Sindh CM calls for revisiting NFC criteria

Urges that more weightage be given to revenue generation rather than population

KARACHI: Sindh Chief Minister Murad Ali Shah has called for revisiting the National Finance Commission (NFC) award criteria and said more weightage should be given to revenue generation rather than population of a province or region while allocating its monitory share.

"The ratio of the NFC tied to performance be increased and weightage given to population should be reduced," Shah said on Monday while presiding over a preparatory meeting for the forthcoming NFC meeting to be held in Islamabad on February 6.

The meeting was attended by the CM's Principal Secretary Sajid Jamal Abro, Secretary Finance Najam Shah and the Sindh Board of Revenue (SRB) senior officials.

He said the wholesale and retail sales are categorised as services, but the Federal Board of Revenue (FBR) collects sales tax on them and these taxes are grossly under-covered. The SBR can do better due to its close proximity to the tax base, he added.

Shah said collection of sales tax on goods should be assigned to the SRB to make this levy more efficient. The SRB can collect that tax on behalf of the FBR and retain service charge.

"Similarly, the federal government collects Capital Gains Tax (CGT) on immovable property. The CGT is levied on the basis of Income Tax Ordinance. In the spirit of the 18th amendment, this tax should be devolved to the provinces," he added.



Talking with reference to the Gas Infrastructure Development Cess (GIDC), the CM said the GIDC needs to be transferred to the provinces as it is a provincial subject.

"Sindh government should also be given its due share from the amount collected by the federal government under the GIDC so far," he said, and adding that the excise duty on crude oil and natural gas as per Article 161 of the Constitution needs to be devolved to the provinces.

He said he would talk to the federal government and urge it to enhance the excise duty on natural gas. "It was fixed in 7th NFC at Rs10 per MMBTU and it should be charged ad valorem," he said.

Talking about royalty on crude oil and natural gas, Shah said the federal government collects royalty on crude oil/natural gas and charges two per cent of the receipts as the collection fee. Now, the provinces should be allowed to collect that tax themselves.

Talking about his government's stance on Octroi & Zila Tax (OZT) said Octroi was a consumption tax and Sindh's share was 46 per cent when it was itself administering that levy. The federal government came along and convinced Sindh to stop collecting the OZT in return for reimbursement from the federal government.



For the purpose, the federal government enhanced the rate of sales tax from 12.5 per cent to 15 per cent and the extra 2.5 per cent levy was used to compensate the provinces.

He said in 2010 the federal government started transferring funds in lieu of the OZT on the basis of the criteria governing the NFC award – that is population, etc – which reduced Sindh's share to 0.66 per cent. He urged the federal government to enhance Sindh's share of the OZT to at least 2 per cent.

Tax reform

Suggesting tax reform, the CM said the FBR tax revenue projection should be on net of all refunds allowed/paid and not on gross basis as the FBR withholds refunds to inflate their receipts.

"They [FBR] make necessary adjustments owing to refunds after end of a financial year which affects the cash flow and budgeting of the provinces. The FBR should be penalised for not achieving the projected Divisible Pool Taxes," he said.

The CM demanded that provinces should be consulted while granting concessions, reducing sales and other taxes on a particular industry and waiving or changing tax rates.

Giving an example, Shah said the sales tax on the LNG was reduced to five per cent without consulting the provinces. He suggested that tax expenditures (for example exemptions, deductions, or credits) be reduced, as they alter horizontal and vertical equity of the basic tax system.

Giving another tax reform proposal, he said a joint committee of federal and provincial governments with international experts be set up for rationalisation of federal and provincial tax collection, broadening the tax bases at both levels; eliminating duplicate taxation and study on revenue generation at the federal and provincial levels.

Oppose special pool

Shah said the federal government insists that seven per cent of the total divisible pool be made part of a special pool for social sector and expenses on security.

He said Sindh government could not accede to this proposal because Khyber Pakhtunkhwa (K-P) was allowed an additional one per cent share on account of its losses in the war on terror. However, he said, most terrorists moved to Karachi, causing Sindh to enhance manifold its expenditure on security.

"The Article 148 of the Constitution requires the federal government to maintain law and order. Therefore, the federal government should reimburse extra outlays on security," he added.

He also said the Federally Administered Tribal Areas (Fata) has now become part of the K-P and the province is going to get more in the NFC award on account of an increase in its population. "Under Article 161, provinces' share cannot be reduced in the divisible pool," he added.

Talking about rationalisation of equalisation payments said the equalization [of payments] are cash payments made to less developed provinces/ states to bring them on a par with others.

"Many states use fiscal equalisation to reduce inequalities in the fiscal capacities of subnational governments due to various factors. The equalization of payments, however, may induce 'perverse incentives' to subnational governments to reduce fiscal effort," he added.

He gave some international instances and said Australia gives horizontal Fiscal Equalization, Belgium makes National Solidarity Intervention, Canada gives Fiscal Capacity Equalization (FCE), Germany makes Post-Unification Equalization Payments. He said these incentives could not go indefinitely and have to have a sunset requirement, as in Germany where equalisation system would end in 2020.