GST - A PROVINCIAL SUBJECT?

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 07 - 13, 2009

With the NFC award meetings having started to take place, the smaller provinces are bracing for a showdown to aggressively press their point against the so-called exploitation by the center and the largest province.

While the under-fire population criterion for the distribution of fiscal resources is challenged by the multiple-criteria proposal, the province of Sindh has taken a strong position on the issue of GST. In Several meetings convened by the political representatives of the province, it has been unanimously decided that the center be asked to make full refund of GST collection to the province instead of making it a subject of appropriation among the center and the provinces. Memoranda in this respect have been sent to the center. The Sindh Chief Minister, recently said, The Sindh government is seeking to regain the power of collecting general sales tax (GST) on the services from the federal government because the Constitution does not allow the federal government to collect the GST. The Sindh government has proposed that population is not the sole criterion for distribution of resources. Poverty, backwardness and the area should also be included as criteria for the NFC award." He further said that Sindh's share in the federal revenue stood at 67 per cent, but it is entitled to get only 23 per cent from the federal divisible pool.

The Sindh provincial assembly, way back in February 2009, tabled a resolution to be unanimously passed by the coalition of PPP, MQM and ANP. The resolution asked of the federal government to allow the provinces to collect and utilize the revenue from GST. During a recent meeting on proposals for NFC Award, the Sindh information minister Ms. Shazia Marri reminded the federal government that Sindh wanted the Award to be based on multiple criteria, including area, population, revenue generation, backwardness and geographical factors. She said that Sindh had suffered losses of Rs.175 billion over the last 10 years including the losses on GST account. Speakers at yet another recently held policy dialogue on the NFC Award advocated the use of GST by the respective provinces. Former finance minister Syed Sardar Ahmed said that at the time of partition, GST was the subject of provinces, which was gradually taken over by the federal government. He said that besides sales tax, excise tax was also a matter of provinces and demanded that both taxes should be left for the provinces.

As the history goes, during the pre-independence era, the Niemeyer Award (under the 1935 Act) treated sales tax as provincial subject. Even after independence (till March 1952), the same award was followed with some adjustments. After independence, Sir Jeremy Raisman evolved a revenue sharing formula which was put into practice with effect from April, 1952. According to this formula 50 per cent ad hoc share of sales tax was granted to federal government to help it overcome the post-independence financial crisis. The ad hoc relief to the then government is understandable, but the continuance of that ad hoc measure even after the passage of 62 years, is inexplicable. The existing revenue assignment protocol between the center and provinces is shown in the table.

REVENUE ASSIGNMENT TO FEDERAL AND PROVINCIAL GOVERNMENTS

GOVERNMENT DIRECT TAXES INDIRECT TAXES
Federal Government Income tax, Corporate tax, Wealth tax, Property tax Sales tax, Excise duty, Custom duty, Import duty, Export duty, Gas& petroleum surcharge, Foreign travel tax
Provincial Government Land revenue, Urban immovable property tax, Tax on transfer of property, Agricultural income tax, Tax on profession & trades Stamp duty, Motor vehicle tax, Entertainment tax, Electricity duty

In India too, the issue of sales related taxes (VAT, GST etc.) tends to be contentious. Not all the states there show unanimity when it comes to the imposition of such taxes. In the past, few states refused to join hands with the center on VAT issue. India now plans to introduce a new GST (Goods and Services Tax) with effect from April 2010, as reported by Anand Kumar in the daily Dawn. States like Tamil Nadu, Madhya Pardesh and Chhattisgarh are opposing the introduction of new GST. Tamil Nadu finance minister is reported to have said, "The roadmap towards GST must be carefully chalked out based on consensus and not compulsion."

In our case, the contention that GST is a provincial subject needs to be sorted out first. If the center feels otherwise, it should properly support its stand through constitutional backing. Once this is resolved, the issues like GST rate, central and provincial shares of GST, generation and collection anomaly, criteria for revenue distribution etc. should be taken up for amicable settlement - of course through "consensus and not compulsion."