Provincial budgets — NFC and beyond

All eyes are now set on the provincial budgets. There are good reasons for this. Thanks to the Seventh National Finance Commission (NFC), the provincial share in the divisible pool of resources is larger than the federal share for the first time in the history of the country. In a single year, it jumps from 46 per cent to 56. In absolute terms, it goes up from Rs655 billion to Rs1,033.6 billion, or by 57.7 per cent. As a consequence, the provinces are also expected to support a larger development effort. Again for the first time in history, the provincial contribution to the public sector development programme (PSDP) will be larger than the federal contribution, Rs373 billion out of a total of Rs663 billion, or 56.3 per cent.

The NFC resources are collected by the federal government and transferred to the provincial governments. Next year the provincial share will rise further to 57.5 per cent. Attention will now naturally be focused on the capacity of the provinces to utilise the additional money — and wisely. The onus of delivering basic services, given the abolition of the Concurrent List, now falls entirely on the provinces. There is, however, not much so far in terms of performance to inspire any degree of confidence.

In the past, the provinces have had very little incentive to mobilise their own tax potential fully. The entire tax collection has hovered around half a percentage of GDP. True, the major taxes have been assigned to the Federal List, Part I. However agriculture, which still contributes around 21.5 per cent of GDP, remains out of the income tax net because of laxity on part of the provinces. In his onslaught on the budget, the whipping of the federal government by the leader of the opposition for failing to levy the agricultural income tax was obviously misdirected. Similarly, taxing services was always the domain of the provinces even before the Value Added Tax controversy. But they awoke to it only after some easily collectible big ticket revenue spinners emerged in the federally collected General Sales Tax.

Beyond the NFC and the existing provincial revenue sources also lie opportunities that the provinces seem to be ignoring altogether. As a result of the 18th amendment, four sources of revenue have been deleted from the Federal List. These include state lotteries, duties in respect of succession to property, estate duty in respect of property and taxes on capital value of immovable property. Following the principle that what is not federal in the constitution is provincial, the provinces now have the right to these areas of revenue mobilisation.

The Federal Bureau of Revenue messed up Capital Value Tax by doubling its rate. The provinces should keep the rate low to encourage maximum declarations. State lotteries are used in other countries to finance schemes of public welfare.

Inequalities in income and wealth are severe and have been on the rise since 2000. This is also the period when a number of taxes affecting the rich were abolished one after the other. Wealth tax, death duty and estate duty are worth mentioning. In formulating their budgets, the provinces should avoid feeling awash with liquidity, post-NFC. The burden of improving quality of life has been shifted to the provinces. They ought to mobilise each rupee that they can and stretch its use to the maximum public benefit.

Published in the Express Tribune, June 11^th, 2010.