Temporary arrangement: Provinces to receive 80% of sales tax on services

NFC meeting goes ahead despite absence of Punjab, Balochistan FMs.

ISLAMABAD:

Despite the absence of two of its five members, one of the highest financial governance bodies in the country went ahead and made critical revenue-sharing decisions in a meeting on Monday, raising questions about the legitimacy of those decisions.

The National Finance Commission, a body that decides revenue sharing arrangements between the federal and provincial governments, devised an interim formula to distribute 80% of sales taxes on services to the provinces. The decision was made despite the fact that the Punjab and Balochistan finance ministers were not present at the meeting.

Punjab Chief Minister Shahbaz Sharif, who also serves as his province’s finance minister, boycotted the meeting because of his party’s stance that Prime Minister Yousaf Raza Gilani’s administration is illegal after the premier’s conviction for contempt of court. Balochistan Finance Minister Asim Kurd Gillo’s is explained by a more mundane reason: his flight from Quetta to Islamabad did not take off on time, according to finance ministry spokesperson Rana Assad Amin.

Federal Finance Minister Abdul Hafeez Shaikh, who presided over the meeting, had called it to discuss the biannual progress report on the implementation of the 7th NFC award, from July to December 2011. But the meeting ended up taking on other subjects as well.

It is not as though Punjab and Balochistan had no representatives at all. The two provinces joined Khyber-Pakhtunkhwa in challenging the authenticity of Sindh’s gas production numbers, claiming these figures have been inflated by Karachi to get a greater share of royalty for natural gas. The participants of the meeting, however, could not agree on a finalised formula for distributing services’ sales tax revenues and decided to go with an old arrangement for an interim period until a final decision can be reached.

The constitution is ambiguous on whether or not all provincial finance ministers need to be present while an NFC meeting takes place. Senator Farogh Naseem of the Muttahida Qaumi Movement, a constitutional lawyer, said that NFC meetings notified far enough in advance can be held without all members being present.

Yet convention has dictated that if all members are not available, the meetings get rescheduled. Two months ago, the federal finance ministry postponed an NFC meeting after the Balochistan finance minister said he could not make it.

Decisions

The government collected Rs64 billion in sales tax on services in the first six months of the fiscal year ending June 30, 2012. About Rs51 billion of that – 80% – will be distributed among the provinces immediately, with the fate of the remainder to be decided once a finalised formula has been worked out, said the federal finance ministry spokesperson.

Under an agreement drawn up in 2010, the federal government was meant to supplement every Rs100 collected by the provinces in sales taxes on services with Rs36 from its own revenues, a measure that was meant to be a stopgap to give the provinces time to build up their own revenue generating capacity. Services such as banking, insurance, stock market, advertising, and construction are subject to a sales tax. Punjab gets 60.4% of the total collection, Sindh 50%, Khyber-Pakhtunkhwa 15.6% and Balochistan 10%, bringing the total to 136%.

Sindh gets no love

The other three provinces, it seems, had many disagreements with Sindh. The province was accused of collecting sales taxes even on services that clearly fall into the jurisdiction of other provinces. In addition, it was accused of exaggerating its gas production figures to get more royalties.

“Sindh will give a presentation to the other provinces to allay concerns about collecting sales taxes on services,” said Amin. He also added that the petroleum secretary was asked by the NFC to verify Sindh’s claims of its production and wellhead prices.

The government distributed Rs15.7 billion in gas royalties from July to December, of which 60% went to Sindh, with Balochistan getting the next highest share of 23.6%.

The NFC also approved the report it had been called to review. In the first six months of fiscal 2012, the federal government transferred Rs458.5billion, or 57.5% of its revenues to the provinces. Punjab got Rs237.2 billion, Sindh Rs112.6 billion, KP Rs75 billion and Baluchistan Rs46.5 billion. The federal government gave 1%, or Rs8 billion, of the divisible pool to KP to compensate losses incurred while fighting war on terrorism.

Published in The Express Tribune, May 15^th, 2012.