Muhammad Ziauddin dives deep into the Hafiz Pasha Report which highlights the shortcomings in the implementation of the 18th amendment and concludes that planning process ought to change fundamentally. "It should become a ‘bottom-up’ process, instead of the old ‘top down’ process".
It has been almost ten years since the historic 18th constitutional amendment was passed by parliament. But so far the provinces are said to have succeeded in achieving no more than five per cent of what the amendment guaranteed. The provinces still seem trapped in the colonial clutches of Rawalpindi/Islamabad. The biggest hurdle in the way seems to be the civil-military bureaucracy, which appears to have not yet reconciled to the idea of losing its colonial powers over the provinces.
Also, the elements in the PML-N and PTI under the direct influence of the civil-military bureaucracy, popularly known as the establishment have been openly expressing their apprehension that ‘bestowing’ autonomy on people who they believe are not yet capable of shouldering increased responsibilities would lead to financial chaos, economic instability and wastage of shrinking resources.
They have also on a number of occasions openly expressed their fear that the provinces would use the 18th amendment to drift away from the federation, not realising that it was because they were being ruled all these years as colonies from Rawalpindi/Islamabad, negating the spirit of federalism that the three smaller provinces today seem to be suffering from a massive dose of disillusionment with the federation itself. And that is also why East Pakistan is Bangladesh today.
Indeed, those who have been trying to create the impression that it was all milk and honey in Pakistan before the 18th amendment was passed need to understand that it was the pre-18th amendment Pakistan that was imploding from within under the weight of a unitary system of governance eating into the vitals of the spirit of federalism.
They also need to beware of the forces of chaos that the unitary system of governance had unleashed causing financial chaos, economic instability and wastage of shrinking national resources.
Reluctance of the establishment
The reluctance of the superior civil-military bureaucracy, and the apprehensions of apolitical elements in PML-N and PTI under direct influence of the establishment have made it almost impossible to draft and pass in time, relevant subordinate legislations both in parliament and the respective provincial assemblies. The federalist elements among the public at large and within the mainstream political parties seem greatly disappointed with the progress of implementation of the amendment largely because the Council of Common Interests (CCI), in their opinion, has been consigned to inactivity.
The senior civil-military bureaucracy does not know that it has continued to remain the main obstacle in the way of the CCI coming into its constitutional being. It has rendered the CCI into a spineless entity not able to regulate, supervise and control vital functions accorded to it by the Constitution.
This has jeopardised the basic concept and essence of the 18th amendment that aimed at striking a balance of power between the Centre and the federating units.
Salient features
The salient features of the 18th amendment are, first, abolition of concurrent list and transfer of most of the functions in this list to the Provinces. Second, a new list, the Federal Legislative List Part II, has been created of functions which are the joint responsibility of both the Federal and Provincial Governments. Third, some additional fiscal powers have also been given to the Provincial Governments.
Federal Legislative List Part-I continues to have functions to be performed exclusively by the Federal Government: Defence, External Affairs, Citizenship, Migration, Posts and Telegraphs, Telecommunication, Currency, Foreign Exchange, Public Debt of Federation, FPSC, Federal Pensions, Ombudsman, Courts and Tribunals, Libraries and Museums, Foreign Students, Nuclear Energy, Research Institute, Maritime Shipping, Air Navigation, Copyrights and inventions, International exports and imports, SBP, Insurance, Stock Exchanges, International Treaties, National Highways and Strategic Roads, Federal Surveys, International Fishing, Standards, Elections, Salaries of VIPs.
Prior to the passage of 18th amendment, there were 51 divisions at the federal level. Following the amendment, 19 divisions have either ceased to exist or changed in character. An attempt has been made to retain some of the functions by establishment of the following new divisions: Aviation, Capital administration and development, National security, Climate change, Heritage, Narcotics control, Human Rights, National Food security and research. National Health Services, Overseas Pakistanis and Human Resources Development, Inter-faith harmony.
