed to generate their own resources by collecting sales tax on goods as was the case till 1948. Had it been the case, the present chaotic situation could have been averted. Islamabad has been claiming that provinces lack infrastructure to efficiently collect sales tax. This has been proved wrong as Sindh and Punjab collected much more sales tax on services after establishing their own tax apparatuses in 2011 and 2012 respectively than collected by FBR. In 2013 Khyber Pakhtunkhwa also followed in their footsteps and results shown for fiscal year 2013-14 were impressive. Before commencement of negotiation of new National Finance Award, political leadership must consider amendments in the Constitution to ensure judicious distribution of taxation rights between the federation and its units. Unless it is done, the provinces will continue to remain heavily dependent upon transfers from the federation through National Finance Commission Award. Transferring indirect taxes on consumption of goods to the provinces would empower the federating units and raise tax-to-GDP ratio to a satisfactory level eliminating fiscal deficit at all levels.
The provincial performance in the case of sales tax on services completely belies the impression that they do not have the capacity to generate taxes. If sales tax on goods is reverted to provinces, as was the case at the time of independence, they would certainly perform much better. Their experience of handling sales tax on services confirms it beyond any doubt. However, the performance of provinces in collecting agricultural income tax is extremely pathetic. This is a common issue both at federal and provincial level arising from sheer absence of the political will to collect income tax from the rich and mighty-meagre collection of agricultural income tax-less than Rs 2 billion by all provinces together in fiscal year 2013-14-should be a serious cause for concern. It is imperative that right to levy tax on income, including agricultural income, should be with the Centre. In return, the Centre should hand over sales tax on goods to the provinces.
FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential. Shahid Javed Burki in 'Provincial Rights and Responsibilities' [Journal of Economics, September 2010] opines that "about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy." He further says that "some 15 million can be regarded as rich, another 25 million as belonging to the upper middle class, another 65 million fall in the category of the lower middle class; the remaining 65 million are desperately poor."
The tax system is not taxing the rich 15 million and income distribution disparities are rapidly widening. In the current year, number of tax returns filed till December 5, 2014, after many extensions, were far less than 2013 when 840,000 were received. Track record of FBR shows remote possibility of collecting even Rs 8 trillion in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tangle will continue unchecked and further taxation through local governments, when elected, would not serve any useful purpose-there will be no relief to the people. Rather tax burden accompanied with procedural complications will increase manifold.
Pakistan will remain ensnared in debts while more and more people will be pushed below the poverty line. If we want to come out of this crisis, Parliament will have to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.
(The writers, partners in law firm, Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences)