Reopening of Pandora's Box

The NFC awards have always been a matter of great contention in the country and there are early signs of a major conflict as the reconstituted National Finance Commission (NFC) is expected to hold its twice-postponed meeting on 16th December, 2011. President Zardari, it may be mentioned, had reconstituted the NFC in August this year to work out the eighth award for distribution of resources among federal and provincial governments and its earlier meetings were scheduled on 16th and 21st November but then postponed to December 16, 2011. According to reliable sources, discussion is also likely to revolve around the reopening of at least two settled subjects pertaining to the collection of sales tax on goods and services by a federal agency and Sindh's demand to make revenue generation a key determinant of provincial shares, along with payment of arrears of around Rs 300 billion. There are reports that the Sindh government has already protested over the agenda and working paper circulated by the Ministry of Finance in which one of the items for discussions would be imposition of GST on services in an integrated mode and its distribution among the provinces. It is believed that if the authority to collect GST by the provinces granted by the 7th NFC award is withdrawn, the Sindh government would go back to its original demand for giving decisive weight to revenue generation in distribution of resources under the federal divisible pool. One fails to understand why the federal government was bent on "reversing through a majority vote" a provincial authority granted by the earlier NFC award to collect GST on services. If this "controversial issue" was not withdrawn, authorities of the Sindh province would, of course, feel obliged to take a firm stance on payment of over Rs 300 billion in arrears and or making revenue generation a key determinant of provincial shares in the coming meeting. In any case there is no ambiguity that the sales tax on services is a provincial tax and is levied by the province, therefore it is to be collected by the province too and the permission of the NFC to collect a provincial tax is not required. It may be recalled that the 7th NFC award had accepted KP's demand for payment of arrears on net hydel profits and Balochistan's demand for payment of gas development surcharge. These payments are already being made by the federal government. The Sindh government had not pressed for payment of arrears on account of replacement of octroi and Zila tax at that time, because its long-standing demand for collection of GST by the provinces was accepted. So far as capacity considerations were concerned, the Sindh government claims to have collected Rs 9 billion in GST on services in the first five months of the current financial year which was higher by 50 percent than last year and this proved that, contrary to the perception of the federal government, that the province had the proper wherewithal to collect this tax. Learning from past experience, we are of the firm view that both the federal and provincial governments should try their utmost to refrain from raising settled issues and not open the Pandora's Box, at least at the early stages of discussions on the 8th NFC award. We don't know the compulsion of the federal government to include the GST on services in the agenda for the proposed meeting but it must be remembered that the unity of the federation is already under a great deal of strain and the distribution of resources under the NFC awards is an extremely emotive issue. There should not be any doubt that if Sindh is compelled to surrender its case of an issue settled under the 7th NFC award, other provinces too would raise voices in favour of their old arguments and meeting their grievances. The 7th NFC award was touted as a great achievement by the political leadership of the country and no effort should be made to undermine this achievement and discredit the democratic process. In our view, let us learn some lessons from history and now concentrate only on refining the agreed formula and examining or arguing on the new issues in a spirit of sacrifice. An important matter which needs to be deliberated upon, however, is the slowness of the provinces in raising their own resources and containing their expenditures within reasonable limits in order to reduce their dependence on the divisible pool as far as possible. Copyright Business Recorder, 2011