Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is merely 6 percent-in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool-the National Finance Commission Award as envisaged in Article 160 of the Constitution. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached upon by the federal government through the levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services.
Before independence, the provinces had the exclusive right to levy sales tax on goods and services within their respective physical boundaries. This was snatched from them in 1948 and was never reverted. In the given circumstances when federations like Canada and India are moving towards harmonised sales tax on goods and services, there is a need to debate the issue in public and Parliament for reaching a consensus.
It is an established fact that even after levying all kinds of irrational and expropriatory taxes, the federal government has miserably failed to reduce the burgeoning fiscal deficit that reached a figure of 8.9% in fiscal year 2018-19. For the last many decades, every attempt to bring it down to 4 percent of GDP has not been successful.
The Federal Board of Revenue (FBR), the apex revenue authority at the federal level, has persistently failed to tap the actual tax potential and bridge the tax gap. For the last many years, it could not meet even the budgetary targets what to speak of realising the real revenue potential, which at federal level alone is not less than Rs 8 trillion.
Tackling twin menaces of underground economy and tax evasion has always met with failure in Pakistan. Even after giving generous amnesties in 2018 by the government of Pakistan Muslim League (Nawaz) and 2019 by the coalition government of Pakistan Tehreek-i-Insaf (PTI), total collection was only Rs. 3828.5 billion in 2017-18 (which was "0.4% lesser than the collection of the previous fiscal year) and Rs 4,435 billion in 2018-19 [which was revised downwards twice, first to Rs 4,398 billion and then to Rs 4,150 billion]. The underground economy is driven by many aspects of poor fiscal policy, and as highlighted by Dr Arthur B. Laffer: "it isn't just high tax rates that indicate whether illicit trade activity will be a problem, but rather high tax rates coupled with other factors such as affordability, level of corruption, effectiveness of enforcement, and cultural and societal reasons."
The collection of taxes at federal level is much below the actual potential and the way it is collected creates doubts and suspicion. In 2018-19, as in the past, FBR failed to meet the third revised target. It is obvious that on the one hand FBR is facing the challenge of bridging tax gap and on the other, collection figures are not reliable.
The failure to tap real tax potential poses a tough challenge to both the federal and provincial governments. Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on what the Centre collects and transfers to them from the divisible pool. Provinces are not ready to collect taxes wherever due and generate their own resources after establishment of local governments as envisaged under Article 140A of the Constitution. Centre is unwilling to grant the provinces their legitimate taxation rights while it collects too little to meet their overall financial demands. The size of the cake-divisible pool-is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter which part of the country they belong to.
The track record of FBR shows remote possibility of collecting even Rs. 6 trillion in the next three years to give enough fiscal space to both the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tangle will continue unchecked and further taxation through local governments, when elected, would not serve any useful purpose-there will be no relief to the people, rather tax burden will increase manifold. Thus, Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to overcome this crisis, the parliament will have to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot subdue perpetual economic crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.
The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It is also imperative that further amendment should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. This will help both FBR in collecting income tax as per actual potential; and by levying sales tax on goods in addition to services, the provinces will generate sufficient funds for their needs. It will also reduce fiscal deficit at the federal level. This is the only way to achieve fiscal stabilisation in Pakistan. However, this can only be successful if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms as suggested in 'Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
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