Instead of abolishing 15-20 divisions and ministries in order to reduce current federal expenditure, the federal government is proposing to withdraw the collection of general sales tax (GST) on services by the provinces after creation of a federal tax commission, which is against the spirit of 18thConstitutional Amendment which provided provincial autonomy, said economist and former advisor to Chief Minister Sindh, Dr. Kaiser Bengali.
Addressing a press conference at Karachi Press Club on Monday, Dr. Bengali, who remained member of National Finance Commission (NFC) from Balochistan said that the provinces are performing very well in collection of GST on services, whereas the Federal Board of Revenue (FBR) has miserably failed to achieve its tax collection targets.
The 7th NFC Award transferred GST Services to the provinces and thereby strengthened provincial fiscal autonomy. Punjab and Sindh do have a strong agricultural and industrial base, but Khyber-Pakhtunkhwa and Balochistan do not. It is thus proposed to add a fifth criteria to the horizontal distribution formula: inverse of cultivable area. This will tilt the distribution balance somewhat towards the two economically weaker provinces.
An important meeting of the NFC is going to be held on 6th February in Islamabad and the federal government has moved a proposal to provide 7 percent directly to it and distribution of the remaining 93 percent on the NFC agreed formal of 42.5 for federal government and 57.5 for all four provinces.
Dr. Bengali proposed to remove the direct taxes (net of Withholding Taxes, which constitutes about 80 percent of direct tax collection) from the Divisible Pool and allow the federal government to retain 100 percent of the direct tax (net of WHT) collection. This will enhance the incentive to target direct taxes as opposed to indirect taxes. Resultantly, it can be expected that the tax structure will become more equitable, he added.
An analysis on the basis of 2014 budget, the proposed change will lead to a gain of Rs 181 billion for the federal government and corresponding loss to the provinces. The provinces may agree to absorb all or part of the losses or ask for full compensation.
Dr. Bangali said the federal government’s contention that the 7th NFC Award weakened federal finance by transferring excessive amount of resources to the provinces is factually incorrect. Federal fiscal problems are on account of two factors, for both of which the federal government is responsible.
The NFC Award required the federal government to raise its tax-GDP ratio, which it has failed to do. The 18th Amendment required the federal government to abolish Concurrent List ministries/division, which it has failed to do. Resultantly, current expenditure has increased over 2010-2017 at 9.8 percent per annum against the inflation rate of 8 percent. Thus, current expenditure has grown at a rate that is nearly 2 percent higher than inflation rate.
Dr. Bengali said the Sindh case offers an insight in the potential dangers of any attempt to dilute or roll back the 7th NFC Award or the 18th Amendment enacted in 2010. Post-independence and post-One Unit, demographic and political events gave birth to a nationalist movement that carried elements of secessionism and was largely rooted in anti-Punjab sentiment.
The 2010 devolution has served to demolish this aspect of Sindh’s politics. Evidence for this change emerges from the fact that post-2010, almost all nationalist parties and groups in Sindh aligned themselves with the Punjab-based PML-N and one of them even merged with it. Clearly, the 18th Amendment and the 7th NFC Award, both achieved with rare unanimity across all political parties and across all provinces, has served to bond the federating units and strengthen national unity.
The implications of any roll back are clear. Any undermining of the 18th Amendment or the 7th NFC Award is almost certainly likely to provide oxygen to the separatist agenda and revive the revisionist nationalist politics of yore.
Published in Daily Times, February 5th 2019.