The share of provinces in the federal divisible pool remains a hotly debated topic

Jun 29 - Jul 05, 1996

If the federal budget for 1996-97 was characterized by heavy taxation and bank borrowing, the budgets of the four provinces have one basic weakness. There has been excessive dependence on the federation for their revenues. The reason for this over-dependence on Islamabad is the result of the taxation structure in which most of the taxes are imposed and collected by the federal government which goes to the divisible pool and is then shared by the provinces.

National Finance Commission has been empowered to develop a formula for the sharing of these resources. However, distribution of the amount to the provinces has always remained a debatable topic. Even in the days when there were only two provinces, East and West Pakistan, the sharing of amount created a lot of resentment against the federation which was one of the major reasons for the people living in the eastern province to revolt, resulting in the creation of an independent and soverign Bangladesh. So is the present situation and the provinces have not arrived at a formula for sharing of resources which was acceptable to all.

While the federation has relied heavily on new taxes, particularly the imposition of GST, enhancement of rate of regulatory duty and withdrawal of many exemptions, Sindh has tried to emulate the federation to the extent of imposing heavy taxes estimated to generate Rs.900 million. The burden of these taxes will be borne by the middle class living mostly in the urban areas of Sindh and already paying heavy taxes.

In case of provincial budget for Sindh, the revenue receipts for the next financial year were estimated at Rs. 42 billion out of which Rs. 35.2 billion would be the provincial share in the federal revenue and the remaining Rs.6.8 billion would be provincial receipts.

In this regard, the point of view of some of the activists from Sindh — that while NWFP and Punjab are entitled for royalty on hydel power and Balochistan for royalty on gas, why should Sindh be deprived of royalty on its ports — may also be considered.

The other points that have not been addressed are: Sindh contributes the largest percentage of revenue to the national exchequer, besides paying the biggest chunk of freight subsidy towards POL transportation apart from Karachi's exclusive right to the motor vehicle tax collected from the City.

By constrast those who are not paying taxes, despite being in a position to pay, have been let off lightly, just because they have political clout — the people deriving income from agriculture sector. However, the Sindh government deserves some credit for being the only province which has been trying to collect at least some amount from this elite group.

The Punjab government has announced a Rs.2.9 billion surplus budget for 1996-97. Against the estimated expenditure of Rs.77 billion, the forecast amount of revenue was Rs.84.05 billion. This increase in receipts was due to enhancement of the provincial share of revenue from the federal divisible pool, amounting to Rs. 71.32 billion, and provincial revenue receipts of around Rs.12.73 billion. However, it is noteworthy that the Punjab government decided at the eleventh hour not to impose agriculture tax because of revolt of members of the ruling PDF alliance.

The NWFP budget with an outlay of Rs.27.146 billion shows an estimated surplus of Rs.284.266 million. The taxation proposals were based on upward revision of existing duties and fees, levy of new taxes estimated to generate an additional Rs.146,2 million for the provincial government. The budget is heavily dependent on receipts from the federal divisible pool.

Unlike to other three provinces, Balochistan has announced a Rs. 18.41 billion budget, showing a gap of Rs.2 billion between receipts and expenditure. Balochistan is expected to get Rs.13.42 billion from royalty, excise duty and gas development surcharge and its share of the divisible pool. Balochistan has a very small revenue base from which only 5% of total receipts are generated and the remaining 95% comes from the federal resources. As the basis of distribution of the divisible pool is population, the province gets only a small amount.

While the provincial finance minister of Balochistan has expressed dissatisfaction over the basis of allocation of funds from the divisible pool, it is necessary for the federal government to abdicate its right to collect certain taxes and allow the provinces to collect the same. However, the disparity of level of industrialization, agriculture and mining in various provinces forces the federal government to keep on supporting the provinces as they have mostly failed in expediting the process of development.

Sindh budget : Taxing the taxed

While the tax burden on urban population mounts, the agriculturists continue to enjoy a tax-free income

The Sindh budget for 1996-97 can best be described as a budget of feudal class whereby new taxes have been imposed on the people living in urban areas. Although Sindh can proudly claim to be the first province to have levied agriculture income tax, the amount collected under this head is of no consequence. In 1995-96 only an amount of Rs. 315,000 was collected. In the proposed budget for 1996-97 this amount has been increased to Rs.343,000 by changing the basis of calculation from PIU to area under cultivation. The government has, in fact, done a great favour to the feudal lords who own much more land than is shown for tax purposes.

