Presentation on NFC PIDE FEBRUARY 21, 2007 by Shahid Kardar
NFC TAXATION STRUCTURE AND AMBIT OF NFC Constitution gives limited tax powers to provinces. Constitution & tax structure developed under IMF prog Federal government levies all productive taxes. For efficiency and economy reasons income tax, import duties, excise duties and GST have to be centralized. Imbalances between taxation powers and expenditure obligations- Vertical imbalance requires resource transfers from higher levels of govt. to lower levels. Sharing between federation and provinces on basis of formula announced by NFC. Concept of pool and formula ensures transparency and predictability and gives statutory protection to award. Takes away discretion and potential for abuse.
Fiscal Decentralization in Major Developing Country Federations Federation, Developing Country Sub-National Expenditures (% Total) Sub-National Expenditures (% GDP) Sub- National Own Revenues (% Total National Revenues) Sub- National Own Revenues (% GDP) (I) (II) (III) (IV) Pakistan 34.2 6.3 7.0 0.9 India 49.2 10.8 33.8 6.1 Ethiopia 35.9 9.5 18.7 3.0 Nigeria 38.0 13.6 10.7 3.18 South Africa 56.5 18.9 18.9 6.1 Argentina 44.4 12.4 44.2 8.4 Brazil 41.7 15.3 39.0 10.5 Mexico 41.0 7.4 25.5 4.5 Russia 38.5 12.7 32.4 13.0 Malaysia 11.0 2.4 9.1 2.4 Source: IMF
Key Indicators for Pakistan s Disparate Federation Population Share GDP per Capita (2004/5) Area Human Development Index % /million Rs. %/km2 Index Balochistan 5.1% NA 45.2% 0.499 NWFP 13.8% 35,211 9.7% 0.51 Punjab 57.4% 47,131 26.8% 0.557 Sindh 23.7% 61,563 18.3% 0.549 Total/Average 128.4-1.5 0.541 Source: World Bank, UNDP 2003 Human Development Report.
Provincial Consolidated Revenues Balochistan NWFP Punjab Sindh Total % % % % % (Current) (Current) (Current) (Current) (Current) Federal Receipts 94.5 73.9 82.9 68.0 78.2 Provincial Taxes 2.4 4.8 9.7 9.3 8.3 Provincial Non-tax Receipts 3.0 21.3 7.3 22.7 13.5 Source: ADB/DfID/WB DSD 100.0 100.0 100.0 100.0 100.0
NFC TAXATION STRUCTURE AND AMBIT OF NFC (continued) Federal Government after 5% collection charge will now get 54.7% and provinces 45.3% (1997: 43.3%) of divisible pool. Sharing between Provinces 2006/07 Province Existing Provincial Share (%) First Year of Award New Share (%) Punjab 54.0 52.3 Sindh 25.3 25.3 NWFP 14.0 15.0 Balochistan 6.7 7.5 Increased Flow for 2006/07 after New Award compared with 1997 Award Province Rs. In billion Punjab 1.7 Sindh 3.4 NWFP 5.8 Balochistan 3.4 Total: 14.3
NEED TO REFORM SHARING ARRANGEMENT BETWEEN FEDERAL & PROVINCIAL GOVTS Need to correct vertical and horizontal transfers. Bizarre outcome of indefensible sharing arrangement. Federal Government constructing provincial roads. Will only get worse with throw-forward of Fed PSDP of Rs.1.7 trillion without the water sector projects. Provincial governments operate under harder budgetary constraints. Receipts highly sensitive to changes in divisible pool share. Reduce share of Fed. govt to 45%. Trim size of federal government to give up subjects that constitutionally lie with provinces. Improve expenditure efficiencies. Tortuous revisions of legal and related definitions to suit federal government s version of its constitutional role and mandate and scope of taxation powers. GST on services provincial subject under Constitution. But revenues from activities under any internationally and rationally accepted definitions of term services forcibly appropriated by Federal government for itself through strange interpretations e.g., electricity, telecommunications, gas, air travel, and restaurants. Isl also now resorting to Excise Duty on Services to deprive provinces their dues under the constitution.
NEED TO REFORM SHARING ARRANGEMENT BETWEEN FEDERAL & PROVINCIAL GOVTS (contd) Reduce perpetual dependence on Islamabad/highly centralized tax structure. 12.5% GST in VAT mode and 2.5% GST as sales tax at retail level levied by provinces with CBR as collection agency.