Consequently, there are 42 divisions currently in the federal government. Even prior to the 18th amendment the Ishrat Hussain Report (2008) on Reforming the government had recommended that the number of divisions be brought down to 37 and the number of ministries to 23.
Following the 18th amendment there is an even stronger case for reducing the size of the federal government and also thereby avoiding duplication of functions.
A report prepared by Dr. Hafiz Pasha recommends the rationalisation of the federal structure in the following directions: i) Based on the principle of ‘Subsidiarity’, agriculture, education, health, are predominantly provincial subjects and there is no strong case for having these divisions at the federal level.
Any common issue in these sectors can be handled by the CCI, through the ministry of inter-provincial coordination; ii) The number of ministries can be reduced by merging Overseas Pakistanis with Foreign Affairs and so on.
However, according to the report strong resistance has come from the federal bureaucracy because fewer ministries/divisions will mean fewer senior positions at the BPS 21-22 level.
Article 154 of the Constitution is unambiguous: “The Council (of Common Interest) shall formulate and regulate policies in relation to matters in part II of the Federal Legislative List and shall exercise supervision and control over related institutions.” The subjects in question include: regulatory authorities, national planning, public debt, census, water and power, petroleum and natural resources, legal, Medical and other professions, standard in higher education, railways, ports, industries and production and inter-provincial coordination.
Another big hurdle in the way is the extension given to Article 143, which empowers the federal legislature to overturn with a simple majority any law passed by any provincial assembly.
The 18th amendment renders redundant a number of federal ministries while increasing the administrative responsibilities of the provinces in equal measure. But the federal government is yet to abolish the redundant ministries, and the provinces are yet to receive the powers that the amendment has mandated. In fact, instead the government has created a dozen new federal portfolios without the approval of the CCI.
Resource distribution
On the other hand, questions are increasingly being raised by responsible elements in decision-making positions on the resource distribution formula which the 18th amendment had formulated for the National Finance Commission Award.
To be sure, the increase in the responsibilities of the provinces, especially their responsibilities concerning social and physical infrastructure, demand enormous amounts of resources to meet the huge bill adequately.
And unless the provinces tap the real potential of the agricultural income tax and the urban immoveable property tax, it would be well-nigh impossible for them to deliver on this front with any degree of success.
‘Bottom-up’ planning
According to Hafiz Pasha the planning process ought to change fundamentally after the 18th Amendment. It should become a ‘bottom-up’ process, instead of the old ‘top down’ process. Each Province should prepare its own Regional Development Plan. This should be aggregated by the Planning Commission along with the Federal Development Plan and a consistent Macroeconomic Framework developed.
“Following the 18th Amendment a sustainable long-run arrangement in the area of higher education should be as follows: HEC continues to perform primarily a regulatory function of setting standards and monitoring their adherence. In addition, Federal universities / DGIs will continue to be funded by the HEC.
“The 9th NFC Award may make some provision for transfer of additional resources to the Provinces for funding of public universities within their respective domains. Provincial HECs can then begin to perform the financing function. The advantage of this arrangement is that it will separate the regulatory function from financing.
“For the first time, there has been recognition of a third tier of Government, the Local Governments. This is articulated in the Article 140A, which states:
“Unfortunately, the local government laws passed by the Provinces have not adhered to 140A, with the exception of Khyber-Pakhtunkhwa. The Supreme Court may wish to ensure that this is done.
Planning autonomy
“The Provinces may be granted more autonomy in the planning process. Only those Provincial projects should come up to Islamabad for approval by the CDWP/ECNEC which either has foreign assistance or cost-sharing by the Federal Government.
“There is a proliferation and duplication of ‘populist’ social welfare programs at both the Federal and Provincial levels. There is need for avoiding this duplication and promoting implementation primarily at the Provincial level.
Contentious issues
“There are a number of potentially contentious issues in the power sector which could put stress on the Federation. The first set of issues relates to the interpretation of Article 157, which allows a Province to do the following: a) to the extent that electricity is supplied to that Province from the national grid, require supply to be made in bulk for transmission and distribution within the Province. b) levy tax on consumption of electricity within a Province. c) construct power houses and grid stations and lay transmission lines within a Province. d) determine the tariff for distribution within the Province.
