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NFC award major reason behind govt’s inability to go after untaxed sectors: economist

  • Dr Ashfaque Hassan Khan says Islamabad loses incentive to tax undocumented economy as it loses big chunk of additional revenue
Published September 4, 2023
Pakistan’s economy has been battling runaway inflation with consumers seeing a 21% increase in price of petrol in the last one month. Photo: AFP
Pakistan’s economy has been battling runaway inflation with consumers seeing a 21% increase in price of petrol in the last one month. Photo: AFP

No one wants to talk about the National Finance Commission (NFC) award, which discourages the federal government from broadening the tax base and going after untaxed sectors, said noted economist Dr Ashfaque Hassan Khan.

Citing this as a reason behind the current crisis in the power and energy sectors – where consumers are left paying hefty bills and prices of petroleum products – Dr Ashfaque said the NFC award removes the incentive for a federal government to tax undocumented sectors.

“There are three factors that are affecting fuel prices,” he told Business Recorder. “One is the international price of fuel. If it goes up, the government has to pass it on. Second is the exchange rate. When rupee depreciates, the impact has to be passed on as well.

“The third reason is the petroleum development levy (PDL). It is a tax but has been called levy because of the NFC award. If it is collected as a tax, the federal government has to share it with the provinces because of the NFC award.”

Dr Ashfaque said the fact that the government would only get 40% of the additional revenue it generates means it lacks the motivation to do so.

“Who will want to go after untaxed sectors?

“There’s no incentive. Most of the increased collection will go to the provinces. No one would want to lose their political capital for nothing.

“The NFC award has crushed the incentive for any government to take meaningful tax reforms. Provinces also get ample amounts from NFC awards and hence, they also don’t improve their tax collection. This NFC award has become a sort of manufacturing defect.”

Apart from PDL, currency depreciation is also playing a huge role in inflation. His remark comes as the rupee has depreciated over 6% in the last one month in the inter-bank market. However, the currency’s fall in the open market has been more dramatic with the gap between the two going beyond 8%.

He said the government should try to keep exchange rates in check to keep fuel and electricity prices stable.

“Same is the case with the electricity bills as its generation is also exposed to exchange rates in Pakistan,” he said.

“Exchange rate crisis damages a country’s economy. Falling value of rupee will increase electricity prices. Increase in electricity prices will increase theft. To recover theft losses, electricity bills will be increased further. Then again, theft will increase and this vicious circle will continue unless the exchange rate issue is addressed.”

Meanwhile, Pakistan Business Council CEO Ehsan Malik said the National Electric Power Regulatory Authority (NEPRA) should expedite tariff adjustments so that arrears do not build up to make recoveries difficult.

“The longer-term solution to lower power tariffs is to transfer DISCOS to provinces, restructure and privatise them to reduce distribution losses and theft,” Malik told Business Recorder. “We also need to enhance transmission capacity and extract cheaper power from Thar and renewables from the South, remove cross subsidies and encourage higher consumption by reducing tariffs, especially in the winter months when capacity utilisation is low.”

He said that prices of petrol and diesel have to be increased because of increase in international fuel prices and rupee’s depreciation.

“Also, the caretaker government does not have a mandate to renegotiate what has already been committed by the previous government. However, it could seek some flexibility in recovery of power tariffs without compromising the overall undertaking.”

Malik said the caretaker government should preserve global agreements since it has no political capital to worry about and IMF’s support is essential for the country’s solvency.

“The new elected government can negotiate with the IMF.”


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Shahbaz H Sep 04, 2023 08:03pm
Rightly said. One solution to the power sector Circular debt is to cut the relevant province’s arrears from the NFC before their transfer to them. Of course they will resist but then we have to take this tough decision if monetary situation is to improve. Plus it will give incentive to the provinces to utilise their LEAs for better recoveries of arrears of DISCOS in their respective domains.
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