In order to usher in some kind of order and sanity in the national economy, the government urgently needs to take some long- and some medium- term steps before announcing the next budget. These steps include conducting the Census followed immediately by finalising the 8th National Finance Commission (NFC) Award while simultaneously unburdening the federal government of all those ministries that had been allocated to the provinces under the 18th amendment. And this needs to be followed up without any further loss of time with the formation of provincial finance commissions and the fiscal and administrative responsibilities clearly delineated between the provincial and local governments.
Broadening of tax base needs to be undertaken with real seriousness sans the usual empty rhetoric that accompanies such schemes. Also, the loopholes left in the real estate amnesty schemes need to be removed at the earliest to make the sector yield the required revenues.
Population had remained the sole criterion for vertical distribution of financial resources until 2009 when the 7th National Finance Commission reduced the population-based share to 82.5 percent. The Award also introduced some major changes. For example, size of the divisible pool was enlarged by reducing collection charges of the federal government from five to one percent. Provinces' share was increased from 46.25 percent to 57.5 percent, effectively reducing the federal government's share to 42.5 percent. KP received one percent extra from the divisible pool as a frontline province against the war on terror. As per a constitutional provision, General Sales Tax (GST) on services was made a provincial tax.
Sindh appears to be justified in demanding in the next award five percent of the national purse to meet its security expenses, particularly for hosting Rangers in the province, a right to directly collect royalty on oil and gas, jurisdiction over collection of GST on goods and compensation for hosting a large number of legal and illegal immigrants from other provinces and countries, which increase the burden on the provincial exchequer.
Balochistan too appears justified in seeking in the forthcoming Award a five percent share of all revenues to be generated from the CPEC projects and increasing weightage for the indicator of geographical area. Likewise, KP appears justified in demanding further curtailment of weightage of the population indicator to 60 percent and bolstering weightage of poverty indicator to 15 percent.
Under the 18th amendment, 47 subjects of the erstwhile concurrent list were devolved to the provinces. It resulted in swelling provinces' salary and pension bill, liabilities of maintaining the existing programs and constructing new infrastructure of the devolved departments and additional expenditure on operation, maintenance and procurements. As opposed to this, the federal government has rather unjustifiably asked the provinces to surrender three percent of the divisible pool to meet security exigencies of the country.
Meanwhile, the shortfall in tax collection which has further widened to over Rs 142 billion by the end of the first half of this fiscal year despite the government taking advances from banks and oil and gas producing companies for the period of at least next six months. This seems to be curtailing the very size of the divisible pool further.
The Federal Board of Revenue (FBR) provisionally collected Rs 1.452 trillion during July-December period of this fiscal year, falling short of the six-month target by Rs 142 billion, according to officials of the tax machinery. However, they have blamed the government for the massive shortfall, highlighting a fundamental flaw in working out tax collection target for current fiscal year 2016-17.
The government set this year's annual target at Rs 3.621 trillion - as much as 16% higher than the final collection of the previous fiscal year. However, it did not exclude the impact of reduction in General Sales Tax (GST) rates on petroleum products and a zero-rating regime for the five export-oriented sectors.
In order to bridge the shortfall, the FBR took advance taxes worth over Rs 30 billion in December alone from commercial banks and the oil and gas sector companies. However, the FBR cannot be fully absolved of the responsibility to achieve the set targets, as it has also failed to broaden the income tax base that remains extremely narrow.
One of the major reasons why our tax collection continues to stagnate is the continued dismal performance of our textile sector, the mainstay of our economy. The industry has been rendered unviable by the high cost of doing business as a consequence of which textile exports fell further by $600 million. Total exports are understood to have fallen by $1.2 billion in the current year as per the present trend. The country's trade deficit has, therefore, swelled to an alarming and unmanageable level of $28.3 billion.
The textile industry continued to face the handicap of being 10% more expensive against international competitors owing to unrealistically high energy costs. Since 2013, the price of energy has been higher than that of competing countries by 4 cents per kilowatt hour. And due to unrealistically high energy prices in the province - where 70% of the country's textile industry is located - the Punjab-based textile industry was exposed to a severe disparity in energy prices.
The two basic raw materials of textile industry, cotton and manmade fibres - to which the textile industry adds value for export - have to be imported as their domestic availability falls far short of the industry's requirement. The completely oblivious approach of the government to this scenario and its subjection of raw materials to increased import duty besides other levies such as sales tax and withholding tax deny the textile industry raw material availability at competitive and viable prices. Besides, the presumptive and innovative tax regime in the country is an additional burden on the organized segment of the textile industry.
A National Assembly panel has approved a blanket tax amnesty scheme for the realty sector to whiten an estimated Rs 7 trillion of black money invested in the sector, despite stiff opposition by the Federal Board of Revenue (FBR).
Detractors say that the amnesty scheme would further discourage people from coming into the tax net. The 3% rate is too low when compared with 35% standard income tax rate. In Pakistan, more than seven million people are paying direct taxes, although regular income tax return filers are less than 1.1 million, indicating FBR's inefficiency to force people to file their returns.
The share of property tax in total taxes has fallen from 18.7% in 2009 to 7.1% in 2016-17 in Punjab. Similarly, in Sindh, the ratio has fallen from 3.9% to 3%. In Balochistan, the ratio has dropped from 3.8% to 1.9%. A property buyer now has to pay an additional withholding tax rate of four percent besides three percent on a transaction if he/she fails to file returns. The withholding tax on a property transaction is two percent if a buyer is an income tax return filer and otherwise four percent. So, a non-filer will end up paying seven percent on a property transaction.
Under the law, an investor needs to pay three percent tax on the amount of difference between declared cost and actual cost. And, that would be so only if a property is sold within five years. The Federal Board of Revenue (FBR), under the Finance Act, 2016, set new market-based property values, which are several times higher than the values fixed by provincial authorities.
By offering people to legitimise their seemingly ill-gotten money at 3% rate, the state has, for the first time, become a party in legitimising the illegal money but this was not something new, as the section 111(4) already facilitates legalisation of black money through remittances - currently foreign exchange dealers are legalising illegal money by producing fake remittance certificates at the rate of 2% to 3%.
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