“The Provincial Governments, especially of Sindh and Punjab, are currently engaged in investing in power projects. Article 157 (c), in effect, allows the future supply of electricity from these projects to be retained within the Province. How will this impact on the role of NTDC?
“Further, there is provision in clause (d) for differential tariffs, as opposed to the current policy of uniform tariffs throughout the country. This will mean a transition to a policy similar to that followed by the States of India, with big differences regionally in tariffs. Also, will provincial equivalents to NEPRA have to be established?
“Another emerging issue, which has already been voiced recently by the Finance Minister of Sindh relates to Article 158, which states,
'The Province in which a well - head of natural gas is situated shall have precedence over other parts of Pakistan in meeting the requirements from the well - head, subject to the commitments and obligations as on the commencing day '.
“Sindh is the Province currently with the largest surplus of natural gas. What will be the implications of diverting more gas from the rest of the country to Sindh? Sindh has already placed a demand for this. This is clearly an issue which will have to be resolved in the CC1.
“It is imperative that these are resolved in the CCI if undue stress on the Federation is to be avoided.”
Grey areas
The 18th Amendment has unambiguously allocated the sales tax on services to the Provinces. However, the grey area relates to the tax base of Federal excise duty. Consequently, FBR has levied an excise duty on some services like banking and insurance, air travel, etc. The consequence is double taxation of a tax base. The Federal Government ought to abolish excise duties on services or drastically reduce the tax rates.
“The other contentious area is the capital gains tax on property. The 18th Amendment has excluded the capital value tax on property presumably and the intent is also to exclude the capital gains tax on property from the domain of Federal fiscal powers. But FBR has proceeded to levy the CGT on property on the grounds that this is a form of income tax.
“In recent years, the federal Government has increasingly encroached on Provincial tax bases through the levy of higher withholding taxes. This has happened in the case of a number of provincial taxes including stamp duty, sales tax on services, urban immoveable property tax, motor vehicle tax and entertainment tax.
“The best example of the negative impact of this encroachment is in the telecommunication sector. In the Federal Budget of 2013-14, the withholding tax on phone bills/cards was raised from 5 percent to 15 percent. The prevailing tax rate of the sales tax on this service is 19.5 percent. Therefore, the combined tax rate rose to over 37 percent, thereby impacting negatively on the growth of the tax base. Recently, the Supreme Court has passed a judgement whereby the withholding tax has been withdrawn.
“There is need for adopting an 'integrated- view of the tax system. The combined rate of taxation has to be kept relatively low to avoid large deadweight losses and contraction of the tax bases, especially to the detriment of the Provinces.
Recommendations
The Dr. Hafiz Pasha report has made some highly sensible recommendations to make the 18th amendment really workable and practical for the smooth functioning of the federation. These are summarized below:
(i) The Federal Government remains too big, even after the transfer of many functions following the 18th Amendment. There are as many as 42 Divisions currently. A number of Divisions like Food Security, Education and Health are essentially duplicating Provincial functions. The number of Ministries could also be reduced by merger of various Divisions.
(ii) The rate of improvement in social indicators has not been commensurate with the substantial transfer of additional resources following the 7th NFC Award. The literacy rate has actually fallen up to 2014-15, while other indicators have remained stagnant. There are three possible reasons for this disappointing outcome relating to failure of governance, low growth, rising poverty and the move back from Local Governments to Provincial Governments for delivery of social services. There is need for setting up a Commission to investigate why social indicators have performed poorly after 2008.
(iii) As per article 154(3) the Council of Common Interests must meet quarterly. During the last two years, only three meetings have been held in eight quarters.
(iv) Borrowing powers have been given to the Provinces after the 18th Amendment, subject to the fulfillment of some conditions. As a special case, the National Economic Council may permit borrowing up to specified limits for power projects.
