Decentralisation of GST services and vertical imbalances in Pakistan.

Ara, Iffat ; Sabir, Muhammad

In Pakistan, provincial finances largely hinge on federal transfers from the divisible pool via the National Finance Commission (NFC) Award. While provincial share in tax revenue is less than 5 percent, provincial share in expenditure is over 25 percent, indicating dependence on federal transfers and the extent of vertical fiscal imbalance. The sustainability of public services provided by the provinces requires enough "own" revenues rather than reliance on federal transfers and grants. The 7th NFC Award and the 18th Constitutional Amendment reinforce the constitutional rights of the provinces to collect GST services. However, tax decentralisation is a complex issue in management of public finances in Pakistan. Its implementation seems difficult due to various factors like the difficulty to distinguish sales tax revenues from goods and services. This paper is an attempt to analyse the role of GST services in minimising vertical imbalances. The findings suggest that the vertical fiscal imbalance can be minimised by shifting the collection of GST services from the federal government to the provincial governments. They indicate that with full provincial share of GST services, provincial share in taxes would have doubled during 2006-10.

JEL classification: H71, H77, H21

Keywords: GST Service, Vertical Imbalances, Tax Decentralisation, Intergovernment Fiscal Relations

1. INTRODUCTION

It is generally believed that the 7th National Finance Commission (NFC) Award and 18th Constitutional Amendment have taken a major step towards much needed fiscal decentralisation. While these two delegate more fiscal autonomy and transfers additional resources towards provinces, it seems difficult that tax decentralisation options provided in these two can practically be implemented. This assertion is based on historical tax decentralisation debate in Pakistan, which has made it a very complex issue in management of public finances.

There are arguments both in favour and against tax decentralisation in Pakistan. Its proponents argue that tax decentralisation is an important principle of governance. They generally propose three advantages of fiscal decentralisation including; preference-matching, efficiency through competition, and increased accountability. In particular, a rational assignment of taxing powers helps providing each level of government, a control over its fiscal destiny by allowing it the choice in the level of spending. It helps assuring taxpayers that they are getting what they paid for and consequently may stimulate participation and improve/increase accountability. According to Bahl (1999), fiscal decentralisation assists in revenue mobilisation, innovation in economic activity, accountability of elected officials and grassroots participation in governance. Given this, it is probable that fiscal decentralisation lead towards improved efficiency in the use of resources as the residents in the sub-national governments can decide about their desired mix of public services and revenues that best suits them.

On the other hand, its opponents counter argue that its implementation seems difficult due to various factors like provincial governments do not have capacity to collect taxes, and the bulk of the taxes in Pakistan are usually paid at the headquarters of the firm that may lead to an unfair allocation of revenues after decentralisation. At the same time, the tax administration in Pakistan desires to move from General Sales Tax (GST) to reformed GST in Value Added Tax (VAT) mode in order to increase the tax-to-GDP ratio. Implementation of this would make the tax decentralisation much more complicated as it is difficult to distinguish the sales tax revenues from goods and services as a good producing factory also consume many services including telecommunication. Furthermore, as highlighted by Ahmed (2010) the abject performance of FBR and "trust deficit" among provinces and with the federal government add more complications in the practicality of GST reforms.

Despite these contradictory arguments, attempts were made to analyse the scope of sales tax on services by provincial governments to enhance tax-to-GDP ratio in Pakistan. SPDC (1994) is a systematic attempt which provides a comprehensive framework for sales taxation of services by provincial governments. It analysed the constitutional domain for implementing sales tax on services as per 1973 constitution. It also looked at the incidence of indirect taxes on services and concluded that nominal incidence of federal and provincial taxes on services sector was 2.3 percent of their value added. It also laid down a criterion for provincial resource mobilisation through effective implementation of GST on services. The criterion gave higher weight-age to under taxation, extent of incidence on richer households, case for integration with national VAT, level of compliance, ease of collection and so on. It also proposed specific taxation proposals for services sector including banking and insurance, wholesale and retail, telecommunication and others. Regardless of such attempts, in 2000, the provincial governments empowered federal government to implement GST services. Since then GST services is being collected by the Federal Board of Revenue (FBR).

