Since 1947, the Centre has been denying the provinces their legitimate right of sales tax on goods, while the Federal Board of Revenue (FBR) collects too little under this head to meet overall needs of the federation and its federating units.
At the time of independence sales tax on goods was a provincial subject that was on the Provincial Legislative List at Serial No.48 in the Government of India Act, 1935. It was described as “Taxes on the sale of goods and on advertising”.
In the Constitution, 1956, “tax on sales and purchases” was mentioned at Serial No.26 of the Federal Legislative List, thus for the first time it became a federal subject. The position was maintained in 1962 Constitution, which mentioned “tax on sales and purchases” on the Federal Legislative List as clause (j) at Serial No.43 in the Third Schedule.
In 1973 Constitution as originally adopted ‘tax on sales and purchases’ was kept on Federal Legislative List at Serial No.49 of Part I of the Federal Legislative List given in the Fourth Schedule to the Constitution. The item was, however, completely substituted by Constitution Fifth Amendment Act, 1976 with effect from September 13, 1976, to read “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”.
OPINION: 11th NFC: challenges, hopes & solutions —I
The second half of the amended entry (supra) appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960. Through that amendment the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption” [see details in WAPDA v. Collector of Central Excise and Sales Tax (2002 PTD 2077) and in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)].
The size of the cake [Divisible Pool] is so small that it cannot help the country to come out of the debt trap and mobilize sufficient revenue to spend adequately for the welfare of the masses, no matter which part of the country they belong to. Under the given scenario, Pakistan will remain in deadly debt prison, and more and more people will be pushed below the poverty line, especially due to oppressive indirect taxes. If we want to overcome the perpetual fiscal mess, the Parliament will have to reconsider the prevailing social contract between federation and the provinces.
The way forward is introduction of unified sales tax on goods and services at a low rate of 10 percent, and its collection through National Tax Council. The 11th NFC should concentrate on it and devise mutually beneficial formula for distribution under this head, which will be a win-win situation for centre and provinces and substantially improve tax-to-GDP ratio. Unified sales tax on goods and services can fetch around Rs 9,000 billion as against collection of sales tax on goods at Rs 3,901 billion by the FBR in FY 2024-25 and on services at Rs 612 billion cumulatively by all provinces.
The additional collection of little over Rs 5,000 billion under the head sales tax on goods and services will not only give fiscal space to the federal government to narrow down fiscal deficit but would also enhance distributable amounts to the provinces.
It is also imperative that further amendments should be made in the Constitution after a wider debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government to enhance direct tax collection to improve infrastructure, retire debts and bridge fiscal deficit. This alone can achieve the real purpose behind Article 160 of the Constitution, ensuring sustainable fiscal stabilization and prosperity for all citizens of Pakistan wherever they may be residing.
Presently, all broad-based and buoyant sources of revenue are with the federal government. The contribution of Rs 978.6 billion by all provinces in total tax revenues of the country for fiscal year (FY) 2024-25 at Rs 12.722 trillion was pathetically low, 0.9 percent of GDP, which was Rs 114,692 billion. It was merely 5.2 percent in overall national revenue base (tax and non-tax revenue) of Rs 17l,997.45 billion [15.7 percent GDP] against the total national expenditure of Rs 24,494.3 billion [21.4 percent of GDP]. The share of provinces in national expenditure was 5.1 percent of GDP. All provinces together generated non-tax revenues of only Rs 313.59 billion.
Pakistan has been facing grim challenges on the fiscal front as Summary of Consolidated Federal and Provincial Fiscal Operations, 2024-25 (Provisional), available on the website of Ministry of Finance (MoF), for July 2024 to June 2025, shows that even part of defence spending is now funded by borrowing. It is more than a fiscal fiasco — a serious cause for concern threatening economic viability and national security of the country.
The negative impact of mindless and costly borrowing, both external and internal, resulted in debt servicing of Rs 8,887 billion with fiscal deficit, reaching Rs 6.16 trillion. In the wake of devastating floods of 2025, it is bound to increase.
It is worth mentioning that planning, in the period following Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] that received assent of President on April 20, 2010, should have been federalised rather than centralised. However, even after a lapse of 15 years, nobody has raised this issue, what to speak of implementing it in letter and spirit.
The 18th Amendment redefined National Economic Council (NEC) on the pattern of Council of Common Interests (CCI). NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. In view of Article 167(4), the role of NEC has become very important, though the Centre and provinces have yet not realized it. It reads: “A Province may raise domestic or international loan or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council.”
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) of the Constitution confers 50% ownership of hydrocarbon petroleum resources to the provinces. The federal government earlier held the subject exclusively. There still exist legal and administrative bottlenecks for implementing this provision even after lapse of more than 15 years.
Presently, many economists and politicians are arguing that 7th NFC Award and 18th Amendment are harming fiscal stability of the federation. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically.
The performance of provinces in collecting taxes from the rich and mighty, e.g., agricultural income tax from the affluent absentee landowners is extremely appalling. This is a common issue both at federal and provincial levels arising from absence of political will to collect income tax from the rich—the meagre collection of agricultural income tax—less than Rs 5 billion by all provinces and federal government in fiscal year 2024-25 is lamentable.
It is imperative that right to collect tax on income, including agricultural income, should be given to the Centre through dialogue in a democratic way and after consensus in terms of Article 144 of the Constitution, which says:
Power of Majlis-e-Shoora (Parliament) to legislate for one or more Provinces by consent
144 (1) If one or more Provincial Assemblies pass resolutions to the effect that Majlis-e-Shoora (Parliament) may by law regulate any matter not enumerated in the Federal Legislative List in the Fourth Schedule, it shall be lawful for Majlis-e-Shoora (Parliament) to pass an Act for regulating that matter accordingly, but any act so passed may, as respects any Province to which it applies, be amended or repealed by Act of the Assembly of that Province”.
As suggested above and highlighted in the first part, the 11th NFC may not just concentrate on the determination of fair and equitable shares’ distribution between the federation and federating units from the net proceeds of taxes but also recommend judicious re-allocation of fiscal rights amongst them. The third and concluding part of this series, will present concrete proposals in the connection.
[To be concluded]
Copyright Business Recorder, 2025
The writer is a lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)
The writer, an Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at abdulrauff@hotmail.com