The much-awaited NFC Award – 2 – Shahid Kardar
The much-awaited NFC Award – 2 – Shahid Kardar
The federal government frequently modifies the rules of the game through tortuous revisions of legal and related definitions to suit its version of what constitutes constitutional role, mandates, distribution and scope of taxation domain and powers between different levels of government. The treatment meted out to the provinces by the federal government on the implementation of the GST on services (revenue from which, under the Constitution, would have accrued entirely to the provincial governments and not shared with the federal government, and for which it was to get just a two per cent share as collection charges) best illustrates this issue. Activities that under any internationally and rationally accepted definition of the term “services” were, through the use of convoluted if not bizarre explanations, twisted and stretched beyond the realm of possible meanings to suit Islamabad’s objective, to forcibly appropriate for itself a bigger share (55 per cent share under the divisible pool arrangement plus an additional three per cent as collection charges).
In federations run along more fair and equitable lines it would be difficult to imagine that activities such as provision of electricity, gas, telecommunications, air travel and restaurants would be classified as anything other than services. However, such is not the case when it comes to Islamabad. At times when Islamabad felt that it could not manipulate definitions to its advantage it simply chose to levy excise duties in GST mode on services so as to get a share in the revenues from a tax to which it otherwise had no share legally. And when, in its opinion, levying such a tax on, say, lawyers would be politically difficult (given that it had no incentive in terms of a share in revenues that would flow to it from its collections), it just did not introduce a GST on such services.
The experience with GST on services briefly described above suggests that, instead of persisting with a convoluted tax structure and to rectify the incentive systems, it would make sense to amend the Constitution to eliminate the artificial distinction between goods and services (that has been the subject of repeated abuse) and make them both part of the national divisible pool with the federal government and the provinces entitled to the same share in the GST on services, as is the present treatment for GST on goods. That the overall share of the federal government needs to be reduced is a matter that should be dealt with in the manner proposed above.
The discussion above has tried to present the argument that it has become imperative to revise the tax structure that has become highly centralised, and give the eprovinces more resources to enable them to meet their constitutional responsibilities, thereby making provincial autonomy more effective and meaningful. Apart from reducing the size of the federal government and hence its share in revenues, so that the provinces get more resources, there is also a need to alter the tax structure, if not revamp it, to enable the provinces to reduce their dependence on resource transfers from the divisible pool by bifurcating the sales-tax structure (for both goods and services after removing the constitutional distinction between the two in the manner proposed above) into two components, a 13 or 16 per cent sales tax in the GST mode with an adjustment for the GST paid on inputs to be levied by the federal government and a three per cent non-GST sales tax to be levied at the retail level by the provinces and collected on their behalf by the federal government.
In the interest of national harmony it is good that Punjab is showing greater magnanimity and supporting a change in the distribution formula to accommodate two major demands – an allocative mechanism that will not only be population-driven but also give weightage to revenue collection (the demand of Sindh) and geographical area, or the inverse population ratio (the demand of Balochistan). However, the only sensible revenue collection/generation criterion that could be used for determining provincial shares would be collections from each province from domestic GST, withholding income tax (especially income tax collected from the taxation of personal incomes) or contribution of provincial taxes to provincial expenditures. Only these indicators would faithfully reflect economic activity in the province, and hence the revenue contribution of the province. Using any other revenue collection data to derive weights would be unfair because:
a) All custom duties and a huge proportion of income tax and sales tax is collected in Karachi, practically the only port in the country (in fact, the single-largest collector of income tax is Karachi’s Collector of Customs!), taxes that are eventually paid by the entire population of the country;
b) Income tax returns are filed by the head offices of companies which are located in one province while the manufacturing facilities are located in another; and
c) GST levied at the manufacturing stage is paid on the output produced and sold throughout the country.
The Punjab of today (in view of the high rates of economic growth over the last eight years or so and a host of other factors) will not be a loser even under this criterion. If anything, data suggests that as its contribution is more than its share of the national population, it would be a net gainer. However, a large weightage to this factor will place the NWFP and Balochistan at a distinct disadvantage.
In the light of the discussion above, a desirable formula for the distribution of resources among the provinces would be one which gives maximum weightage of 70 per cent to population, 10 per cent to revenue generation (as proposed above), 10 per cent to backwardness (on the basis of criteria to be developed through consultations between the centre and the provinces–a tricky one since poverty alone as an indicator or any other per capita basis would again end up invoking the population factor!) and 10 per cent to geographical area/inverse population ratio.
Such a distribution formula will involve some decline in the volume of revenue transfers from the divisible pool to Punjab, but this reduction will only be marginal since Punjab, through its own resource mobilisation measures (and it has a fair amount of untapped potential), will be able to recoup these losses. And more importantly, this small sacrifice of Punjab will go a long way towards strengthening national unity.
At this stage it should also be noted that it is a mistake to include net hydel profits and royalties and excise duties on gas and oil under the NFC Award, since they are dealt with under Article 161 and should not be the subject of the NFC Award. Hence, the argument of the Punjab government is flawed that its per-capita share of resource flows is significantly lower than that of the other provinces (implying that despite its higher level of development partly because of better “initial-1947- conditions” it needs a better compensation structure). It is not only making a mistake by including in the flows to the other provinces transfers like net hydel profits, gas development surcharge and excise duties and royalties on oil and gas (transfers that fall outside the NFC), but is also conveniently ignoring the benefits accruing to it from the spending in Punjab of the various federally financed agencies, the obvious ones being the defence forces, WAPDA, the Higher Education Commission funding universities, and the Federal PSDP on schemes and projects like water and highways.
I would also like to take this opportunity to discuss the issue of net hydel profits based on a nonsensical formula devised by Ghulam Ishaq Khan and A G N Kazi and how the demands of the NWFP in this connection are beyond countenance.
(To be continued)
The writer is a former finance minister of Punjab. Email: kardar @systemsltd.com