At present, in Pakistan financial status of provincial governments largely hinges on federal transfers to the provinces constituted through NFC award rather than on a rational tax assignment. There is an overriding centralisation of revenue collection as over 90 percent of the revenues are collected at the federal level consequently leaving the provinces with very narrow tax bases. From the perspective of sustainable public service provision, the provincial governments require enough "own" revenues rather than heavily relying on federal transfers and grants. GST on services is an ideal option for decentralisation ensured by the 18th Constitutional Amendment and 7th NFC Award.

In this context, this paper is an attempt to analyse the devolution of GST services and vertical imbalance in Pakistan. It determines the scope of GST services in minimising vertical imbalances, if implemented practically. Since, GST services has been initiated in 2000-01, the paper cover the period 2000-01 to 2009-10.

The paper is organised as follows: Section 2 underlines the constitutional provision of revenue assignment; Section 3 presents the pattern of resource mobilisation in Pakistan; Section 4 reveals the extent of vertical imbalance in Pakistan; Section 5 analyses the devolution of GST services and its impact on vertical imbalance; Section 6 discusses the implementation challenges in collecting GST services; and Section 7 concludes the paper.

2. REVENUE ASSIGNMENT AS PER CONSTITUTION

In Pakistan, the constitution and certain statutes designate the revenue assignments between the federal and provincial governments. After the abolishment of concurrent lists in the 18th Amendment, the revenue source assigned to the federal and provincial governments is through an express provision in an article of the constitution or through classification in the federal lists of subjects. In the latter case if the revenue source is mentioned in the Federal List it belongs to the federation only. However, if a revenue source is not mentioned in the Federal List it then belongs to the provinces only.

Federal taxes under the Fourth Schedule, Article 70(4), of the Constitution of Pakistan are given Table 1. It states that among the indirect taxes the federal government has a constitutional right to collect taxes only on the sales and purchases of goods (imported, exported, produced, manufactured or consumed) but not on sales of services. This provides autonomy to the provincial governments to levy sales tax on services.

The revenue assignment of provincial governments according to the constitutional scheme is given in Table 2. It is to be mentioned that property tax, capital gains, excise duty, sales tax on services, tax on professions, motor vehicle tax are shared revenues under the NFC clauses of the constitution. The base and rate are set by the federation.

Thus, according to the constitution of Pakistan, federal government is empowered to levy GST only on the sales, purchase and consumption of goods; however GST on services exclusively falls under the domain of provincial governments.

It was for this very reason that provinces levied sales tax on services on 15th July 2000. Later on, in 2000-01, the provincial governments empowered the federal government to collect GST services on their behalf. Since then federal government has been collecting GST services by breaking it into two modes: GST CE mode and GST provincial. The latter has been transferred to provinces (after deducting the collection charges) on the basis of population rather than collection. CE mode was being treated similar to GST goods before the implementation of 7th NFC Award (July 2010).

Though. collection of sales tax on services already remains a constitutional right of provinces, the 7th NFC Award and the 18th Constitutional Amendment further strengthened this. The document of the 18th Amendment states, in fourth schedule of the constitution, in the federal legislative list, entry 49 after the word "consumed" the comma and words "except sales tax on services" shall be added. As a result, GST services CE mode is transferred to provincial governments.

3. RESOURCE MOBILISATION IN PAKISTAN

Before analysing the impact of tax decentralisation on provincial finances, this section presents the pattern of resource mobilisation (generating the required resources to carry out expenditures for public service delivery) in Pakistan by major revenue source both at the federal and provincial levels.

3.1. Resource Mobilisation at Federal Level

Table 3 gives the magnitude and growth in different components of FBR tax revenue in Pakistan. In 2009-10, total tax revenue in Pakistan was Rs 1,380 billion. Of this, 39 percent were the direct taxes and 61 percent were indirect taxes. 16 percent of the indirect taxes were originated via excise duties and 20 percent via import duties while the remaining from GST on goods and services.

The trend in growth indicates that tax revenue increased at an average rate of 11 percent per annum during 2001-05 and 18 percent during 2006-10; indicating higher growth in federal taxes in the second half on 2000s. In the first half of 2000s, highest growth was observed in GST services while in second half it was in direct taxes. During the entire period, GST services depicted highest growth that could be due to the fact that it started from a zero base.

