fairer balance of fiscal effort between the federal and provincial governments, which have agreed to re-balance spending activities in line with the 18^th Constitutional Amendment through the signature of a National Fiscal Pact that devolves to provincial governments higher spending for education, health, social protection and regional public infrastructure investment, enabling improved public service provision. At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonising their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025”—IMF’s Press Release No. 24/273, July 12, 2024.

The staff level agreement between Pakistan and the International Monetary Fund concluded on July 12, 2024, subject to the approval of the latter’s executive board. The $7 billion, 37-month Extended Fund Facility will have a far-reaching impact for revenue mobilisation at the national level, distribution of tax collection between the federation and the federating units as well as revamping of the outdated and under-performing national tax system.

There has been constant pressure from the IMF for reconsidering the 7th NFC Award. The reduction in the provinces’ shares is not possible unless the constitution is amended. Obviously, there will be resistance from the provinces. The issue of fiscal consolidation is not because of assumed inequitable distribution (sic) between the Centre and the provinces, but the size of the cake—the divisible pool. Both the Federation and the Federating Units have failed in the past to harness the tax potential by not taxing the rich. The IMF, too, has also failed to issue any report after 2016 to indicate the true tax potential of Pakistan.

A 2016 report by the IMF, titled Unlocking Pakistan’s Revenue Potential estimated Pakistan’s actual tax potential at Rs8 trillion. It mentioned: “The latest National Finance Commission award, signed in 2010, advanced fiscal decentralisation and increased the provincial share in federal tax revenues from 45 percent to 57.5 percent, even though provinces have exclusive power to tax agricultural income, property and services and account for only about 35 percent of total general government expenditures. Consequently, while provincial tax revenues increased by about 0.3 percentage points over the past three years to 1 percent of GDP in 2016, provincial governments have limited incentive to boost their own source revenues and instead rely on transfers from the federal government. The agriculture sector, for example, generates less than 0.1 percent of total tax revenues under the purview of provincial governments, although it accounts for about 20 percent of GDP and employs 45 percent of the workforce at the national level.”

The crux of the IMF’s objection to the 7th NFC Award in 2016 was “poor performance of provinces” in terms of tax collection, especially in respect of the agricultural income tax. The anti-agriculture tax-lobby says that an overwhelming majority of farmers live on subsistence level and are not liable to this tax. According to economist Dr Hafiz A Pasha, in 2022, the net income of one percent landowners, possessing 22 percent of the land in entire Pakistan, was Rs 2,800 billion, but they paid only Rs 2billion tax. The issue, is, thus of non-taxation of the rich and mighty in Pakistan.

Now, the IMF’s mission chief to Pakistan, Nathan Porter, has linked the success of the 24th EEF programme to the full harmonisation of provincial “Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes” that “must become effective from January 1, 2025.”

In 2024, our economic managers are still relying on the 7th NFC Award, signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010 [commonly called the 18th Amendment]. Article 160(3A) of the constitution, inserted by the 18th Amendment, categorically says: “The share of the provinces, in each Award of the National Finance Commission shall not be less than the share given to the provinces in the previous Award.” However, outside the ambit of Article 160 of the constitution, the Centre can impose taxes to meet the budgetary gap as it did in 2013 by enacting Income Support Levy Act, 2013. The levy was repealed the very next year.

More amendments should be made in the constitution after building consensus to assign the right to levy tax on all kinds of income, including agricultural income, to the federal government to tax the rich to improve infrastructure, retire debts and bridge fiscal deficit.

If the federal government can impose any tax/ levy/ cess to meet its needs without sharing the proceeds with the provinces, then what is the need for the debate over the7th NFC Award and the18th Amendment? The real issue is poor collection of taxes by the governments – federal as well as provincial. Both are guilty of not collecting taxes from the rich and mighty.

The history of negotiating NFC awards after the 7th NFC Award is intriguing. As the negotiations for the 8th and 9th NFC remained inconclusive, the 10th NFC was constituted on May 12, 2020. Its award was to take effect from April 23, 2020. Nobody knows its current status.

The inaugural meeting of the 10^th NFC was held on February 18, 2021. Presided over by the then finance minister, Dr Abdul Hafeez Shaikh, it constituted six sub-groups to prepare sectoral recommendations. In the maiden meeting, Khyber Pakhtunkhwa and Balochistan demanded more resources “to address their peculiar deprivations.” Hafeez Shaikh was removed from the chairmanship of 10th NFC, after opposition from provinces and Balochistan High Court’s verdict against the composition of the NFC. It was reconstituted on July 21, 2020, so that it will expire on July 20, 2025.

After the meeting, Sindh Chief Minister Murad Ali Shah told newsmen that “the story of insufficient capacity for utilisation of additional resources under the 7th NFC award was no more relevant. He said disbursement of provincial shares by the federal government was such that his province had to invariably face a situation on 30th of each month as to how much overdraft was required to pay salaries.” He also pointed out that “the actual problem was that FBR’s collections in last two/ three years has been lower than fiscal year 2017.”

Though a few meetings of the NFC were held during the tenure of Pakistan Tehreek-i-Insaf, no award was announced till the end of its rule in April 2022. During the 16-month period of Pakistan Democratic Movement, two budgets were presented, but not a single meeting of the NFC was held.

Currently, all broad-based and buoyant sources of revenue are with the federal government. The contribution of provinces to the tax revenues is hardly 6 percent —in overall national revenue base (tax and non-tax revenue) it is around 8 percent.

During the Decade of Democracy [2008-18] neither Pakistan Peoples Party nor Pakistan Muslim League-Nawaz made the necessary effort to ensure adequate collection of revenues by the Federal Board of Revenue so that distribution of their net proceeds could bring fiscal consolidation for the Federation. The provinces failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the constitution.

On assuming power in August 2018, the coalition governments led by the PTI in the Centre, the Punjab and Balochistan and the two-thirds majority PTI government in Khyber Pakhtunkhwa miserably failed in improving tax collection and devolution under Article 140A of the constitution. This shows their utter disrespect for the constitution and complete apathy towards well-being of people and transferring powers to the grassroots level. Had they acted prudently, the less-privileged and have-nots would not have been suffering so immensely.

The Centre is unwilling to federalise the tax policy and tax administration. Resultantly, the size of the cake is so small that it cannot bring the country out of its debt trap or spend adequate amounts on the welfare of the masses. The way forward is a harmonised sales tax on goods and services to be collected through a National Tax Council.

It is imperative that more consensus amendments be made to the constitution to assign the right to levy tax on all kinds of income, including agricultural income, to the federal government to improve infrastructure, retire debts and bridge fiscal deficit. This alone can achieve sustainable fiscal stabilisation in Pakistan.

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.