Sindh CM urges Centre to ‘revisit’ NFC award criteria

–Demands provinces should get CGT under 18th Amendment 

–Claims GIDC is ‘provincial subject’

–Asks for an increase in Sindh’s share of OZT to 2pc, says provinces should have a say in tax concessions

KARACHI: Sindh Chief Minister Syed Murad Ali Shah on Monday called for revisiting the National Finance Commission (NFC) criteria.

The provincial chief minister was presiding over a preparatory meeting for the forthcoming NFC meeting that will be held in Islamabad on February 6. He demanded that the ratio of NFC tied to performance is increased, the weightage given to population should be reduced and revenue generation is given more weightage.

Shah was preparing a Sindh case in consultation with his Finance, Planning and Development and Sindh Board of Revenue (SRB) teams. The meeting was attended by CM’s Principal Secretary Sajid Jamal Abro, Finance Secretary Najam Shah, SRB senior member Noor Alam, Dr Asad Syed, SRB Chief Economist Dr Naeem Zafar, Consultant SRB  Mushtaq Kazmi, Nawaz Leghari, NFC Consultant Qazi Masood, Dr Syed Ashraf Wasti, Finance Additional Secretary Dr Ashraf Wasti  and NFC Director Altaf Soomro.

During the meeting, Shah asserted that wholesale and retail sales are categorized as services but the Federal Board of Revenue (FBR) collects sales tax on them that are grossly under-covered. The provincial revenue board can do better due to its close proximity to the tax base.

He argued that the collection of sales tax on goods should be assigned to SRB to make this levy more efficient. Similarly, he argued, the federal government collects capital gains tax (CGT) on immovable properties which is levied on the basis of Income Tax Ordinance. In the spirit of the 18th amendment, this tax should be devolved to the provinces, he contended.

GIDC: 

Talking about Gas Infrastructure Development Cess (GIDC), the chief minister said that GIDC needs to be transferred to the provinces as it is a provincial subject.

“Sindh government should also be given its due share from the amount collected by the federal government under the GIDC so far,” he said and demanded that the excise duty on crude oil and natural gas as per Article 161 of the Constitution need to be devolved to the provinces.

Shah asserted that he would talk to the federal government and urge them that the duty on natural gas should be increased. “It was fixed in 7th NFC at Rs10 per MMBTU and it should be charged ad valorem,” he said.

Speaking further of royalties, Shah said that the federal government collects royalties on crude oil and natural gas and charges two percent of the receipts as a collection fee. Now, the provinces should be allowed to collect that tax themselves, he demanded.

OCTROI AND ZILA TAX: 

Talking about his government’s stand on Octroi and Zila Tax (OZT), Shah said Octroi was a consumption tax and Sindh’s share was 46 percent when it was itself administering that levy. The federal government came along and convinced Sindh to stop collecting OZT in return for reimbursement from the federal government, he added, for that purpose, the federal government enhanced the rate of sales tax from 12.5pc to 15pc and the extra 2.5pc levy was used to compensate the provinces.

He recalled that in 2010 the federal government started transferring funds in lieu of OZT on the basis of the criteria governing the NFC award, that is population etcetera which reduced Sindh’s share to 0.66pc. Sindh’s share of OZT to at least 2 percent, he demanded.

PROVINCES TO BE CONSULTED ON TAX CONCESSIONS:

Suggesting tax reforms, the chief minister said that FBR tax revenue projection should be on the net of all refunds allowed or paid and not on a gross basis as FBR withholds refunds to inflate their receipts. He added that they [FBR] make necessary adjustments owing to refunds at the end of a financial year which affects the cash flow and budgeting of the provinces.

He demanded that the FBR should be penalized for not achieving the projected divisible pool taxes.

The chief minister demanded that provinces should be consulted while granting concessions, reducing sales and other taxes on a particular industry and waiving or changing tax rates. Giving an example, Shah said that sales tax on LNG was reduced to five percent without consulting provinces. He suggested that tax expenditures (for example exemptions, deductions, or credits) are reduced, as they alter the horizontal and vertical equity of the basic tax system.

Giving another tax reform proposal, the chief minister said that a joint committee of federal and provincial governments with international experts be set up for “rationalization of federal and provincial tax collection, broadening the tax bases at both levels, eliminating duplicate taxation and study on revenue generation at the federal and provincial levels”.

SINDH OPPOSES ‘SPECIAL POOL’ FOR SOCIAL STABILITY: 

Moreover, Shah stated that the federal government insists that seven percent of the total divisible pool be made part of a special pool for social sector and expenses on security. However, he categorically said that the Sindh government could not accede to this proposal because Khyber Pakhtunkhwa (KP) was allowed an additional one percent share on account of its losses in the war on terror.

However, he added, most of the terrorists moved to Karachi, requiring the provincial government to enhance its expenditure on security manifold.

He said that Article 148 of the constitution requires the federal government to maintain law and order. Therefore, he urged the federal government to give reimbursements for its extra outlays on security.

He also said that the tribal areas have now become part of KP and the province stands to gain in NFC on account of an increase in its population. He added that under Article 161, provinces’ share cannot be reduced in the divisible pool.

RATIONALIZATION OF EQUALIZATION: 

Talking about rationalization of equalization payments, Shah said that the equalization [of payments] are cash payments made to less developed provinces and states to bring them at par with others.

Many states use fiscal equalization to reduce inequalities in the fiscal capacities of subnational governments due to various factors, he said and proposed that the equalization of payments, however, it may induce “perverse incentives” to subnational governments to reduce fiscal effort.

Relating some international examples, Shah said that Australia gives horizontal fiscal equalization, Belgium makes use of national solidarity intervention, Canada gives fiscal capacity equalization (FCE) and Germany makes post-unification equalization payments.

He added that these incentives could not go indefinitely and have to have a sunset provision, as in Germany where equalization system would end in 2020.