Currently, all broad-based and buoyant sources of revenue are with the federal government. The contribution of provinces in the total tax revenues [Rs4,748 billion] for the fiscal year 2019-20 [11.4 percent of GDP] was merely 8 percent and in overall national revenue base (tax and non-tax revenue) of Rs6,272 billion [15 percent of GDP] it was 9 percent against the total national expenditure of Rs 9,648 billion. All provinces together generated Rs 414 billion in taxes and the non-tax revenues came to only Rs 102 billion.

The federal government spent Rs 1,213 billion on defence and Rs 2,619 billion on debt-servicing and after transfers to provinces under the National Finance Commission Award (NFC), these two alone were Rs 554 billion higher than net revenue collection of the federal government. This is our main fiscal dilemma today.

While the federal government is accumulating debts, the provinces are heavily dependent on transfers from the NFC Award. What makes the situation more disturbing is the fact that the provinces’ right to levy sales tax on services is encroached upon by the federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services.

Before independence, the provinces had the exclusive right to levy sales tax on goods and services within their respective boundaries. The sales tax was on the Provincial Legislative List at Serial No 48 in the Government of India Act, 1935, and was described as “Taxes on sales of goods and on advertising”. In the 1956 Constitution, “tax on sales and purchases” was mentioned at Serial No 26 of the Federal Legislative List, and therefore, for the first time it became a Federal subject.

The position was maintained in the 1962 Constitution, which mentioned “tax on sales and purchases” in the Federal Legislative List as Clause (j) at Serial No 43 in the Third-Schedule. In 1973 Constitution as originally adopted ‘tax on sales and purchases’ was kept on Federal Legislative List at Serial No 49 of Part I of the Federal Legislative List given in the Fourth Schedule.

The item was, however, completely substituted by Constitution 5^th Amendment Act, 1976 with effect from September 13, 1976, that read “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”. The second half of the amended entry appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960.

Through that amendment the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption” [see details in WAPDA v Collector of Central Excise and Sales Tax (2002 PTD 2077 and also in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)].

The solution is to move towards a harmonised sales tax on goods and services for which there is a need to debate in public and p arliament for reaching a consensus. The total collection by imposing unified sales tax on goods and services can reach Rs 4,000 billion as against collection of around Rs 1,596 billion by FBR in 2019-20 through sales tax on goods and provinces cumulatively of Rs 232 billion through sales tax on services. The additional revenue collection of nearly Rs 2,000 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per Constitution.

Even after levying all kinds of irrational and expropriatory taxes, the federal government has miserably failed to reduce the burgeoning fiscal deficit that reached a figure of 8.1 percent in the fiscal year 2019-20.

Even after levying all kinds of irrational and expropriatory taxes, the federal government has miserably failed to reduce the burgeoning fiscal deficit that reached 8.1 percent in fiscal year 2019-20 against the target of 7.1 percent. For the last many decades, attempts to bring it down to 4 percent of GDP have not been successful.

The Federal Board of Revenue (FBR has persistently failed to tap the actual tax potential and bridge the tax gap. For the last many years, it could not meet even the budgetary targets what to speak of realising the real revenue potential, which at federal level alone is not less than Rs 8 trillion. Tackling the twin menaces of underground economy and tax evasion has always met with failure in Pakistan.

Even after generous amnesties in 2018 by the government of Pakistan Muslim League (Nawaz) and in 2019 by the coalition government led by Pakistan Tehreek-i-Insaf (PTI), total collection was only Rs 3,997 billion in 2019-20, after blocking refunds of Rs 578 billion, which if excluded, the net collection comes to only Rs 3.4 trillion against the claimed figure of Rs 3.9 trillion (just 8.2 percent of GDP). Resultantly, the fiscal deficit is around Rs 4 trillion, if FBR’s correct net collection is taken into account.

Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on what the Centre collects and transfers to them from the divisible pool. Provinces are not ready to collect taxes wherever due and generate their own resources after establishment of local governments as envisaged under Article 140A of the Constitution. Centre is unwilling to grant the provinces their legitimate taxation rights as it collects too little to meet their overall financial demands. The size of the cake—divisible pool—is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter which part of the country they belong to.

The track record of FBR shows a remote possibility of collecting even Rs 8 trillion in the next three years to give enough fiscal space to both the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor, as well as trade and industry. Under the given scenario, federation-provinces fiscal woes will continue unchecked and further taxation through local governments, even if materalised, would not serve any useful purpose—there will be no relief to the people, rather tax burden will increase manifold.

The PTI government secured over $13 billion in foreign loans in the fiscal year 2019-20 alone. It was the second highest in history—we are now borrowing mainly to repay maturing external debt. During the previous fiscal year, Pakistan received gross loans of $13.2 billion from bilateral and multilateral lenders including, the IMF and commercial creditors, according to a report, quoting data compiled by the Ministry of Economic Affairs.

We received $29.2 billion in foreign loans in the past two years that include $26.2 billion by the PTI government since coming to power in 2018. Out of this, $19.2 billion was taken just to repay the maturing external debt.

Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth are meaningless. We cannot overcome the perpetual economic crises unless the provinces are given ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.

The way forward is for the provinces to agree to a harmonised sales tax on goods and services. It is imperative that a further amendment should be made in the Constitution after debate and consensus to assign the right to levy tax on all kinds of income, including agricultural income, to the federal government.

This will help FBR both in collecting income tax as per actual potential and levying sales tax on goods in addition to services. The provinces will also get sufficient funds for their needs. This will also reduce fiscal deficit at the federal level. However, this can only happen if we also reform and merge all tax collection agencies at federal and provincial levels for which, comprehensive structural reforms are needed as elaborated in “A new tax agency,” The News, November 15, 2019.