Table 4 presents the trend in tax to GDP ratio in Pakistan. It shows that total tax revenue remained on average 9.2 percent per annum of GDP during 2001-05 and increased slightly to 9.5 percent during 2006-10. Direct taxes that on average constituted 3 percent per annum of GDP during 2001-05 increased on average by 0.5 percentage points during 2006-10. Alternatively, indirect taxes declined from an average of 6.2 percent per annum of GDP to 5.9 percent of GDP during these two sub-periods. It is noticeable that contribution of GST on goods in GDP remained on average over 3 percent per annum during these sub-periods while that of GST on services stayed at less than 0.5 percent. (1)

3.2. Resource Mobilisation at Provincial Level

Table 5 gives the resource mobilisation efforts at provincial level. Compared to Rs 1,380 billion tax collected by the federal government in 2009-10, provincial governments altogether collected only Rs 70 billion. It further indicates that provincial tax revenues increased from a meagre Rs 19.1 billion in 2000-01 to Rs 70 billion in 2009-10. On the other hand, non-tax revenues increased from Rs 19.9 billion to Rs 95 billion during same period.

Relative to taxes, higher growth in non-tax revenues indicates that provincial revenues are tilted towards non-tax revenue. Further, over the entire period, provincial taxes grew at a pace similar to federal taxes suggesting that capacity of provincial governments in collecting taxes is not as bad as it usually argued.

4. VERTICAL FISCAL IMBALANCE IN PAKISTAN

Vertical fiscal imbalance means the disparity between the revenues of a government and its expenditure responsibilities. An adequate provision of social services is a concurrent function of federal and provincial governments. However, the combination of decentralised spending with centralised financing through grants and tax revenue sharing leads to vertical fiscal imbalance. This situation prevails in Pakistan where the financing and delivery of social services largely lie in the hands of provinces and major sources of revenues in the hand of federal government creating vertical imbalances.

Table 6 shows the total tax and non-tax revenue collected by the federal and provincial governments. Noticeably, the table reveals that the federal government collects 92 percent to 94 percent of the revenue in Pakistan. Only 6 percent to 8 percent of the revenues are collected by the provincial governments. This suggests that provincial governments have a very narrow base of revenue collection.

Table 7 gives only the total tax collection of federal and provincial governments. It further strengthens the point that provinces have limited control in collection of taxes in Pakistan. In most of the years since 2000-01, provincial governments collected only 4 percent of the total taxes in the country.

On the other hand, the current expenditures of the federal and provincial government given in Table 8 indicate that the share of provinces in total current expenditure is tar high. Provinces spend 23 percent to 29 percent of the total current expenditure in Pakistan. It needs to mention that the share of provinces would go up if these expenditures include the amount of development expenditures.

Thus, while provincial share in tax revenue on average is less than 5 percent during the 2000s their share in expenditure is over 25 percent indicating the extent of vertical imbalance in Pakistan. This builds the argument that provinces to a large extent depend on the resources or transfers from the federal government to meet their expenditures demand. Accordingly, in Pakistan, 88 percent of the provincial government's resources depend on intergovernmental transfers. In contrast, in other developing countries, like India and Malaysia, 35 percent of the provincial government's resources come from intergovernmental transfers.

5. DEVOLUTION OF GST SERVICES AND VERTICAL IMBALANCE

Having developed that there are significant vertical imbalances in Pakistan, it is important to analyse whether or not devolution of GST services will make any sizeable impact As Khan (2009) highlights that services sector constitutes more than half of the value added of the economy, but it is fetching only 34 percent of the federal tax receipts. While mentioning the difficulties in taxing services, he points out that many services are rendered at the distribution process or at the stage of production, which sometime have informal characteristics, hence making it difficult to collect taxes from them. Given the narrow base of services and difficulties attached to collecting taxes from them, this section first highlights the contribution of GST in overall FBR taxes and then looks whether GST services has sizeable tax base. As per scope of the study, it excludes other taxation on services sector such as Federal Excise Duty (FED), income tax and the like. It also compares effective tax rate of GST services with other taxes to highlight the tax potential in GST services. Afterwards, it compares the vertical imbalances in revenue transfer to the provincial governments with or without GST services.

