Sindh Chief Minister Syed Murad Ali Shah on Monday called for revisiting National Finance Commission (NFC) criterion. "The ratio of NFC tied to performance ought to be increased and revenue generation be given more weightage reducing the weightage to population," he suggested, presiding over a preparatory meeting for forthcoming NFC meeting to be held in Islamabad on February 6.
Murad Shah's meeting was aimed at preparing the Sindh case in consultation with the team from Finance, Planning and Development departments and Sindh Board of Revenue (SRB). Principal Secretary to the CM Sajid Jamal Abro, Secretary Finance Najam Shah, Sr Member SRB Noor Alam, Dr Asad Syed, Dr Naeem Zafar, Chief Economist of SRB, Mushtaq Kazmi Consultant to SRB, Nawaz Leghari, Qazi Masood, NFC Consultant, Dr Syed Ashraf Wasti, Additional Secretary Finance and Altaf Soomro, Director NFC attended the meeting.
Sindh CM said the wholesale and retail sales were categorised as services, but the Federal Board of Revenue (FBR) collects Sales Tax on them and these taxes are grossly under-covered. The SRB can do better due to its close proximity to the tax base.
"Collection of Sales Tax on goods should be assigned to the SRB to make this levy more efficient," he said, adding that the SRB can collect that tax on behalf of the FBR and retain service charge. Similarly, the federal government collects Capital Gains Tax (CGT) on immovable property, he cited, noting that the CGT is levied on the basis of Income Tax Ordinance. In the spirit of the 18th Amendment, this tax should be devolved to the provinces, he recommended.
On Gas Infrastructure Development Cess (GIDC), the chief minister said that GIDC needs to be transferred to the provinces as it is a provincial subject. "Sindh government should also be given its due share from the amount collected by the federal government under the GIDC so far," he asked. Shah further suggested that Excise Duty on Crude Oil and Natural Gas as per Article 161 of the Constitution need to be devolved to the provinces. He said he would talk to and urge the federal government hat Excise Duty on Natural Gas should be enhanced. "It was fixed in the 7th NFC at rupees 10 per MMBTU and it should be charged ad valorem," he said.
He said that federal government collects royalty on crude oil/ natural gas and charges two percent of the receipts as collection fee. Now, the provinces should be allowed to collect that tax themselves, he demanded.
He said Octroi was a consumption tax and Sindh's share was 46 percent when the province was administering that levy. Then, the federal government came along and convinced Sindh to stop collecting octroi and zila tax (OZT) in return for reimbursement from the federal government. For the purpose, the Centre enhanced the rate of sales tax from 12.5 percent to 15 percent and the extra 2.5 percent levy was used to compensate the provinces. He recalled that in 2010 the federal government began transferring funds in lieu of OZT on the basis of the set of criteria governing the NFC award such as population, etc, which reduced Sindh's share to 0.66 percent. He urged the Centre to enhance Sindh's share of OZT to at least 2 percent.
On tax reforms, he said that FBR tax revenue projection should be on net of all refunds allowed/ paid and not on gross basis as FBR withholds refunds to inflate their receipts. He said they [FBR] make necessary adjustments owing to refunds after end of a financial year which affects the cash flow and budgeting of the provinces. He demanded FBR should be penalised for not achieving the projected Divisible Pool Taxes.
The chief minister demanded that provinces should be consulted while granting concessions, reducing sales and other taxes on a particular industry, waiving or changing tax rates. Shah cited said that Sales Tax on LNG was reduced to 5 percent without consulting provinces. He suggested that tax expenditures (for e.g. exemptions, deductions, or credits) be reduced, as they alter horizontal and vertical equity of the basic tax system.
The chief minister also proposed to constitute a joint committee of federal and provincial governments with international experts for rationalisation of federal and provincial tax collection; broadening the tax basis at both levels; eliminating duplicate taxation and study on revenue generation at the federal and provincial levels.
He said the federal government insisted 7 percent of the total divisible pool be made part of a special pool for social sector and expenses on security but the Sindh government could not accede to this proposal because Khyber-Pakhtunkhwa was allowed an additional one percent share on account of its losses in the war on terror. He indicated that most of the terrorists moved to Karachi, causing manifold increase in Sindh government's expenditure on security. He said Article 148 of the Constitution requires the federal government to maintain law and order. Therefore, he urged the federal government for reimbursement in view of Sindh's extra outlays on security. He said the tribal areas (FATA) have now become part of KP province that stands to gain in NFC on account of increase in its population. He said that under Article 161, provinces' share cannot be reduced in the divisible pool.
Sindh CM also spoke on equalisation of payments that he said are cash payments made to less-developed provinces/states to bring them at par with others. Many states use fiscal equalisation to reduce inequalities in the fiscal capacities of sub-national governments due to various factors, he said, adding that the equalisation of payment, however, may induce perverse incentives to sub-national governments to reduce fiscal effort. He gave the examples that Australia gives horizontal Fiscal Equalisation, Belgium makes National Solidarity Intervention, Canada gives Fiscal Capacity Equalisation (FCE) and Germany makes Post-Unification Equalisation Payments. He said these incentives could not go indefinitely and have to have a sunset requirement; as in Germany where equalisation system would end in 2020.
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