KP CM demanded federal government to fulfill its promise to fund Chashma right bank canal
Federal Minister of Finance and Revenue, Muhammad Aurangzeb. PHOTO: APP
ISLAMABAD:
Khyber-Pakhtunkhwa (KP) Chief Minister Sohail Afridi announced his attendance at the inaugural meeting of the National Finance Commission (NFC) but demanded that the Center clear over Rs 3 trillion of outstanding obligations and also fulfill its commitment to construct an irrigation canal.
“I will attend the NFC meeting because it is a matter of provincial tax rights,” Afridi said while speaking to reporters in Islamabad on Friday.
The federal government convened the inaugural meeting of the NFC on December 4 in Islamabad. This meeting will lay the foundations for devising a new formula to distribute fiscal resources between the Center and the federative units.
At the inaugural meeting, the commission will have a general discussion on the strategy for deliberations on the 11th NFC award, including the proposal to form subgroups for deliberations on the thematic areas, according to 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 key stakeholders – Balochistan, Punjab, the KP, Sindh and the federal government will make presentations on their respective fiscal positions.
The federal government wants to reduce the provinces’ share from the current 57.5% of the divisible total, either by cutting the revenue share or transferring spending responsibilities, or by a combination of both.
However, the provincial proportion of the current 57.5% cannot be reduced until the Constitution is amended. Prime Minister Shehbaz Sharif recently shared his opinion on reducing the provincial ratio.
During a high-level meeting, Shehbaz stated that customs duty was not part of the NFC award and should be treated as federal revenue.
However, the 7th NFC, which was finalized and approved in 2009-2010, includes customs duties as part of the divisible federal fund along with income tax, wealth tax, capital value tax, sales tax and federal excise tax.
For the current fiscal year, the estimated share of provincial governments in federal taxes is Rp 8.2 trillion based on a tax collection of Rp 14.13 trillion projected by the Federal Board of Revenue. Of this amount, 892 billion rupees or 10.8% corresponds to customs duties.
The KP chief minister said that his province’s share in revenue generation, reverse population density and increasing the proportion of population after the merger of former tribal districts should be increased in the upcoming NFC award.
He said the federal government owed Rp3 trillion to the province because of Hydel’s net profit and pending participation under the NFC.
The federal government owes Rs2.2 trillion on account of outstanding net profit dues from Hydel and another Rs800 billion is pending payment under the NFC, he said.
The federal government had committed to donate Rs 700 billion, Rs 100 billion per year, as costs to reintegrate and develop the merged districts, said Muzammil Aslam, financial advisor to the KP CM. Aslam said only Rs 165 billion has been donated so far over the last seven years, leaving a shortfall of Rs 535 billion.
The provincial population has increased, which should have increased our share to 19.6% seven years ago, but despite that, the federal government owes the province between Rp700 and Rp800 billion, he said.
This year, the provincial share in the NFC based on revised population is Rs 225 billion higher than what it is getting so far, Aslam said.
For this fiscal year, the federal government had committed Rs 65 billion for the merged districts, but the KP did not receive a single cent during the first five months of this fiscal year.
The KP CM also demanded the federal government to fulfill its promise to fund the Chashma Right Bank Canal, which he said was very critical to the food security of the province. He said the Center had initially committed to provide 80% funding for the project, which it has now reduced to 65%.
“We have set aside 35% of our funding, but the federal government is not fulfilling its commitment,” Afridi said.
He said the Punjab government’s decision to ban transportation of wheat to its province raised the price of wheat and bread and created very negative sentiments in the province.
The upcoming NFC discussions are based on the notion that federal fiscal problems stem from the 7th NFC, which increased provincial participation by 10%.
However, the 10% increase in the ratio had to be offset by a 1% increase in the tax/GDP ratio each year starting in 2010. In the year 2010, the tax/GDP ratio was 10%, which remained fixed.
“Pakistan’s tax-to-GDP ratio remains stubbornly low, around 10% of GDP over the past five years,” says the IMF’s Governance and Corruption Diagnostic Assessment report, released on November 9 by the Ministry of Finance.
The IMF report highlighted that Pakistan’s tax system is also complicated by 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 differences in treatment lead to disputes that can be resolved through negotiations with tax officials, creating opportunities for corruption.
He added that the National Fiscal Council continues to work on harmonization with assistance from the World Bank, but progress is slow.
The IMF report highlighted that tax-related concerns are exacerbated by the absence of a clear and coherent medium-term strategy for fiscal policymaking. The absence of such a strategy leads to a short-term ad hoc approach to tax policy design.
While authorities can set a short- or medium-term GDP target, there is no coherent three- to five-year tax reform strategy that seeks to meet the usual tax reform objectives of making the system more efficient, equitable and simple, while increasing revenues, the IMF said.
He added that the tax system in Pakistan is overly complex, creating uncertainty for taxpayers, inviting disputes, enabling corruption and compromising economic efficiency and fairness.
This complexity creates uncertainty for taxpayers and the FBR, but also provides opportunities for tax planning and evasion.
“Disputes are often resolved through negotiations with FBR officials,” the IMF said. These negotiated agreements increase the risks of corruption and also lead to potential inequalities due to likely differences in treatment between taxpayers, he added.
