NFC Award: Lower tax collection eats up share of provinces

Federating units accuse centre of subverting the budget through tax breaks.

Shahbaz Rana February 09, 2013
Federating units accuse centre of subverting the budget through tax breaks.

ISLAMABAD: The government’s act of giving tax breaks in the middle of the year has started affecting the revenue share of provinces, resulting in a significant reduction in transfers during the first six months of fiscal year 2012-13. Provinces have accused the centre of subverting the budget.

From July to December, the government transferred Rs592 billion or 37.8% of the annual commitments made under the National Finance Commission (NFC) Award to provinces, according to official documents. Provincial authorities say the ratio should have been close to 45%.

For the current fiscal year, the government expects to disburse Rs1.45 trillion to the provinces as per their share in tax revenues. Under the seventh NFC Award, the provinces will get 57.5% of the total tax collection for the fiscal year.

Punjab received Rs278.6 billion or 39.3% of its share of Rs710.3 billion. Sindh received Rs154.1 billion or 41.2% of the annual share of Rs373.6 billion, Khyber-Pakhtunkhwa received Rs96.4 billion or 39.9% and Balochistan was given Rs63.2 billion or 47.4% of its annual share of Rs133.3 billion.

The transfers fell short of the semi-annual estimates, though they were in line with the tax collected, as the government failed in its efforts to achieve the revenue targets and granted exemptions through statutory regulatory orders (SROs).

It is expected that similar to the previous fiscal year, lower revenue collection will jeopardise the federal and provincial budgetary frameworks. Owing to the Federal Board of Revenue’s (FBR) inability to collect projected revenues, provincial budgets run into deficits that contribute to further widening of the national budget shortfall.

Besides the adverse implications of political appointments on top FBR positions, the following tax breaks affected the collections: the government withdrew the biggest new revenue spinner – 1% withholding tax on manufacturing – resulting in a revenue loss of Rs18 billion.

Similarly, the government drastically cut the federal excise duty on sugar to 0.5% at a time when it was negotiating a new bailout programme with the International Monetary Fund (IMF) in Islamabad. The cut was aimed at bailing out the influential sugar industry, causing a revenue loss of Rs8 billion to the national exchequer.

In yet another move, the government halved sales tax on steel melters, which caused roughly Rs4 billion loss.

“By withdrawing tax measures through SROs, the government is subverting the budget,” said Dr Kaiser Bengali, NFC’s technical member from Sindh. He said provinces were facing the brunt of the government’s actions.

Bengali said all SROs which affect the revenue share of provinces should be approved by the Council of Common Interests – the constitutional body headed by the prime minister with all chief ministers as its members.

As the FBR comes under pressure to give a boost to the revenue collection, it has resorted to the old tactic of burdening the lower and middle class taxpayers as it plans to levy new taxes.

An official of the K-P Finance Department also confirmed that the province received Rs10 billion less than the commitment under the NFC. “The provincial government will take up the issue of lower than targeted revenue collection with the centre in the quarterly review meeting of the NFC.”

He regretted that for the last many months, the government had failed to convene the NFC review meeting.

The silver lining for the provinces is that despite significantly reduced transfers, their budgets remain in surplus due to delay in disbursement of their respective shares until the deadline. This has resulted in accumulative savings of Rs96.5 billion by all the four provinces in the six-month period.

An official of the Punjab Finance Department said that the trend will reverse in the second half of fiscal 2013 like it did the previous fiscal year.

Published in The Express Tribune, February 10th, 2013.

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H. Khan | 8 years ago | Reply

Why do people not realise that FBR in last 6 months have become dysfunctional and all senior officers of integrity are leaving FBR. This should be clear signal

Suheil Siddiqi | 8 years ago | Reply

Every PKR fiat note has phantom taxes & interest on odious loans baked into it.

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