FBR encroachment on provincial revenue?

The four provinces, including Punjab, have unanimously accused the federal government of encroaching on provincial taxes through the levy of withholding tax on automobiles, telecommunications, cash transactions, as well as on rental income through the Finance Act 2015. This reflects three major policy decisions proposed, one may assume based on past precedence, by the Federal Board of Revenue (FBR) and fully supported by the Dar-led Finance Ministry to raise total government revenue - decisions that violate the 7th National Finance Commission (NFC) award.
First, increased reliance on withholding taxes, at present over 70 percent of all direct tax revenue is generated through withholding taxes, whose incidence is greater on the rich than on the poor; in actuality however withholding tax levied on several items is being passed onto the consumers indicating its regressive component. The government decision to levy a 0.6 percent withholding tax on all banking transactions of non-filers of income tax returns in the 2015 Finance Act, reduced to 0.3 percent till 30th September 2015, is being resisted by traders who have threatened a countrywide strike action effective 9th September (yesterday). Economists argue that the government has taken its reliance on withholding tax as its primary direct revenue source too far and this may well lead to a continuing shrinking of the legal economy with a consequent increase in the parallel economy that does not pay any tax to the government at all. There is evidence to support this argument: the weekly statement of all scheduled banks for the week ended September 3 shows that deposits and other accounts of scheduled banks decreased to 4,124 billion rupees - lower by 38 billion rupees over the preceding week's figure of 4,162 billion rupees.
Second, withholding tax is not collected by the FBR (though it is added onto the income tax the Board collects on behalf of the federal government) but by withholding agents; and in the case of some services, such as, real estate and automobile registration, the withholding tax imposed by the federal government is being collected by the provincial government. This collection is in addition to the provincial tax that as per the constitution is its domain and not that of the federal government. This has resulted in a decrease in real estate and automobile registrations. Therefore, their accusations against the federal government encroaching on their prerogative appear legitimate.
Finally, the federal government has not kept its side of the commitment that it made in the 2010 7th NFC Award, namely that, after the provinces decided to collect their own sales tax on services, the federal government would withdraw the federal excise duty that it had imposed on services. That unfortunately has not been done by the PML-N government in the centre yet.
In its defence the federal government argues that its heavy reliance on withholding taxes is premised on a conscious policy decision to tax the untaxed sectors and to widen the tax net. If a withholding taxpayer has filed his/her tax returns and has paid a tax on the income, then and only then, will he be able to take credit for such tax paid and offset it against the tax payable. This claim falls by the wayside as services procured including the use of cell phones does not necessarily imply that the user of cell phone has an income liable to tax. Economists further maintain heavy reliance on withholding taxes on several activities such as imports are in any case ensuring that even traders with some bank accounts that remain undeclared are paying taxes. At present, the federal government is reportedly collecting over 200 billion rupees as tax on imports. Any more tax, they argue, would further inhibit economic activity.
It is relevant to note that the 7th NFC award was hailed by all, including the then major national parties. For PML-N which was in government in the Punjab; at the time of the agreement there was considerable praise, particularly for Shahbaz Sharif, the Chief Minister, for agreeing to reduce the population criterion for the award, a long standing demand of the other three provinces. To then proceed to violate the agreement by a PML-N government in the centre is extremely unfortunate and one would hope that appropriate mitigating measures are taken promptly by the federal government with the objective of conforming to the NFC.