Fiscal decentralisation necessarily involves the transfer of taxing and spending powers to sub-national levels of government — in our context, local governments that are still deprived of devolution of political, administrative and fiscal powers despite unambiguous command contained in Article 140-A of the Constitution.
With the completion of the process of general elections for the national and provincial assemblies on February 8, 2024, one hopes the issue of implementation of Article 140-A of the Constitution in letter and spirit will be taken up seriously and urgently by all the elected members, no matter to which party they belong. Article 140-A, inserted through the Constitution (Eighteenth Amendment) Act 2010 (commonly called the 18th Amendment, it became effective on April 19, 2010, after receiving the assent of the President of Pakistan), remains unimplemented even after a lapse of almost 14 years.
Article 140-A requires, "Each Province shall, by law, establish a local government system and devolve political, administrative and financial responsibility and authority to the elected representatives of the local governments". Elections of local governments is the duty of the Election Commission of Pakistan (ECP).
A local government system under the constitutional scheme of governance is a dire need of the country, as it emphasises fiscal decentralisation. Presently, major fiscal powers are concentrated in the hands of the federal government. On the one hand, the federal government has usurped the rights of provinces to levy sales tax on goods within their respective territories. On the other, the provinces have shown apathy in devolving political, administrative, and fiscal powers to local governments. Resultantly, the democratic polity has failed to take root in Pakistan.
Malice Towards None & All: Self-Governance & Fiscal Decentralization At present, all broad-based and buoyant sources of revenue are with federal government, the contribution of provinces in total tax revenues is 8.3 percent and in overall national revenue base (tax and non-tax revenue) just 8.5 percent. This has made them heavily dependent on the federal government for transfers from the divisible pool.
The centrist mind, since independence, has never allowed provinces to generate their own resources through sales tax on goods. It has resulted in a chaotic economic mess
We can learn a lot from countries that have successfully achieved the goal of fiscal decentralisation. For example, municipalities in Finland enjoy complete fiscal independence through their elected residents. These municipalities have the right to levy municipal tax in accordance with the Local Government Act 1995. Local authorities perform functions assigned by virtue of their autonomy under the law. This type of local self-governance is totally missing in Pakistan in violation of Article 140-A of the Constitution.
In Finland, extensive functions that fall within the specific sphere of local self-governance include education, health care and social welfare services. Furthermore, the municipalities are responsible for matters related to the residents' free time, recreation, housing, and management and maintenance of their living environment (i.e. roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.
Tax revenues play a critical role in municipal finances in Finland, that are conspicuous by their absence in our model. The power to levy and collect taxes is one of the cornerstones of municipal self-governance. It ensures that the municipalities can manage the functions that they have undertaken to execute or which they are responsible for by law. The most important is municipal tax. In 2023, the municipal tax rates ranged between 4.36% and 10.86% in mainland Finland. The average municipal tax rate was 7.38%. In 2023, total municipal tax collected was €16 billion. Corporate income tax amounts to a little over €6 billion, and real estate tax raises almost €4 billion. This is more than Pakistan's total tax collection by the Federal Board of Revenue (FBR) of Rs7.169 billion in fiscal year 2022-23.
Malice Towards None & All: The State Needs A Paradigm Shift In Tax Policy One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the state has to ensure that they have the necessary resources for them. Finland has a well-functioning relationship between the state and the local authorities, as well as a state-subsidy system that ensures municipal resources and residents' equal access to services.
We can learn from Finland's great innovation. It can change the fate of Pakistan in a short span of time. We have the resources but the system for self-governance, as is in vogue in Finland and elsewhere, is non-existent. Resultantly, power vests with the privileged classes instead of the people. Like Finland, we must move to a welfare state model, largely based on the idea of the municipalities being the producers and providers of services.
In Pakistan, unfortunately, the federal government has been shamelessly encroaching upon the rights of the provinces by levying presumptive taxes on services camouflaged under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services (Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006).