(v) Vertical programs in Population Welfare and Health continue to be financed form the Federal PSDP, up to the next NFC Award. Given the importance of these Programs it is essential that adequate allocations be made and releases of funds correspond to the allocations.
(vi) Following the setting up of Provincial HECs in Sindh and Punjab, there is potentially some duplication with the Federal HEC. It is essential that prior to the 9th NFC Award a decision is taken in the CCI on the allocation of responsibilities, including financing, in the area of higher education between the Federation and the Provinces. Appropriate changes will then be needed in the federal HEC Act.
(vii) Following the transfer of all labor-related functions to Provincial Governments, the amounts collected under the Workers Welfare Fund (WWF) and the Workers Profit Participation Fund (WPPF) may be reverted to the Provinces, as per a mutually agreed formula. The CCI will also have to take a decision on the future of EOBI.
(viii) Perhaps the biggest failure in implementation of the 18th Amendment was the delay in the establishment of elected Local Governments, with requisite autonomy as per Article 140A. It is essential that proper arrangements be made for financing of Local Governments. This could involve reversion to the provision in the 2006 Distribution of Revenue and Grant-in-Aid Order, which provided for transfer of one-sixth of sales tax revenues to Local Governments.
(ix) The Provinces may be granted more autonomy in the planning process. Only those Provincial projects should come up to Islamabad for approval by the CDWP/ECNEC which either have foreign assistance or cost-sharing by the Federal Government.
(x) There is a proliferation of ‘populist’ social welfare programs at both the Federal and Provincial levels. There is need for avoiding duplication and promoting cost sharing and implementation primarily at the Provincial level.
(xi) A number of contentious issues are emerging in the energy sector. It is imperative that these are resolved in the CCI if undue stress on the Federation is to be avoided.
(xii) Following the transfer of the sales tax on services to the Provincial Governments, federal excise duties on services must be withdrawn or drastically reduced to avoid double taxation.
(xiii) In recent years, the Federal Government has been encroaching on various provincial tax bases, leading to over taxation and erosion of these tax bases. There is need for focusing on development of a national integrated tax system.
Hopefully, the report concludes, the spirit of the 18th Amendment will remain alive and the Federation of Pakistan will find strength from ‘Unity from Diversity’
The 9th NFC Award
The tenure of the 7th NFC Award came to an end in 2014-15. No new Award has been announced since then despite the setting of the 9th NFC. One of the reasons for the delay may have been the absence of a recent Population Census. Such a Census was competed in 2017 and results have been announced.
According to Dr. Hafiz Pasha report clause (d) of the TOR of the 9th NFC is contentious, relating to the allocation of resources to meet expenditures of AJ&K, Gilgit-Baltistan and FATA. These are Federal Territories and should be financed from the Federal share. As such, they do not come under the purview of the NFC. However, following the merger of FATA with Khyber-Pakhtunkhwa the expenditure requirement of FATA will be met through the share of the Province.
“There is need for the NFC Secretariat in the Federal Ministry of Finance to update the data on the horizontal criteria, besides population, at the Provincial level. This is essential if any controversy is to be avoided during discussions of the 9th NFC.
“The 9th NFC must recognize that following transfers from the Federal Government, the Provincial Governments are fully autonomous in the utilization of their funds. No conditions must be placed on the generation of cash surpluses of a particular magnitude unless the Provinces themselves voluntarily do so.
“The 9th NFC must complete the process of implementation of the 18th Agreement. There should be agreement on the remaining functions to be transferred to the Provinces and the Award should cater for the cost of these functions to be borne henceforth by the Provincial Governments.”
(This report has been liberally resourced from Chapter 29 (The 18th Amendment) of a detailed work (Growth and Inequality in Pakistan---Agenda for Reform) prepared by Dr. Hafiz Pasha in collaboration with German Think Tank Friedrich Ebert Stiftung)
(http://library.fes.de/pdf-files/bueros/pakistan/15252.pdf)
It has been almost ten years since the historic 18th constitutional amendment was passed by parliament. But so far the provinces are said to have succeeded in achieving no more than five per cent of what the amendment guaranteed. The provinces still seem trapped in the colonial clutches of Rawalpindi/Islamabad. The biggest hurdle in the way seems to be the civil-military bureaucracy, which appears to have not yet reconciled to the idea of losing its colonial powers over the provinces.