5.1. Contribution of GST Services in FBR Taxes

Table 9 gives the contribution of GST on services in comparison with GST on goods under different tax heads. For instance, in total GST, services contributed on average only 7.4 percent per annum during 2001-05, which increases to 12.6 percent during 2005-10. GST services contributed on average 4.5 percent per annum in total indirect taxes and 3 percent per annum in total tax revenue during 2001-05. These shares increased to 7.7 percent and 4.8 percent respectively during 2006-10. While in comparison with GST goods these shares are still very low, they showed relatively higher growth.

5.2. Tax Base of GST Services

Table 10 shows the ratios of GST goods and GST services base to GDP. While base-to-GDP ratio of GST goods substantially increased, base-to-GST ratio of services hovered around over 20 percent during the two sub-periods. This happened because FBR focused only on the efficiency of GST services collection till 2008-09, without broadening its tax base. However in 2009-10, new services like banking insurances and other were also added to broaden its base.

5.3. Effective Tax Rates

Table 11 portrays the effective tax rate of different components of tax revenues in Pakistan. It indicates that effective tax rate of GST services hanged on average only about 1.4 percent and 2 percent per annum respectively during the two sub-periods. GST on goods though declined from an average of 12 percent per annum during 2001-05 to nearly 9 percent during 2006-10 but remained far above than that of GST on services. GST services have lowest rates because of lower efficiency of tax collection and tax exemptions. This lowest effective tax rate indicates greater potential of GST in services sector.

Though, it is apparent there exist potential of taxation in the services sector but the idea here is to observe how far the vertical imbalance be reduced once the provinces are empowered to collect GST services.

5.4. Share of Provincial Revenues with or without GST Services

Table 12 displays the share of provincial tax revenues in total taxes with and without GST services. It indicates that had the GST services been devolved in 2000-01 and had it acquired the same efficiency then provincial share of taxes would have increased from 4.3 percent to 6.3 percent in 2000-01. And, with the passage of time this share would have further increased to 8.6 percent in 2009-10. Thus, with full provincial share of GST services, provincial share in taxes would have more than doubled during 2006-10.

5.5. Role of GST Services in Minimising Vertical Imbalances

Table 13 shows vertical imbalances in Pakistan with or without devolving GST services during 2006-07 to 2009-10. It indicates that if GST services were successfully devolved then vertical imbalance would have been reduced. For instance, in 2006-07 vertical imbalance would have been reduced from 27.2 percent to 23.9 percent due to decentralisation of GST services. Similarly in 2009-10, vertical imbalance would have been reduced from 24.3 percent to 21.2 percent due to decentralisation of GST services.

6. IMPLEMENTATION CHALLENGES

Despite the fact that devolving GST service has constitutional provision and it also reduces the vertical imbalances, this has not yet been put into practice. There are certain challenges that often come in its implementation debate. These can be sum-up in following three arguments.

* Provincial governments do not have the capacity to collect GST on services.

* Under VAT regime, collection of goods and services cannot be separated.

* Bulk of the taxes in Pakistan are paid at the headquarters of the firm that may lead to an unfair allocation of revenues after decentralisation.

This section systematically discusses the validity of these arguments by analysing the structure of GST services. Table 14 presents the GST collected on services by sectors in 2009-I0. The statistics reveal that GST on services is largely collected from telecommunication sector, which contributed more than 70 percent of total GST on services. Historically, the share of telecommunication in GST services was more than 90 percent. The other major tax spinners are banking and insurance (tax collected under federal excise duty), community and social services, and transport and communication services.

6.1. Devolution of GST on Telecommunications

There are several apprehensions regarding the devolution of GST on telecommunication services. For example, does it require lots of capacity that provincial government do not have at present? Will it lead to an unfair allocation among provinces? Is it impossible under VAT regime?

