KP CM asked the federal government to fulfill its promise to finance the Chashma canal on the right bank
Federal Minister for Finance and Revenue, Muhammad Aurangzeb. PHOTO: APPLICATION
ISLAMABAD:
Khyber-Pakhtunkhwa (KP) Chief Minister Sohail Afridi announced his participation in the first meeting of the National Finance Commission (NFC) but demanded that the Center clear over Rs 3,000 billion of outstanding debts and also honor its commitment to construct an irrigation canal.
“I will attend the NFC meeting as it is a matter of provincial tax rights,” Afridi said while speaking to reporters in Islamabad on Friday.
The federal government has convened the first meeting of the NFC on December 4 in Islamabad. This meeting will pave the way for the development of a new formula for the distribution of fiscal resources between the Center and the federated units.
In the first meeting, the commission will hold a general discussion on the deliberation strategy on the 11th NFC Awards, including the proposal for formation of sub-groups for deliberations on the thematic areas, as per the meeting agenda.
Finance Minister Muhammad Aurangzeb will chair the meeting which will be attended by four provincial finance ministers and their technical members.
The finance minister portfolios are held by KP CM Afridi and Sindh CM Syed Murad Ali Shah.
The five major stakeholders, Balochistan, Punjab, KP, Sindh and the federal government will make presentations on their respective fiscal situations.
The federal government wants to reduce the provinces’ share from the current 57.5% of the divisible total, either by reducing the percentage of revenue, shifting spending responsibilities, or a combination of the two.
However, the current 57.5% provincial share cannot be reduced until the Constitution is amended. Prime Minister Shehbaz Sharif recently shared his thoughts on reducing the provincial share.
At a high-level meeting, Shehbaz said customs duties were not part of the price of NFC and should be treated as federal revenue.
However, the 7th NFC, which was finalized and approved in 2009-2010, includes customs duties in the divisible federal pool, as well as income tax, wealth tax, capital value tax, sales tax and federal excise taxes.
For the current financial year, the estimated share of provincial governments in federal taxes is Rs 8.2 trillion based on a projected tax collection of Rs 14.13 trillion by the Federal Board of Revenue. Of this sum, Rs 892 billion, or 10.8%, is due to customs duties.
The KP chief minister said his province’s share due to revenue generation, reverse population density and increase in population ratio after merger of erstwhile tribal districts should be increased in the next NFC award.
He said the federal government owed Rs3,000 billion to the province as hydel net profit and pending share under the NFC.
The federal government owed Rs2.2 trillion under unpaid net profit dues of the automobile industry and another Rs800 billion was outstanding under the NFC, he said.
The federal government had pledged to spend Rs 700 billion, or Rs 100 billion annually, to reintegrate and develop the merged districts, said Muzammil Aslam, the KP CM’s financial advisor. Aslam said that so far only Rs165 billion had been disbursed in the last seven years, leaving a gap of Rs535 billion.
The provincial population has increased, which should have increased our share to 19.6 percent seven years ago, but despite this, the federal government owes the province between Rs700 billion and Rs800 billion, he said.
This year, the provincial share in the NFC on the basis of revised population is Rs225 billion higher than what it got so far, Aslam said.
For this financial year, the federal government had committed Rs 65 billion for the merged districts, but KP did not receive a penny in the first five months of this financial year.
The KP CM also asked the federal government to fulfill its promise to fund the Chashma Canal on the Right Bank, which he said is very critical for the food security of the province. He said the Center had initially committed to fund the project to the tune of 80 per cent, which it has now reduced to 65 per cent.
We have earmarked 35% of our share of funding, but the federal government is not fulfilling its commitment, Afridi said.
He said that the Punjab government’s decision to ban transportation of wheat to his province has increased the price of wheat and bread and created very negative sentiments in the province.
Upcoming NFC discussions hinge on the idea that federal fiscal problems have their origins in the 7th NFC, which increased the provincial share by 10%.
However, the 10% increase in the share had to be offset by a 1% increase in the tax-to-GDP ratio each year starting in 2010. In 2010, the tax-to-GDP ratio was 10%, and remained stuck at that level.
“Pakistan’s tax-to-GDP ratio remains stubbornly low, around 10 percent of GDP over the past five years,” says the IMF Governance and Corruption Diagnostic Assessment report, released on November 9 by the Ministry of Finance.
The IMF report highlights that Pakistan’s tax system is also complicated by the lack of harmonization and coordination between federal and provincial taxes.
The lack of harmonization and coordination of the sales tax, with the federal goods tax and provincial services taxes, continues to complicate the tax system, according to the new report.
The IMF said uncertainty and differential treatment lead to disputes that can be resolved through negotiation with tax officials, opening the door to corruption.
He adds that the National Tax Board continues to work on harmonization with help from the World Bank, but progress is slow.
The IMF report highlights that tax concerns are exacerbated by the lack of a clear and coherent medium-term strategy for tax policy development. The absence of such a strategy leads to an ad hoc, short-term approach to tax policy design.
Although authorities may set a tax-to-GDP ratio target in the short to medium term, there is no coherent 3-5 year tax reform strategy aimed at achieving the usual tax reform goals of making the system more efficient, fairer and simpler, while increasing revenue, the IMF said.
He added that Pakistan’s tax system is excessively complex, creating uncertainty for taxpayers, sparking disputes, fostering corruption and undermining economic efficiency and fairness.
This complexity leads to uncertainties for taxpayers and the FBR, but also provides opportunities for tax planning and evasion.
“Disputes are often resolved through negotiation with FBR officials,” the IMF said. These negotiated deals increase the risks of corruption and also lead to potential inequalities due to likely differences in treatment between taxpayers, he adds.