Also, the elements in the PML-N and PTI under the direct influence of the civil-military bureaucracy, popularly known as the establishment have been openly expressing their apprehension that ‘bestowing’ autonomy on people who they believe are not yet capable of shouldering increased responsibilities would lead to financial chaos, economic instability and wastage of shrinking resources.
They have also on a number of occasions openly expressed their fear that the provinces would use the 18th amendment to drift away from the federation, not realising that it was because they were being ruled all these years as colonies from Rawalpindi/Islamabad, negating the spirit of federalism that the three smaller provinces today seem to be suffering from a massive dose of disillusionment with the federation itself. And that is also why East Pakistan is Bangladesh today.
Indeed, those who have been trying to create the impression that it was all milk and honey in Pakistan before the 18th amendment was passed need to understand that it was the pre-18th amendment Pakistan that was imploding from within under the weight of a unitary system of governance eating into the vitals of the spirit of federalism.
The team that drafted the 18th amendement. Picture courtesy: civiceducation.org
They also need to beware of the forces of chaos that the unitary system of governance had unleashed causing financial chaos, economic instability and wastage of shrinking national resources.
Reluctance of the establishment
The reluctance of the superior civil-military bureaucracy, and the apprehensions of apolitical elements in PML-N and PTI under direct influence of the establishment have made it almost impossible to draft and pass in time, relevant subordinate legislations both in parliament and the respective provincial assemblies. The federalist elements among the public at large and within the mainstream political parties seem greatly disappointed with the progress of implementation of the amendment largely because the Council of Common Interests (CCI), in their opinion, has been consigned to inactivity.
The senior civil-military bureaucracy does not know that it has continued to remain the main obstacle in the way of the CCI coming into its constitutional being. It has rendered the CCI into a spineless entity not able to regulate, supervise and control vital functions accorded to it by the Constitution.
This has jeopardised the basic concept and essence of the 18th amendment that aimed at striking a balance of power between the Centre and the federating units.
Salient features
The salient features of the 18th amendment are, first, abolition of concurrent list and transfer of most of the functions in this list to the Provinces. Second, a new list, the Federal Legislative List Part II, has been created of functions which are the joint responsibility of both the Federal and Provincial Governments. Third, some additional fiscal powers have also been given to the Provincial Governments.
Federal Legislative List Part-I continues to have functions to be performed exclusively by the Federal Government: Defence, External Affairs, Citizenship, Migration, Posts and Telegraphs, Telecommunication, Currency, Foreign Exchange, Public Debt of Federation, FPSC, Federal Pensions, Ombudsman, Courts and Tribunals, Libraries and Museums, Foreign Students, Nuclear Energy, Research Institute, Maritime Shipping, Air Navigation, Copyrights and inventions, International exports and imports, SBP, Insurance, Stock Exchanges, International Treaties, National Highways and Strategic Roads, Federal Surveys, International Fishing, Standards, Elections, Salaries of VIPs.
Also read: Nawaz says his party overcame the energy crisis. Is it true?
Prior to the passage of 18th amendment, there were 51 divisions at the federal level. Following the amendment, 19 divisions have either ceased to exist or changed in character. An attempt has been made to retain some of the functions by establishment of the following new divisions: Aviation, Capital administration and development, National security, Climate change, Heritage, Narcotics control, Human Rights, National Food security and research. National Health Services, Overseas Pakistanis and Human Resources Development, Inter-faith harmony.
Consequently, there are 42 divisions currently in the federal government. Even prior to the 18th amendment the Ishrat Hussain Report (2008) on Reforming the government had recommended that the number of divisions be brought down to 37 and the number of ministries to 23.
Following the 18th amendment there is an even stronger case for reducing the size of the federal government and also thereby avoiding duplication of functions.