Although an effort has been made to increase the revenue by imposing additional taxes, bringing most of the goods and services under tax regime, the way the provincial government spends its money has always come under a great amount of criticism. This includes expenditures on supporting a rather over-sized government outfit of ministers and advisors which resulted in actual expenditure of Rs. 1,144 million in 1995-96 against an allocation of only Rs. 554 million. In the 1996-97 budget this amount has been increased to Rs.1,428 million — almost three times the size of the original allocation in 1995-96.

This kind of extravagance negates the right of any government to impose and collect any tax. The purpose for which taxes are imposed — and people are willing to pay them — is to spend the money on development projects in the spheres of education, health and infrastructure to improve the quality of life of the masses.

Even in the case of money spent on 'some development projects' it is most painful to note that scarce resources were hardly spent on real development projects. Often the money is squandered or pilfered by allocating disproportionately large amounts on projects of no consequence. The development fund was being used for promoting the personal prosperity of legislators and favourites of the area for political gains.

As a result of living beyond means, the provincial government was forced to seek approval of a supplementary budget for 1995-96 amounting to over Rs.5 billion along with the budget for the next financial year.

In Sindh, many of the development projects are being financed by foreign assistance as well as from domestic sources. As the major chunk has to come from the federation, the chief minister has expressed his apprehensions on the delay in getting the money in the absence of an NFC award. The present one expires on June 30, 1996.

While the amounts to be spent on real development projects are nominal, the Sindh government would spend a huge amount of Rs.4.7 billion on the maintenance of law and order in the province during 1996-97 — the third highest amount of expenditure in the budget. However, the legitimacy of spending this huge amount remains questionable. Because, the situation has not improved. And the excesses of law enforcing agencies, including 'police encounters' not only continue to be common, but everyday occurances have come to be widely quoted in the international media.

The business community has already declared the 1996-97 budget 'anti-industry and anti-poor' and the employees of corporate sector, the largest group of income tax payers has also demanded restoration of exemptions withdrawn in the budget. It is yet to be seen if the government revises the budget proposals. But surely the Sindh government could have avoided imposition of new taxes by simply cutting down its own expenditures.

After staying away from the provincial assembly, 13 members out of the 26 members belonging to MQM, including detained legislators, attended the budget session but failed to make any impact. However, Dr. Farooq Sattar, rejecting the budget proposals criticised the move to impose additional taxes. According to him, out of this colossal amount only Rs. 0.343 million would be collected from rural Sindh while the balance would be paid by the people from urban areas. He added that feudals would not pay an abiyana (water tax) of more than Rs. 50 million which was a negligible share of the taxes.

Dr. Farooq Sattar was of the opinion that while the work on development schemes in the rural areas was slow, the progress of projects in urban areas was minimal as 80% of the schemes had not been started yet.

Punjab budget

 Enforcing agriculture taxation is a matter of political will

The most important aspect of the Punab budget for 1996-97 was the decision not to impose agriculture tax in the province. According to the finance minister of the province, "the provincial government believes that the PDF parliamentary party's majority decision (to force the government not to levy farm tax) is the voice of the people". This was contrary to the impression given by the provincial government prior to the announcement of the budget.

As the economists have been saying, it needs commitment and political will to enforce agriculture taxation in the country. The PPP which enjoys absolute majority in Sindh was able to make this difficult decision but in the Punjab as most of the members of legislature belong to the feudal class and there is a coalition government, the ruling party could not make this difficult decision.

Punjab enjoys the lion's share in the federal divisible pool as it has the largest population. In the budget for 1996-97 it would receive Rs. 71.32 billion as compared to the provincial receipts which were expected to generate only Rs. 12.73 billion. The provincial receipts denoted an expected increase due to efficient tax and duty collection.

While the total recepits were projected at Rs. 80.05 billion, the estimated expenses amounted Rs.77 billion — an increase of Rs. 6.18 billion from the allocations for 1995-96.

In an effort to increase the revenue collection, the main thrust has been on raising taxes from the services sector, i.e. petrol pumps, chartered accountants, beauty parlours, private hospitals, marriage halls etc. All this would have a direct impact on the common man. But the most important point is the improvements in the tax collecting regime. No doubt the level of affluence in the Punab is higher but tax evasion is also much higher.

It is worth noting that Punjab has an extensive network of small size manufacturing units located in Sialkot, Wazirabad, Sheikhupura, Faisalabad and other cities. But most of these units enjoy various exemptions simply because they have been classified as cottage industries.

The annual development programme 'Tameer-e-Punjab' secured Rs. 15.75 billion of which Rs. 13.02 billion would be spent on ordinary development projects while Rs. 2.73 billion would go to Social Action Programme. The total budgetary allocation for education has been increased to Rs. 23.97 billion which amounts to 31% of the total expenditure. Whereas, the allocation for health sector has been set at Rs. 5.70 billion which signifies an increase of 20% over the last financial year.