Malice Towards None & All: Taxes, Jobs, & Growth Federal injustice in tax matters has denied the provinces their constitutional rights besides crippling them financially—even the seventh National Finance Commission (NFC) Award has not solved the issue of dependence on Islamabad as FBR has miserably failed to collect projected taxes. We need to introduce a harmonised sales tax (HST) on goods and services as is in vogue in Canada and India — federations like us. The distribution of taxes should be fairly and justly under Article 160 of the Constitution. It may be recalled that the right to levy sales tax on goods was with the provinces at the time of independence. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the federal government has miserably failed to reduce the burgeoning fiscal deficit that will reach the horrifying mark of Rs8 trillion at the end of the current fiscal year.
The centrist mind, since independence, has never allowed provinces to generate their own resources through sales tax on goods. It has resulted in a chaotic economic mess. We could avert it by adopting a rational and growth-oriented tax policy with a federalised system of collection. The FBR has the audacity to claim that provinces lack the infrastructure to efficiently collect sales tax — an attitude that is reflective of a colonial legacy.
Malice Towards None & All: Distribution Of Legislative Powers The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own
On the one hand, we denied the provinces autonomy over their resources and on the other money that belonged to them — collected fraudulently as federal taxes, e.g. presumptive taxes and federal excise duty on services — is given to them as an act of benevolence under the NFC Award. It is like adding insult to injury. This is a considered policy of control by Islamabad for maintaining hegemony over federating units. The provinces should have exclusive right to levy indirect taxes on goods and services generated within their boundaries and they must devolve fiscal powers to local governments for meeting the universal entitlements of local residents.
Performance of provinces in collecting agricultural income tax is extremely poor. This is a common issue both at federal and provincial levels arising from the absence of will to collect income tax from the rich and mighty — the meagre collection of agricultural income tax despite the existence of relevant provincial statutes should be a serious cause of concern. It is imperative that the right to levy tax on income, including agricultural income, should be with the federal government.
The federal government has miserably failed to tap the real revenue potential, which is not less than Rs20 trillion at the federal level alone. FBR even failed to collect Rs7,200 billion last year — the original target assigned in the budget. The failure of FBR to tap the real tax potential is the real dilemma of Pakistan. Poor performance of FBR adversely affects the provinces as they are wholly dependent on what the Federal Government collects and transfers to them from the divisible pool. The federal government is unwilling to grant the provinces their legitimate taxation rights while it collects too little to meet their overall financial demands. The size of the cake — the divisible pool — is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter in which part of the country they live.
Malice Towards None & All: Open Government, Judiciary & The Right To Information FBR's track record shows a remote possibility of collecting even Rs15 trillion in the next three years to give enough fiscal space both to the federation and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tangle will continue unchecked, and further taxation through local governments would not serve any useful purpose—there will be no relief to the people, rather, the tax burden will increase manifold.
Pakistan will remain in debt enslavement while more and more people will be pushed below the poverty line. If we want to come out of this crisis, the Parliament will have to reconsider the prevailing social contract between the federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth are meaningless.
We cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue, and exclusive right to utilise it for the welfare of their denizens. Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed in the Constitution (Municipal self-governance, Business Recorder, July 19, 2013).
The principle of universal entitlements, as practised in Finland through municipalities, is worth studying. The provincial parliaments in Pakistan should be pressurised by the civil society to enact laws as ordained under Article 140-A of the Constitution on the basis of social policy discussed above—they have so far just copied the previous outdated ones with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.
Malice Towards None & All: Benazir Bhutto, A Victim Of The ‘New Great Game’ Concisely, for achieving the goal of fiscal decentralisation, local governments' financial resources must be commensurate with the responsibilities provided for by the Constitution and the law to ensure the welfare of the people and ensure sustainable growth at the grassroots level. Part of the financial resources of local authorities shall derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states like Finland, where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.
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