A report prepared by Dr. Hafiz Pasha recommends the rationalisation of the federal structure in the following directions: i) Based on the principle of ‘Subsidiarity’, agriculture, education, health, are predominantly provincial subjects and there is no strong case for having these divisions at the federal level.
Any common issue in these sectors can be handled by the CCI, through the ministry of inter-provincial coordination; ii) The number of ministries can be reduced by merging Overseas Pakistanis with Foreign Affairs and so on.
However, according to the report strong resistance has come from the federal bureaucracy because fewer ministries/divisions will mean fewer senior positions at the BPS 21-22 level.
Article 154 of the Constitution is unambiguous: “The Council (of Common Interest) shall formulate and regulate policies in relation to matters in part II of the Federal Legislative List and shall exercise supervision and control over related institutions.” The subjects in question include: regulatory authorities, national planning, public debt, census, water and power, petroleum and natural resources, legal, Medical and other professions, standard in higher education, railways, ports, industries and production and inter-provincial coordination.
Another big hurdle in the way is the extension given to Article 143, which empowers the federal legislature to overturn with a simple majority any law passed by any provincial assembly.
The 18th amendment renders redundant a number of federal ministries while increasing the administrative responsibilities of the provinces in equal measure. But the federal government is yet to abolish the redundant ministries, and the provinces are yet to receive the powers that the amendment has mandated. In fact, instead the government has created a dozen new federal portfolios without the approval of the CCI.
Resource distribution
On the other hand, questions are increasingly being raised by responsible elements in decision-making positions on the resource distribution formula which the 18th amendment had formulated for the National Finance Commission Award.
To be sure, the increase in the responsibilities of the provinces, especially their responsibilities concerning social and physical infrastructure, demand enormous amounts of resources to meet the huge bill adequately.
And unless the provinces tap the real potential of the agricultural income tax and the urban immoveable property tax, it would be well-nigh impossible for them to deliver on this front with any degree of success.
‘Bottom-up’ planning
According to Hafiz Pasha the planning process ought to change fundamentally after the 18th Amendment. It should become a ‘bottom-up’ process, instead of the old ‘top down’ process. Each Province should prepare its own Regional Development Plan. This should be aggregated by the Planning Commission along with the Federal Development Plan and a consistent Macroeconomic Framework developed.
“Following the 18th Amendment a sustainable long-run arrangement in the area of higher education should be as follows: HEC continues to perform primarily a regulatory function of setting standards and monitoring their adherence. In addition, Federal universities / DGIs will continue to be funded by the HEC.
“The 9th NFC Award may make some provision for transfer of additional resources to the Provinces for funding of public universities within their respective domains. Provincial HECs can then begin to perform the financing function. The advantage of this arrangement is that it will separate the regulatory function from financing.
President Asif Ali Zardari signs the 7th National Finance Commission Award. Photo courtesy: civiceducation.org
“For the first time, there has been recognition of a third tier of Government, the Local Governments. This is articulated in the Article 140A, which states:
- i) Each Province shall by law, establish a local government system and devolve political, administrative and financial responsibility and authority to the elected representatives of the local government.
- ii) Elections to the local governments shall be held by the Election Commission of Pakistan.
“Unfortunately, the local government laws passed by the Provinces have not adhered to 140A, with the exception of Khyber-Pakhtunkhwa. The Supreme Court may wish to ensure that this is done.
Planning autonomy
“The Provinces may be granted more autonomy in the planning process. Only those Provincial projects should come up to Islamabad for approval by the CDWP/ECNEC which either has foreign assistance or cost-sharing by the Federal Government.
“There is a proliferation and duplication of ‘populist’ social welfare programs at both the Federal and Provincial levels. There is need for avoiding this duplication and promoting implementation primarily at the Provincial level.