Like in Sindh, the law and order situation in the Punjab has also deteriorated lately resulting in various bomb blasts killing many people. Therefore, an allocation Rs. 5.15 was deemed necessary. However, this amount is still less than the amount allocated by the Sindh province.

An allocation of Rs. 33 million for the maintenance of the chief minister's controversial plane and another Rs. 10 million for the purchase of new furniture for the chief minister's office in the supplementary budget for 1995-96, against the backdrop of acute shortage of funds has disturbed many.

Punjab, having a coalition government also suffers from heavy expenditure on ministers and advisors needing millions of rupees. While the provinacial government suffers from acute shortage of money and it was deemed necessary to impose new taxes, the tax payers have a right to ask the managers of the provincial economy to cut down their own expenditure.

Balochistan budget

Heavy reliance on public sector development programme.

The provincial budget is characterized by a record deficit and the largest ever Public Sector Development Programme (PSPD) of Rs. 5.495 billion. The total revenue receipts of the province including capital receipts, federal and foreign project assistance amounted to Rs. 16.310 billion while the total expenditure, including the PSPD and the current expenditure were estimated at Rs. 18.298 billion, indicating a resource gap of Rs. 1.987 billion.

The province would get Rs. 11.33 billion from the federal government as its share in the federal divisible pool and the revenue generated from gas production, etc. This amount reflects a decline of Rs. 1.22 billion if compared to the current (1995-96) revised budgetary estimates. This unusual reduction in the revenue has put the province in a tough situation.

The largest chunk of revenue was expected from the federal divisible pool which was likely to be Rs. 6.351 billion. But the revenue from the development surcharge on gas, the second largest source of revenue, had marked a sharp decline and the province would get only Rs. 2.848 billion as against Rs. 4.560 billion as per 1995-96 revised budgetary estimates.

The income from the excise duty and royalty would also decline from Rs. 2.525 billion in 1995-96 to Rs. 1.118 billion. However, the federal government would provide a grant of Rs. 1.7 billion to bridge the gap. The federal government would also provide Rs. 7.3 million as grant-in-aid to the province for the maintenance of strategic roads.

In order to generate additional revenue a provincial tax of Rs. 0.50 would be levied on bank cheques, 5% excise duty on advertisements on electronic media and a flat tax on shops and business. These measures would generate extra resources of Rs. 80 million.

On the expenditure side, the current revenue, expenditure has gone up to Rs. 12,412 billion. This includes Rs. 2.396 billion for debt servicing. The province has an exceptionally high debt and the amount has already gone up to Rs. 3 billion as per revised budget of 1995-96.

Another major increase in the expenditure was recorded in the subsidy on wheat which doubled from the previous year. In the budget for 1995-96, Rs. 300 million were allocated for the subsidies on food, but according to the revised budget for the year, Rs. 600 million were spent on the account and for the year 1996-97, a huge amount of Rs. 617.50 million has been allocated for the purpose.

In the Rs. 5.495 billion PSPD of the province, having a component of Rs. 2.5 billion foreign aid, Rs. 2.317 billion have been allocated for the SAP sectors i.e. education, health, water supply and population welfare projects, while Rs. 3.117 billion have been allocated for the non-SAP sectors — food and agriculture, livestock, fisheries, forestry and wildlife, communications and works, information, sports, tourism, social welfare, etc.

The minister while presenting the budget was somewhat bitter at the attitude of the federal government which ignored the province in the federal PSPD and delayed the announcement of the fresh NFC Award, causing financial problems for the province. Very small allocations were made for the development projects which would ultimately delay the projects and enhance their cost.

In this regard, Rs. 170 million were required for the completion of Petfeeder Canal but only Rs. 152 million were allocated. Similarly, the federal government had committed to provide 60% of the funds for the Rs. 185 million extension project of Kirthar Canal, but not a single rupee had been allocated for the purpose.

The provincial minister also pointed out that neither the special development programmes were introduced in the province, particularly after the announcement of the NFC award of 1991, nor the NFC Award was implemented properly, which resulted in the progress of the province slowing down.

As the province has a small industrial and industrial base, it is heavily dependent on allocations from the federal government. However, the provincial authorities have also failed in developing a strong industrial base due large-scale smuggling through the Iranian and Afghan borders. Since the people can earn quick money in trading, various industrial estates in the province have not developed. What has been there was due to the investment made by the people from Sindh particularly Karachi.