ARRANGEMENTS FOR HORIZONTAL DISTRIBUTION OF DIVISIBLE POOL Presently pool distribution between provinces on population basis. Development has to be perceived in terms of people population as principal criterion is representative measure of need. But per capita not a good index: o Because of minimum threshold of administrative overheads. o Standards required for certain basic public services like education, health and drinking water. o Income differentials between provinces ignored if all treated equally. o Assists those who make no extra effort to mobilize resources and have not been prudent. o Works against national objective of population control. Should relatively backward provinces be assisted through direct grants or through pool? Building it into formula provides an incentive to remain backward.
ARRANGEMENTS FOR HORIZONTAL DISTRIBUTION OF DIVISIBLE POOL (continued) CRITERIA FOR REVENUE SHARING AMONG SUB-NATIONAL GOVERNMENTS Country Shared Taxes % Sharing Criteria % VAT 53.90 Population 65.00 Income Tax 48.70 Development Gap 25.00 Asset Tax 49.00 Inverse Population 10.00 Argentina Density Excise Tax 49.00 Financial Service Tax 49.00 Brazil Fuel Tax 53.00 Income Tax 21.50 Population Payroll Tax 66.70 Area Tax on Industrial Products 21.50 Per Capita Taxes on hydroelectricity 45.00 and minerals Income Tax 85.00 Income Tax Equal Share Excise Duties 45.00 Population 22.50 Estate Duty 100.00 Distance of Income per 45.00 capita Collection 10.00 Backwardness 11.25 India Excise Duty Population 25.00 Income Adjusted Total 12.50 Population Backwardness 12.50 Distance of Income per 33.50 capita Projected budget deficits 16.50 Import and Excise Duties on 30.00 Revenue Growth Grant Oil Malaysia Export Duty on tin, etc. 10.00 Population 50.00 Growth in per capita 50.00 Domestic Product Bangladesh Population 40.0 Malawi Population 25.0 Nepal Population 20.0
ARRANGEMENTS FOR HORIZONTAL DISTRIBUTION OF DIVISIBLE POOL (continued) Sharing should be combination of population, tax effort (extent to which revenues from own efforts finance provincial government expenditures), tax collection, area and backwardness. Punjab should make a small sacrifice for national unity and support formula revision.
TAX COLLECTION CRITERION Can only be income tax from personal incomes as this would reflect economic activity. Any other criterion would be unfair because: o Karachi practically only port at present. o Income tax returns filed by head offices of companies in one province with manufacturing capacity in another. o GST paid on manufactured output sold throughout country
NWFP NET HYDEL PROFIT NWFP gets Rs. 6 billion per annum but demanding Rs. 12 billion. Irrespective of who made investment (Rs. 12.3 billion) in Tarbela translates to return of 50% on investment and 272% on cost of generation. And we were reluctant to give HUBCO 18%. Incorrect formula. Profits not apportioned to other components of power infrastructure. Investment in Tarbela 1/6 th of total investment in generation, transmission and distribution.
BALOCHISTAN AND SINDH Gas Development Surcharge (GDS) not covered under NFC Award. In case of Balochistan price for royalty payment different and lower than for determining share of GDS. But who should own and control the oil and gas reserves? Solution is not royalty. If Pakistani model then New York and Washington would have been rich and not State of Texas. Similarly, in Canada and Australia.
OTHER ASPECTS Consult Provinces before finalizing budgetary proposals. Treating them as equal partners will improve fiscal management and national harmony. Also in consonance with principle of federation. Provinces have ceded some powers to create Federal government and they should agree to give share to federation to run its affairs and not other way around. Just because some taxes have to be centralized for administrative purposes does not tantamount to relinquishing of powers. Federal government s strength not only from superior taxation powers but also from ability to borrow. Unfair arrangement. Islamabad can be extravagant but restrictions placed on provinces.
OTHER ASPECTS (continued) Set up impartial body such as NFC or truly independent State Bank that places ceiling on total public sector credit and its sharing between federal and provincial governments. Australia has loan commission which performs this task. Empower Parliament to approve membership of NFC and provide guidelines on sharing from pool. NFC Award should be technical issue. NFC membership should comprise professionals.