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Potential Fiscal Constitutional Amendments & the Sensitivity of the Provincial Autonomy 

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Tariq Mahmood Awan

Pakistan’s recent election results, with a potential two-thirds majority for the ruling coalition, open the door for significant constitutional amendments. These amendments are seen as crucial for addressing the country’s current economic woes.

A key area of focus is the 2010 National Finance Commission (NFC) award. The Pakistan Muslim League-Nawaz (PML-N) has reservations about the award, which increased provincial share of the divisible pool (tax revenue shared between federal and provincial governments). This, they argue, has led to a heavier reliance on non-divisible pool taxes like the petroleum levy, a major contributor to inflation.

However, the issue is complex. The PPP, whose support is vital for any amendment, suggests a different approach. They advocate for devolving remaining federal ministries to the provinces, as envisioned by the 18th Amendment in 2010. This, they claim, could save around one trillion rupees and potentially ease tensions between the federal government and provinces.

Another area for potential Amendment is taxation. The constitution gives provinces exclusive power to tax immovable property and farm income. However, provinces haven’t imposed taxes on wealthy landowners at the same rate as salaried individuals taxed by the federal government. This has led to calls for a constitutional amendment allowing the federal government to levy farm or agriculture income tax. Furthermore, the provincial governments are also not successful to collect potential property tax.

Economists acknowledge the potential benefits of such an amendment but highlight concerns about leakages within the Federal Board of Revenue (FBR). They propose an alternative by granting all provincial assemblies the power to tax wealthy farmers at the same rate as salaried individuals. If provinces fail to act, then a constitutional amendment could be pursued. However, the issue is more political than economic. Although, IMF is also proposing to change the ratio of NFC award between federation and provinces, yet the results might be sensitive for the federalism of Pakistan in the long run.

However, the economists emphasize the need to move beyond simply raising existing taxes, which disproportionately impact the poor. Instead, they advocate for reforms that:

  • Eliminate tax exemptions for influential groups like the construction industry and retailers.
  • Bring a vast majority of businesses currently outside the tax net into the system.
  • Remove anomalies in existing taxes across all sectors.
  • There is an essential need to document the economy

The power sector, a major source of past government borrowing, also requires attention. While the privatization of distribution companies is being discussed, the issue of tariff equalization, which previously allowed significant financial releases to these companies, needs to be addressed. Without revisiting this policy, the situation is unlikely to improve.

The critics acknowledge the need for painful reforms but recognize the hardship faced by middle-income earners and those below the poverty line. They propose short-term measures like reducing expenditures, limiting domestic borrowing, and encouraging voluntary sacrifices from government spending recipients. These measures could strengthen Pakistan’s negotiation position for a more manageable IMF loan package. Furthermore, the potential for constitutional amendments offers a chance to address Pakistan’s economic challenges. However, careful consideration and alternative solutions are crucial to ensure reforms benefit all segments of society and don’t exacerbate existing inequalities. Constitutional amendments may be a future course but definitely not at the cost of provincial autonomy

Critically, Pakistan’s recent election results present a potential turning point for the nation’s economy. The ruling coalition’s two-thirds majority opens the door for significant changes, but the path forward should rely on something other than potentially disruptive constitutional amendments. Instead, a focus on strengthening governance within the existing federal structure, coupled with enhanced collaboration between federal and provincial authorities, holds incredible promise for sustainable economic recovery.

The allure of amending the National Finance Commission (NFC) award, as proposed by the PML-N, is understandable. Their concerns about the increased reliance on non-divisible pool taxes are valid. However, tinkering with the delicate balance established by the 18th Amendment, which enshrined greater provincial autonomy, could have unforeseen consequences. Reopening this pandora’s box could reignite tensions between federal and provincial authorities, hindering progress rather than accelerating it. Federalism has been the most sensitive issue of the Federation of Pakistan. 

Similarly, calls for a constitutional amendment allowing the federal government to levy farm income tax raise concerns about inefficiency within the Federal Board of Revenue (FBR). Instead of seeking additional powers, the federal government should focus on reforming the FBR itself. Eliminating tax exemptions for privileged groups like the construction industry and retailers is a low-hanging fruit that could significantly improve revenue collection. Additionally, bringing a vast majority of businesses currently outside the tax net into the system is crucial for broadening the tax base and ensuring fairness. These reforms can be achieved without disrupting the 18th Amendment’s spirit of provincial autonomy. Federalists believe the 18th Amendment is the insurance policy of the Federation of Pakistan.  

The federal government can further strengthen its fiscal position by reducing the size of its own bureaucracy, ministries and institutions as per the federal legislative list. A bloated government sector consumes significant resources that could be better directed towards development projects. Streamlining operations and eliminating unnecessary positions would demonstrate a commitment to responsible fiscal management.

The provinces also have a crucial role to play. The constitution already grants them exclusive power to tax immovable property and agricultural income. However, many provinces have been hesitant to impose taxes on wealthy landowners at the same rate as salaried individuals taxed by the federal government. This selective approach undermines the principle of fair taxation. By empowering provincial assemblies to tax wealthy farmers at the same rate as salaried individuals, the federal government can put the onus on the provinces to act. If provinces fail to take responsibility, then the issue of a constitutional amendment could be revisited.

The key to success lies in fostering a collaborative environment where federal and provincial authorities work together rather than against each other. Federal leadership needs to focus on strengthening its own governance systems, improving tax collection efficiency, and reducing wasteful spending. Provinces, in turn, should embrace their fiscal responsibilities and implement fair taxation policies. Regular dialogue and information sharing between federal and provincial governments can ensure a more coordinated approach to economic management.

This collaborative approach, built on a foundation of strong governance at all levels, offers a more sustainable and equitable path to economic recovery for Pakistan. By focusing on internal reforms and leveraging the existing federal structure, the government can avoid the pitfalls of disruptive constitutional amendments and lay the groundwork for a brighter economic future for all Pakistanis. Lastly, Pakistan is a sensitive federation, and federal sensitivities should be vital to the nation’s social contract.

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