Soon after the signing of the 7th National Finance Commission (NFC) Award, a section within the federal government began to voice misgivings about the vertical distribution of resources (57.5 percent to the provinces and the rest to the federal government) in the award. With the passage of time, the federal government has been seeking ways to somehow nullify or dilute the gains that accrue to the provinces from the award. Ever since the PML (N) government has come in office it has attempted to find ways and means to whittle the gains accruing to the provinces or encroach upon their domain of resource mobilization. The first attempt in this regard was made through the very first budget that the PML (N) government presented in 2013 when section 2(22A) of the sales tax act 1990 was substituted by the Finance Act 2013. This resulted in a genuine hue and cry from the taxpayers who consume services liable to sales tax by provinces and litigation ensued in the higher courts. The courts passed interim orders restoring input tax adjustment of provincial sales tax. Eventually, the FBR reversed its decision by issuing SRO 212(1)2014 allowing input tax credit. Now again the Finance Bill 2016 has proposed disallowance of input tax credit of sales tax paid to the provinces by amending the definition of input tax. Needless to say that the concept of input and output taxation is an integral part of the scheme of Value Added Taxation (VAT) and disallowance of input tax will cause a severe hardship to taxpayers.
As if this is not enough, the Finance Bill 2016 also proposes to make the provincial tax authorities FBR's withholding agents for collecting income tax for FBR from non-filers of income tax returns. This is being done by making it mandatory for the provincial tax administrations for not allowing the filing of their sales tax returns by such persons unless the advance income tax of 3 percent has been collected and deposited. This provision of the finance bill raises a fundamental question whether a federal legislation can paralyse the operation of a provincial legislation to extract monetary benefit for the federation. In other words, can the province be stopped from collecting its tax from provincial residents on the basis that they have not paid federal tax? In this instance, it increasingly appears that the FBR has taken its penchant to use everyone and anyone to collect tax on its behalf under pain of penalties to a ridiculous level. It is now seeking to compel the provinces to collect its tax or forgo theirs too. Member Inland Revenue Policy (IRP) Federal Board of Revenue (FBR) Rehmatullah Khan Wazir's exhortation during the post-budget press conference that the provinces should impose a lower sales tax as they were getting the major chunk of revenue from the divisible pool is a reflection of the heart burning that afflicts the federal government as a result of the NFC.
Be that as it may, the federal and provincial governments unanimously approved the 2010 National Finance Commission (NFC) award, which is constitutionally required to meet every five years to recommend the distribution of tax proceeds between the federal government and the provinces. Sadly the PML (N) government has been extending the 2010 award that expired in 2015 due to concerns that the provinces would demand and succeed in negotiating a higher share from the divisible pool taxes thereby further reducing the federal government's share. The decision to extend the 2010 award is therefore a cause of concern to the federating units and one can only hope that the federal government is aware of the serious damage to harmonious relations between the centre and the provinces and the fuelling of a trust deficit particularly with those provinces where the opposition is in power. However, one must appreciate the budget proposal to abolish the federal excise duty on services chargeable to provincial sales tax to avoid duplication of taxes, a long standing demand of trade and industry.
Subsequent to the 18th Constitutional Amendment, to which PML-N was privy, social sectors are now devolved to the provinces and they need the higher revenue to meet their obligations to their constituents. The Dar-led Finance Ministry by insisting on ever-rising provincial surpluses to contain the federal fiscal deficit, delays in releasing the funds under the divisible pool and by dictating support for federal programmes whose priority is challenged by provincial governments has negatively impacted on grass root development.
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