Huzaima Bukhari & Dr. Ikramul Haq
The governments in Pakistan, military and civilian alike, have failed to end injustice in all spheres of life and areas, but more tragically in distribution of taxes between the federation and the federating units. Assignment of taxes is a vital constitutional and political issue that has been blatantly ignored, resulting in there being no judicious distribution of taxes between the centre and the provinces. The imbalances and unjust monopoly of taxes by Islamabad is a perpetual source of disharmony between the Centre and the provinces. Mr. Yousaf Raza Gilani, unanimously-elected Prime Minister, in his maiden speech after winning the “historic” vote of confidence, made a pledge that Concurrent List in the Constitution will be abolished within one year. One wonders why it could not be dispensed with immediately when there has been consensus in both the houses that it denies fair and equitable distribution of taxing powers between the federation and the federating units.
It is an undeniable fact that Islamabad has always usurped the right of the provinces by levying sales tax and other duties at federal level on goods and services within their (provincial) territorial jurisdiction. In all major federations, e.g. USA, Canada and India, the federating units have the exclusive right to levy indirect taxes on goods and services generated within their geographical boundaries. In Pakistan, the federal government has vehemently denied this right to all the four provinces. Adding insult to injury the federal government is collecting huge amount of taxes through provincial government departments treating them as withholding tax agents without paying any service charges as envisaged in Article 149 of the Constitution. On the contrary, it charges 2% fee to provinces while collecting sales tax on services on their behalf! This dichotomy has never been contested by any provincial government.
Federal highhandedness in tax matters (by using both federal and concurrent lists) has destroyed the financial and economic rights of provinces. The provinces should have the exclusive right to levy taxes on goods and services within their respective physical boundaries, but the Federal Government blatantly encroaches upon their undisputed right by levying tax on goods and services under the garb of presumptive taxes in Income Tax. Such taxes cannot be termed as taxes on income (which the federal government is empowered to levy under item 47 of the Federal List) but tax on goods and services. It is a great tragedy that this argument was not presented in the Supreme Court when the constitutionality of such provisions was challenged in 1991 and the debate merely revolved around academic discussions over the concept of income. If the Federal Government can treat tax on goods and services as tax on income, as held by the apex court per incuriam (a mistaken judgement) in Elahi Cotton case PLD 1997 SC 582, then what will be the sanctity of division of fiscal powers provided in the Constitution of Pakistan between the Federation and the provinces.
Our tragedy is that on the one hand we have too many taxes in the country (federal, provincial and local, although the last two only generate negligible national revenue) while on the other, the benefits of revenue collection are not reaching the poor masses of the less privileged provinces. The few rich are the real beneficiaries of every luxury that is available. Fiscal gap is increasing every year despite five-year Tax Administration Reform Programme (TARP) initiated in 2002 with borrowed funds of US$ 100 million.
The prime reason for failure to stall ever-increasing fiscal deficit is that provinces have not been empowered to generate their own resources. They have been denied fiscal autonomy of levying taxes on goods and services. Since 1947 our rulers at the Centre have been treating the provinces in the same way as the British imperialists.
In fiscal year 2006-2007, total federal tax revenue by Federal Board of Revenue (FBR) was Rs. 843 billion. The Federal government showed total receipts (both tax and non-tax) at Rs. 1087 billion, out of which the provinces received as little as Rs. 437 billion. Interestingly, the federal expenditure under two heads alone i.e. defence and debt-serving was Rs. 515 billion. The over-all deficit suffered by the Federal government was Rs. 373 billion.
The Centre might have given away some of the federal taxes to the provinces, most likely sales tax as is the case in India, if the federal taxes collection had increased substantially, but tragically, despite all kinds of oppression, highhandedness, negative tactics, withholding of refunds and what not the FBR took four years —1998-99 to 2001-02— to cross from Rs. 307 billion to Rs. 401 billion — an average increase of Rs. 24 billion a year. From 2002-03 to 2004-05 FBR managed to increase revenue from 460 billion to 590 billion— a poor performance as average annual increase did not even cover inflationary impact. In 2005-06, the collection was Rs. 710 billion, and the last year it was Rs. 843 billion. This year’s target of Rs 1025 billion already stands reduced to Rs. 950 billion, whereas our real potential is not less than Rs. 1600 to 1800 billon. FBR’s track record shows little possibility of achieving Rs. 2200 to 2700 billion mark in next five years to give a fiscal space both to the Centre and the provinces to come out of the present mess extending some relief to the poor and trade and industry for growth. Thus in the near future, if our federation-provinces taxing impediments continue, the country will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, there is an urgent need in Pakistan to reconsider equitable distribution of fiscal and taxing powers between federation and the provinces. Provincial autonomy is meaningless without fiscal rights and redistribution of income and wealth amongst all the federating units. It is hoped that some concrete measures will be announced in the forthcoming first budget of the new government, for achievement of these goals.
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The writers are tax advider ikram@huzaimaikram.com
Tags: federation, income disparities, social justice, taxes
