Social Policy and Development Centre (SPDC) research has suggested a numbers of reforms that include revisiting tax collection responsibilities, linking transfers with spending on social and strengthening local government to strengthen federalism in Pakistan.
A research on "Comparative Study of the Intergovernmental Fiscal Transfers in India and Pakistan" has been jointly undertaken by SPDC-Karachi and National Institute of Public Finance and Policy (NIPFP)-New Delhi with an aim to evidence implications of various strategies of intergovernmental fiscal transfers for effective and equitable public service delivery. The research has helped in bringing-forward essential characteristics that are common or different across the two federations.
A talk on "fiscal federalism in Pakistan: emerging issues" was arranged by SPDC Wednesday to share the findings of research for the feedback. Dr Kaiser Bengali was the guest speaker of the talk, while Dr Khalida Ghaus MD SPDC, Muhammad Kabir and Muhammad Asif also spoke on the occasion.
Addressing as guest speaker Dr Kaiser Bengali urged for a dedicated secretariat for the National Finance Commission (NFC) with skilled team for proper working on NFC Award as presently, he said, only one additional secretary with limited staff is working at the NFC Department.
He said this is not necessary that provinces can collect all taxes efficiently compared to federal government and agricultural tax is best example as provinces have failed to collect in a proper manner. "Agricultural tax should be shifted to federal government from provinces and hopefully it will be beneficial for all stakeholders of NFC," he suggested. He said that although 9th NFC has already been announced but its meeting is not being convened and most likely the result of this award will be like 8th NFC Award.
Bengali said the federal government's interest in tax collection has reduced after raising provinces' share in the NFC. Now, the federal government is focusing more on non-tax collection instead of tax collection as it believed that collected tax will be distributed through already prescribed formula of the NFC.
He said provincial governments are reducing the powers of local body governments and established a number of authorities; however, he said that this is not the right solution. There is need to strengthen the local body governments, he suggested. After the 18th amendment, provinces have set up tax authorities for collection of tax and making concrete efforts for tax collection but unfortunately federal government's efforts for tax collection are not satisfactory, he said.
Muhammad Sabir of SPDC in its presentation said fiscal federalism is a dynamic concept both in theory and practice and is in practice as different countries have different ways of designing, implementation and revisiting of revenue and expenditure assignments.
As per constitution, the President will constitute a National Finance Commission consisting of minister of finance of the federal government, ministers of finance of the provincial governments and such other persons as may be appointed by the President after consultations. It will be the duty of the NFC to make recommendations to the President as to the distribution between the federation and the provinces of the net proceeds and the making of grants-in-aid by the federal government to the provincial governments, he added.
The share of provinces in each NFC will not be less than the share given to the provinces in the previous award, he added. He said that despite significant increase in the share of provinces in the divisible pool as a result of the 7th NFC, the tax assignment in Pakistan remains more or less the same. The buoyant taxes such as income and corporate taxes and sales tax on goods are in the federal domain.
Speakers said that most of the provincial taxes are assigned through a bar in the federal list that implies part of the tax base falls under the federal domain whereas remaining tax base are with the provincial domain. The provincial governments are also responsible for expenditures on social service. At present four provincial governments collectively collect less than 10 percent of taxes that can only finance less than 20 percent of their expenditures. The outcome of tax and expenditure assignment has increased dependencies of provincial governments on the intergovernmental fiscal transfers.
They said post 7th NFC Award and the 18th constitutional amendments share of provincial government expenditure on social services increased. However, the trend in social development indicates that a higher growth in the social service expenditures has been unsuccessful in improving the development indicators. For instance, increased expenditure on education resulted in an increase in per-student expenditure rather than bringing out-of-school student.
The SPDC has undertaken a comparative study by analyzing fiscal federalism in Pakistan and India. The reason behind which is the common legacy and unique country-specific evolution. One of the main differences is the institutional arrangements for intergovernmental fiscal transfers. India constitutes an independent Finance Commission with technical members that do not require a consensus.
In contrast, Pakistan's NFC is an independent intergovernmental forum that requires consensus. While Pakistan did not have many conclusive awards in the past, Pakistan's NFC has certain advantages that suites the country. Another major difference is in the tax assignments of the two countries. In India, the share of states in total revenues is around 40 percent since 2012 - onwards. Moreover, States revenues after transfers reach to more than 70 percent in India while in Pakistan it is around 50 percent. In India, States have greater shares in both current and development expenditures. Further, with stronger local government system (responsible for collection of property taxes) and PFC awards a regular feature of Indian Fiscal Federalism India has relatively better state of social and human development.
According to SPDC research, the challenges bring faced by the fiscal federalism in Pakistan and scope for reforms requires revisiting tax assignments and revenue collection responsibilities, linking transfers with spending on social and economic services, linking spending to development outcomes through gender-responsive budgeting and strengthening local government as per the spirit of the constitution. These reforms will not only be important to strengthen federalism in Pakistan but also for the achievement of Sustainable Development Goals, it added.
Specific objectives of the research are to examine the individual and aggregate country level fiscal behavior of federating units (provinces) in response to the change in design of intergovernmental fiscal transfers and grants formula, analyze the change in design of intergovernmental fiscal transfers having a positive or negative impact on public investments by provincial governments for promoting social development; and look into the links between fiscal transfers to provinces and gender equality; and we do hope that the findings being shared will help initiate public debate and will provide policy advice to the federal and sub-national governments for making the transfer system more equitable.
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