Central government controls the main fiscal jurisdiction, such as taxation, spending and borrowing, in the countries having federal morphology, to upraise stability in the country by truncating horizontal inequities.
Through the 18th constitutional amendment a new paragraph to article 38 of Principles of Policy of the constitution was added and disparities regarding share of provinces in assorted services were consigned to expiration bin.
The amendment also extirpates Provincial autonomy and the articles 70, 142, 143, 144, 149, 157, 160, 161, 167, 172, 232, 233 and 234 were either measured or out-rightly altered. The issues included National Finance Commission affairs; production of electricity; emergency provisions; natural gas; legislative powers and borrowing of provinces. The most momentous change was Article 142(b) and (c), which gave rights to provincial assemblies to legislate with respect to criminal law, criminal procedure and evidence.
Pakistan is also a Federal democracy and to conserve inter-governmental fiscal relationships, setting up of a National Finance Commission (NFC) at mostest intervals of five years is provided under Article 160 of the Constitution. The mandate of NFC is to recommend to the President the distribution of resources between the Federal and Provincial Governments. The President, through Presidential Order, endow legal cover to the recommendations of the NFC. The contrivance of revenue allocation between federal and provincial governments is available and used in the form of NFC.
NFC acts as a constitutional gizmo and has primary onus of disseminating the resources at sub-government levels employing a conjointly agreed and specified formula. This apparatus of allocation of resources and accountabilities betwixt distinctive layers of government is a serious affair and privations may lead to social, economical and political turbulence, therefore, this format of revenue sharing arrangements is required to be supplemented by a strong system of upfront and transparent distribution.
Presently, 7th National Finance Commission (NFC) Award (2009) is functional. Through this Award, the financial sovereignty of the provinces has been invigorated by snowballing their share in the Divisible Pool (taxes) from 50% to 56% in fiscal year 2010-11 and to 57.5% from fiscal year 2011-12 onwards. For the first time in history, diverifox indicators were assented for apportionment of provincial shares in the divisible pool whereas in all the previous Awards, population remained as solitary criterion for dispersal of provincial share in the divisible pool with special grants (subventions) to smaller provinces.
NFC also acknowledged that sales tax on services is a Provincial subject under the Constitution of the Islamic Republic of Pakistan, and may be collected by respective Provinces. Provinces were allowed to collect sales tax on services and consequently, Punjab revenue Authority ("PRA"), Sindh Revenue Board ("SRB") and Khyber Pakhtunkhwa Revenue Authority ("KPRA") were established as alternative to Federal Board of Revenue for collection of sales tax on services.
These boards/authorities were established and are functioning under their separate rules and regulations. The lack of uniform provincial tax laws has provoked rifts to be evolved among provinces, peculiarly between SRB and the other two provincial bodies (PRA and KPRA).
An example of mismatch among provincial tax laws is that Punjab and Khyber Pakhtunkhwa are of the opinion that services received or consumed in their jurisdiction should be subjected to sales tax. But Sindh argues that services originating in its territory should be subjected to sales tax even if they are delivered or consumed in other provinces.
Currently there are a number of different types of taxes imposed in Pakistan operating both under federal and provincial regime.
Some of them are enumerated below:
1. Income Taxes
2. Workers Profit Participation Fund (WPPF)
3. Workers Welfare Fund (WWF)
4. Goods and sales tax (VAT)
5. Provincial Sales Taxes on Services
6. Professional tax
7. Stamp duty
8. SESSI
9. EOBI
10. Sindh Development & Maintenance of Infrastructure (SDMI)
11. Petroleum Development Levy
12 Marking Fee
13. Customs Duty
14. Federal Excise Duty
15. Property tax
16. Motor Vehicle tax
17. Capital Value Tax (CVT)
18. Hotel Tax
19. Tax on interest
20. Entertainment Duty
21. Advertisement (Visibility) Tax
22. Market Committee Act 1948
23. Education Cess
24. Fuel tax
25. Employee paid - Pension contribution
The presences of assorted types of taxes under different authorities also evince the presence of complexities in the inter-governmental revenue transfers and settlements besides causing grave catastrophe to genuine taxpayers. This country is virtually being supported by an insignificant number of tax payers and these rifts are also dissuading them to operate and grow.
The issues relating to inter-governmental transfers arising time and again due to lack of concrete revenue entitlement determination mechanism. This causes piling of taxes paid on services pending to be adjusted against federal taxes or refund claims. These growth impediments are attenuating the growth of economy and wherefore resulting into "dead weight loss".
To address the anomalies amid provinces and between provinces and federation, there needs to be a way forward. The representatives of the provinces, at highest forum, will have to discuss and agree on the basis of provincial taxes, that is, whether the tax should be charged on services on the basis of area of origination or consumption. Also, a thorough study would be required to be undertaken to evaluate and harmonize the provincial and federal tax laws especially for services.
Probable way forwards should include:
1. Harmonized Tax Codes:
The lack of harmony over provincial tax laws for services amidst provinces causes the incompatibility between taxes charged and their adjustments for the taxpayers operating in multiple provinces. Therefore, the tax codes should be harmonized and any disagreements should be discussed and removed. The tariff codes for services in each province should also be revised.
2. National Tax Authority and Clearing Company
A structure through which dues of provinces to each other and to federation and vice versa are settled should also be defined. A national neutral body is required to be established with responsibility and authority to settle inter-governmental dues employing this mechanism. The body may be called as National Tax Authority ("NTA"). NTA may be structured through formation of a Board of Directors ("BoD") consisting of five directors, one representing federation and the rest representing each province and all stakeholders must subscribe its equity equally.
A National Tax and Levy Clearing Company ("NTLCC") may be formed under the NTA to clear and settle the inter-governmental dues. The lessons learned and experiences gained through working with Pakistan Revenue Automation (Pvt.) Ltd. ("PRAL"). NTLCC would act as a hub for collection and disbursement of taxes and levies to and from governments. The taxes and levies which relate directly to provinces like stamp duty, motor vehicle tax etc. would be directly disbursed to provinces and the revenues which are p art of federal pool would be settled on a monthly basis after incorporating inter-governmental adjustments forthwith.
The establishment of NTLCC will smoothen the flow of revenue and would pace up the economic activities.