Pakistan needs to increase revenue collection at all levels to improve tax-to-GDP ratio to a respectable level of 25 percent. Presently, it is only 9.2 percent. This will not be possible unless the Federal Government, after consultation with the provinces, introduces harmonized sales tax on goods and services, and establishes a National Tax Agency (NTA). All existing tax authorities at the federal and provincial levels should merge to form the NTA. The NTA should be modern, automated and efficient, manned by competent personnel and run by an independent Board of Management, comprising officials from the federal and provincial governments and independent professionals. The autonomous status of the NTA can be ensured like that of Canadian Revenue Authority (CRA)—its Board of Management is directly accountable to Parliament through Canadian Minister of National Revenue.
The NTA, unlike Federal Board of Revenue (FBR), will not have any role in framing tax policy or undertaking any legislative work. For this, a permanent Tax Policy Board should be established in terms of Article 156(2) of the Constitution of Islamic Republic of Pakistan, as economic and financial planning is no more a federal subject alone. The Policy Board should have a permanent secretariat and its role should be that of a think tank - it can be housed for instance at the Pakistan Institute of Developmental Economics (PIDE) - to recommend to the federal and provincial governments and assemblies the tax policies for growth and meeting the financial needs of the country.
“The Planning Commission (denoted as PC) is a financial and public policy development institution of the Government of Pakistan. The Commission comes under Ministry of Planning, Development and Reforms. The Planning Commission undertakes research studies and state policy development initiatives for the growth of national economy and the expansion of the public and state infrastructure of the country in tandem with the Ministry of Finance (MoF). Since 1952, the commission have had a major influence and role in formulating the highly centralized and planned five-year plans for the national economy, for most of the 20th century in Pakistan. Although the five-year plans were replaced by Medium Term Development Framework, the commission still played an influential and central role in the development of the programme. Furthermore, the Public Sector Development Programmes (PSDP) also placed under the domain of the planning commission. The commission’s authoritative figures includes a Chairman who is the Prime Minister, assisted by the deputy chairman, and a science advisor.”
It is strange that with the devolution of a large number of subjects to the provinces since April 19, 2010 when the Constitutional (18th Amendment) Act, 2010, commonly called the 18th Amendment, became effective, the Planning Commission is still working as an arm of Federal Government without taking into account the command of Article 156(2) of the Constitution which says:
“The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.
The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC)—recently reconstituted—in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments as per Article 154(1) remains unnoticed by our parliamentarians and constitutional experts. Strangely, the provinces have not raised this issue till today.
Centralized planning was one of the factors in the dismemberment of the country in 1971. The planning, in the post-18th Amendment period should have to be federalized rather than centralized. But nobody has raised this issue. The 18th Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled ‘Special Provisions’.
Before the 18th Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the 18th Amendment. The pre-amendment clause (1) read as follows:
“The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:
Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province”.
While the apex planning body, the NEC, has been federalized, the Planning Commission also continues to be centralized. The spirit of the Constitution can be satisfied by making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and by reducing the number of its members to five, one each from the Provinces and the Federal Government. The Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.
PIDE is now a University under the administrative control of the Planning and Development Division. With Planning Commission moving to the CCI/NEC, the Planning and Development Division can continue to deal with the development issues of the Federal Legislative List, Part I. PIDE can play the role of a think-tank for the Planning and Development Division. There is also an urgent need for restructuring the planning mechanisms in the provinces.
At present, only Punjab has a Planning and Development Board, with members in charge of the main sectors. Other provinces have their respective Planning and Development Departments. An important reason why the centralized role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms.
After the 18th Amendment, the Planning Commission could no more be a centralized body. The Federal Legislative List, Part I, contains subjects which lie in the exclusive jurisdiction of the Federal Government. Before the 18th Amendment, its item 32 related to planning: “National planning and national economic coordination including planning and coordination of scientific and technological research.”
The FBR has been persistently failing to meet budgetary targets for the last many years, what to speak of realising the real revenue potential. FBR was not able to collect even Rs. 7,400 billion—the original target for fiscal year 2022-23 was Rs. 7,460 billion, later revised to Rs. 7,640 billion after a mini-budget levying additional taxes of Rs. 170 billion was passed through the Finance (Supplementary) Act, 2023.
After the 18th Amendment, the subject was included in Part II of the Federal Legislative List. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, a special institution, the CCI, has been created to supervise the affairs of the Federation listed in Part II of the Federal Legislative List.