Contentious issues
“There are a number of potentially contentious issues in the power sector which could put stress on the Federation. The first set of issues relates to the interpretation of Article 157, which allows a Province to do the following: a) to the extent that electricity is supplied to that Province from the national grid, require supply to be made in bulk for transmission and distribution within the Province. b) levy tax on consumption of electricity within a Province. c) construct power houses and grid stations and lay transmission lines within a Province. d) determine the tariff for distribution within the Province.
“The Provincial Governments, especially of Sindh and Punjab, are currently engaged in investing in power projects. Article 157 (c), in effect, allows the future supply of electricity from these projects to be retained within the Province. How will this impact on the role of NTDC?
“Further, there is provision in clause (d) for differential tariffs, as opposed to the current policy of uniform tariffs throughout the country. This will mean a transition to a policy similar to that followed by the States of India, with big differences regionally in tariffs. Also, will provincial equivalents to NEPRA have to be established?
“Another emerging issue, which has already been voiced recently by the Finance Minister of Sindh relates to Article 158, which states,
'The Province in which a well - head of natural gas is situated shall have precedence over other parts of Pakistan in meeting the requirements from the well - head, subject to the commitments and obligations as on the commencing day '.
“Sindh is the Province currently with the largest surplus of natural gas. What will be the implications of diverting more gas from the rest of the country to Sindh? Sindh has already placed a demand for this. This is clearly an issue which will have to be resolved in the CC1.
“It is imperative that these are resolved in the CCI if undue stress on the Federation is to be avoided.”
Grey areas
The 18th Amendment has unambiguously allocated the sales tax on services to the Provinces. However, the grey area relates to the tax base of Federal excise duty. Consequently, FBR has levied an excise duty on some services like banking and insurance, air travel, etc. The consequence is double taxation of a tax base. The Federal Government ought to abolish excise duties on services or drastically reduce the tax rates.
“The other contentious area is the capital gains tax on property. The 18th Amendment has excluded the capital value tax on property presumably and the intent is also to exclude the capital gains tax on property from the domain of Federal fiscal powers. But FBR has proceeded to levy the CGT on property on the grounds that this is a form of income tax.
“In recent years, the federal Government has increasingly encroached on Provincial tax bases through the levy of higher withholding taxes. This has happened in the case of a number of provincial taxes including stamp duty, sales tax on services, urban immoveable property tax, motor vehicle tax and entertainment tax.
“The best example of the negative impact of this encroachment is in the telecommunication sector. In the Federal Budget of 2013-14, the withholding tax on phone bills/cards was raised from 5 percent to 15 percent. The prevailing tax rate of the sales tax on this service is 19.5 percent. Therefore, the combined tax rate rose to over 37 percent, thereby impacting negatively on the growth of the tax base. Recently, the Supreme Court has passed a judgement whereby the withholding tax has been withdrawn.
“There is need for adopting an 'integrated- view of the tax system. The combined rate of taxation has to be kept relatively low to avoid large deadweight losses and contraction of the tax bases, especially to the detriment of the Provinces.
Recommendations
The Dr. Hafiz Pasha report has made some highly sensible recommendations to make the 18th amendment really workable and practical for the smooth functioning of the federation. These are summarized below:
(i) The Federal Government remains too big, even after the transfer of many functions following the 18th Amendment. There are as many as 42 Divisions currently. A number of Divisions like Food Security, Education and Health are essentially duplicating Provincial functions. The number of Ministries could also be reduced by merger of various Divisions.
(ii) The rate of improvement in social indicators has not been commensurate with the substantial transfer of additional resources following the 7th NFC Award. The literacy rate has actually fallen up to 2014-15, while other indicators have remained stagnant. There are three possible reasons for this disappointing outcome relating to failure of governance, low growth, rising poverty and the move back from Local Governments to Provincial Governments for delivery of social services. There is need for setting up a Commission to investigate why social indicators have performed poorly after 2008.
(iii) As per article 154(3) the Council of Common Interests must meet quarterly. During the last two years, only three meetings have been held in eight quarters.
(iv) Borrowing powers have been given to the Provinces after the 18th Amendment, subject to the fulfillment of some conditions. As a special case, the National Economic Council may permit borrowing up to specified limits for power projects.
