Federal vs provincial tax collections

The government has reportedly decided to establish a high-powered Tax Commission with the objective of getting back the power to collect general sales tax on services and agriculture income tax from provinces as well as formulate a unified valuation rate for real estate, according to credible media reports. This is not likely to produce any positive result as the constitution of Pakistan gives to the provinces the prerogative of collecting and utilizing sales tax on services, though sales tax on goods is collected by the Federal Board of Revenue (FBR). In the past, FBR, on payment of a fee, collected sales tax on services on behalf of the provincial governments however the situation changed when Sindh decided to collect this tax by creating the Sindh Revenue Board to collect it which, in turn, resulted in: (i) higher collections for the province not only because the Sindh Revenue Board (SRB) was more cognizant of the extent of the income of the services sector due to its proximity relative to FBR but has since raised provincial revenue by extending the tax to more services; and (ii) the collection charge was not payable to FBR anymore.
The Sindh government took a very bold step by refusing to allow the FBR to continue to collect sales tax on services during the presidency of Asif Ali Zardari who had put considerable pressure on Sindh, where the PPP was also in power, to maintain the status quo by allowing FBR to collect sales tax on behalf of the province. The province's resistance to this move led to not only a significant increase in collections under sales tax on services but also led to Punjab and Khyber Pakhtukhwa following suit and raising their own collections under this head though Sindh clearly remains in the lead in generating revenue from this source.
Granting greater financial autonomy to provinces, through not only empowering provincial revenue boards to begin collection of those taxes that come under its jurisdiction as per the country's constitution but also building capacity to deal with lacunae in social sector development as envisaged under the 18th constitutional amendment, must be respected as they represent a consensus across the political divide. Granted that the Pakistan Tehrik-i-Insaaf (PTI) was not party to these decisions as it did not have a presence in the assemblies between 2008 and 2013 yet reversing these decisions require all the provinces' to be on board and it is highly unlikely that Sindh would agree. Additionally, irrespective of the deference accorded by the Punjab Chief Minister to the Prime Minister one would hope that Usman Buzdar takes a principled decision in this regard in the interest of the province rather than taking a dictation from the federal government.
Reports also indicate that income tax on farm income is also being considered to be collected by the centre with a unified valuation rate of real estate. Farm income tax is again a provincial subject as per the constitution; however Business Recorder has urged all administrations, past and present, to set tax on farm income at the same rate as individual income tax, a suggestion endorsed by economists but never implemented as the assemblies, federal and provincial, are dominated by the rich absentee landlords who resist any change in the constitution in this regard and/or allow the provincial assemblies to raise taxes on farm income on the basis of actual documented profit.
There is little doubt that the objective of these proposals is not just to raise federal revenue but also increase revenue for the provinces by centralizing the collection process but would dilute provincial autonomy and make the provinces ever more dependent on the federal government. Sales tax on goods, admittedly, is the largest generator of tax revenue for the federal government. There are, however, gaping holes in the sales tax net on goods because all the wholesalers and retailers of goods are not in the tax net. This results in massive leakage or escape from payment of tax with the result that collection of sales tax is without doubt below its potential. A more achievable option would be to allow the provincial revenue boards to begin collecting sales tax on goods from wholesalers and retailers within their respective provinces on behalf of the FBR against payment of a collection charge. The Sindh government, in fact has floated a proposal already along these lines. It is contended that this would raise revenue collections for the federal government under this head given the proximity of the provincial government to transactions taking place.
To conclude, one would hope that the suggestions/recommendations put forth by federal ministers/entities take account of the constitution and have the capacity to achieve the stated objective. Preparing recommendations and/or setting up yet another Tax Commission in the absence of a consensus amongst all the stake holders are measures that are unlikely to bear fruit, as in the past.