By abolishing the Concurrent List and deleting certain items from the Federal Legislative List Part-I, the 18th Amendment has substantially increased the quantum of provincial autonomy. Second, the role of provinces in decision making of the federation has been substantially enhanced by the enlargement of the Federal Legislative List Part-II.
Provinces now have more subjects to deal with than was the case before the 18th Amendment. In the first place, they have been given full and effective control of the social sector, especially education, health, population, labour, social welfare, Zakat, Auqaf, environment, tourism, print media and cinematograph films, culture and archeology etc. Other than standards of higher education, research and international student's exchange, the provinces are now entrusted with education policy formulation, planning, and curriculum standards.
The 18th Amendment has given provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. It says: “Subject to the existing commitments and obligations, mineral oil and natural gas within the Province or the territorial waters adjacent thereto shall vest jointly and equally in that Province and the Federal Government.” The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.
“A Province may raise domestic or international loan, or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council”.
Article 167(4) thus ensures provinces to run and administer their own local government systems and enter into direct financial loan or credit arrangements with external and internal lenders.
In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. In this perspective, we should also discuss the idea of NTA. The FBR has been persistently failing to meet budgetary targets for the last many years, what to speak of realising the real revenue potential. FBR was not able to collect even Rs. 7,400 billion—the original target for fiscal year 2022-23 was Rs. 7,460 billion, later revised to Rs. 7,640 billion after a mini-budget levying additional taxes of Rs. 170 billion was passed through the Finance (Supplementary) Act, 2023. FBR is dysfunctional to the extent that the system is not taxing the ultra-rich 3.5 million and income distribution disparities are rapidly widening. There is an urgent need to dismantle and reconstruct FBR.
The right to levy tax on agricultural income tax should be given to the federal government. Despite levying taxes that should have been with provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that exceeded Rs. 6.5 trillion in fiscal year 2022-23.
Below are some recommendations vis-à-vis implementation of 18th Amendment from a holistic point of view for better fiscal management and economic growth of Pakistan as well as making the federation a true representative of all and not just a few privileged ones as has been the case for the last 76 years of its existence.
First and the foremost need is establishment of an independent, totally federalized, CCI Secretariat that must have equal representation of centre and provinces and must include technical experts to build its capacity and ensure that the CCI mandate can be effectively supervised. On the issue of interpretation of Article 172(3) of the Constitution and its implementation special attention should be given to allay the fears of the provinces.
Immediate problems like inadequate infrastructure in the backward areas of all provinces and federally-controlled areas, lack of avenues for provincial revenue generation, low electricity generation capacity, and low quantum of representation of Balochistan in the Federal services must be resolved in CCI on priority basis.
A comprehensive policy along with operational framework needs to be adopted to promote a culture of Inter-Provincial Coordination for developing and coordinating information and communication amongst Federal/Provincial organizations. Research analysis is required by respective sectors/departments to pre-empt the notion that provinces lack fiscal capacity or discipline to tackle social and economic issues. The provinces have to legislate and create the necessary infrastructure to fully utilize the potential of the devolution process for the benefit of provinces and their people.
Planning, in the post-18th Amendment period has to be federalized rather than centralized. The message of the 18th Amendment is that the provinces should take charge of their own planning and development. This needs de-bureaucratization, appropriate investment in human capital and democratic devolution down to districts (Article 140A).
The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence.
The right to levy tax on agricultural income tax should be given to the federal government. Despite levying taxes that should have been with provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that exceeded Rs. 6.5 trillion in fiscal year 2022-23. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted. Centre and provinces should work together under the NTA to improve efficiency in collecting taxes.
India amended its Constitution and enforced since April 12, 2017 the unified Central Goods and Services Tax Act, 2017—popularized as ‘one nation, one tax.’ This law has harmonised the indirect tax regime. GST with broad tax base will result in better tax compliance. Pakistan needs to learn from this move and must also consider introducing harmonised GST as early as possible.
Pakistan needs a paradigm shift in tax policy and a revamp of the entire tax administration. Establishment of NTA, capable of generating sufficient resources for the federal and provincial governments must be the top priority. Through consensus and democratic process resorting to Article 144 of the Constitution, all legislatures can agree to establishing an autonomous NTA, comprising specialists and professionals that would facilitate people to deal with single body rather than multiple agencies at the national, provincial and local levels. The mode and working of NTA can be discussed and finalised under CCI [Article 153] and its control can be placed under NEC [Article 156].