(v) Vertical programs in Population Welfare and Health continue to be financed form the Federal PSDP, up to the next NFC Award. Given the importance of these Programs it is essential that adequate allocations be made and releases of funds correspond to the allocations.
(vi) Following the setting up of Provincial HECs in Sindh and Punjab, there is potentially some duplication with the Federal HEC. It is essential that prior to the 9th NFC Award a decision is taken in the CCI on the allocation of responsibilities, including financing, in the area of higher education between the Federation and the Provinces. Appropriate changes will then be needed in the federal HEC Act.
(vii) Following the transfer of all labor-related functions to Provincial Governments, the amounts collected under the Workers Welfare Fund (WWF) and the Workers Profit Participation Fund (WPPF) may be reverted to the Provinces, as per a mutually agreed formula. The CCI will also have to take a decision on the future of EOBI.
(viii) Perhaps the biggest failure in implementation of the 18th Amendment was the delay in the establishment of elected Local Governments, with requisite autonomy as per Article 140A. It is essential that proper arrangements be made for financing of Local Governments. This could involve reversion to the provision in the 2006 Distribution of Revenue and Grant-in-Aid Order, which provided for transfer of one-sixth of sales tax revenues to Local Governments.
(ix) The Provinces may be granted more autonomy in the planning process. Only those Provincial projects should come up to Islamabad for approval by the CDWP/ECNEC which either have foreign assistance or cost-sharing by the Federal Government.
(x) There is a proliferation of ‘populist’ social welfare programs at both the Federal and Provincial levels. There is need for avoiding duplication and promoting cost sharing and implementation primarily at the Provincial level.
(xi) A number of contentious issues are emerging in the energy sector. It is imperative that these are resolved in the CCI if undue stress on the Federation is to be avoided.
(xii) Following the transfer of the sales tax on services to the Provincial Governments, federal excise duties on services must be withdrawn or drastically reduced to avoid double taxation.
(xiii) In recent years, the Federal Government has been encroaching on various provincial tax bases, leading to over taxation and erosion of these tax bases. There is need for focusing on development of a national integrated tax system.
Hopefully, the report concludes, the spirit of the 18th Amendment will remain alive and the Federation of Pakistan will find strength from ‘Unity from Diversity’
The 9th NFC Award
The tenure of the 7th NFC Award came to an end in 2014-15. No new Award has been announced since then despite the setting of the 9th NFC. One of the reasons for the delay may have been the absence of a recent Population Census. Such a Census was competed in 2017 and results have been announced.
According to Dr. Hafiz Pasha report clause (d) of the TOR of the 9th NFC is contentious, relating to the allocation of resources to meet expenditures of AJ&K, Gilgit-Baltistan and FATA. These are Federal Territories and should be financed from the Federal share. As such, they do not come under the purview of the NFC. However, following the merger of FATA with Khyber-Pakhtunkhwa the expenditure requirement of FATA will be met through the share of the Province.
“There is need for the NFC Secretariat in the Federal Ministry of Finance to update the data on the horizontal criteria, besides population, at the Provincial level. This is essential if any controversy is to be avoided during discussions of the 9th NFC.
“The 9th NFC must recognize that following transfers from the Federal Government, the Provincial Governments are fully autonomous in the utilization of their funds. No conditions must be placed on the generation of cash surpluses of a particular magnitude unless the Provinces themselves voluntarily do so.
“The 9th NFC must complete the process of implementation of the 18th Agreement. There should be agreement on the remaining functions to be transferred to the Provinces and the Award should cater for the cost of these functions to be borne henceforth by the Provincial Governments.”
(This report has been liberally resourced from Chapter 29 (The 18th Amendment) of a detailed work (Growth and Inequality in Pakistan---Agenda for Reform) prepared by Dr. Hafiz Pasha in collaboration with German Think Tank Friedrich Ebert Stiftung)
(http://library.fes.de/pdf-files/bueros/pakistan/15252.pdf)