As per our understanding, the answer to all these questions is in negative. Firstly, there are fewer telecommunication companies to deal with. They have computerised record and have complete information about usage of their services, charging of bills and payment of taxes. As a result, devolution of telecommunication taxes does not require much capacity and provincial governments can easily collect tax with these fewer computerised telecommunication companies. Their computerised records also help minimising the scope of unfair allocation among the provinces. However, devolution of GST on telecommunication under VAT mode is relatively a difficult task. Attempts have been made at the federal and provincial (Sindh) government level to resolve this issue. Their technical teams concluded, "while VAT regime requires 'input-output adjustment' to be centralised, collection can be decentralised." For instance, as per 2009-10 estimate provinces can collect Rs 45 billion in GST from telecommunications services. Since bulk of this tax is collected from end users with limited scope for input output adjustment, however, companies seeking refunds submit consolidated (goods and services) account/claim to FBR. As per FBR estimates these refunds hardly reached to Rs 3.5 billion. After receiving and verifying these refund claims FBR can provide refunds (Rs 3.5 billion) to companies and provinces can reimburse FBR the amount equivalent to refund claims i.e. Rs 3.5 billion.

6.2. Devolution of GST on Banking and Insurance

Banking and insurance sector is the second biggest contributor in services tax. At present, the services of this sector are taxed under FED mode and not under GST. Nevertheless, after the 7th NFC Award, it is likely that this collection can be treated as GST. This sector also has smaller number of banking and insurance companies, mostly in formal sector, having computerised records. Given this, the provincial governments do not require much capacity and can easily deal with them. Moreover, complete computerised transaction details also minimise the scope of unfair allocations of GST among the provinces. Similar to telecommunication sector, the input output adjustment can be dealt by federal government; however, the collection can be devolved.

6.3. Devolution of GST on Other Sectors

In contrast to telecommunication and banking and insurance, other sectors have large number of tax payers. The provincial governments need to build capacity in order to collect GST from them. In this regard, recently an attempt has been made by the government of Sindh where it established a board named Sindh Revenue Services (SRS). It has an independent board of directors and separate collection mechanism. Currently, the progress of SRS working is slow as the decision to devolved GST services is in pending.

Certain confusions also prevail regarding the collection of GST services. For example, there is confusion that if more than one person was involved in consuming a service like telecommunication then who will pay the tax. And if they live in different provinces then which province would receive the revenue from GST services. Theoretically, this argument seems very difficult but in reality this can be addressed very easily. For example, every telecommunication company charges a fee on its services. While two persons are consuming same service the bill is generally paid by one person. Since GST service is a proportional tax on billing amount, it would be collected by the province whose consumer bears the charges of bill and hence that province will receive the revenue. The same logic can be followed if more than one consumer pays the billing amount and taxes, whether in a pre- or post-paid manner.

Another confusion is whether or nor GST service is a part of divisible pool. Prior to the 7th NFC Award, GST on services CE mode was part of the divisible pool and GST provincial tax was treated as straight transfers. After the 7th NFC Award, both GST provincial and CE mode would be treated as straight transfers and hence GST services would no more be part of divisible pool.

7. CONCLUSION

In Pakistan, confinement of major sources of revenues with the federal government and a sizeable expenditures assignment at provincial level creates vertical fiscal imbalances. While these vertical imbalances are generally addressees through intergovernmental transfers, there is still a need to devolve taxes at provincial levels. The 7th NFC Award and 18th Constitutional Amendment ensure that a GST services is a provincial tax. In this context, this paper analyses the scope of GST services in minimising the vertical fiscal imbalances in Pakistan. The analysis indicates that devolution of GST services will help doubling the share of provincial tax revenues in total taxes thus facilitate reducing vertical imbalances in Pakistan. Moreover, the telecommunication sector, which pays bulk of the GST services, requires limited provincial capacities for collection of GST as there are fewer telecommunication companies in Pakistan and all have computerised database.

Though, the devolution of GST services will reduce the vertical imbalance but it will not eliminate it completely. Future NFCs would therefore be needed to address the issues of reaming vertical and horizontal imbalances.

REFERENCES

Ahmed, Ehtisham (2010) Why is it so Difficult to Implement a GST in Pakistan? The Lahore Journal of Economics 15-SE.

Bahl, Roy (1999) Implementation Rules for Fiscal Decentralisation. International Studies Programme, School of Policy Studies, Georgia State University, USA.

Bahl, Roy, Sally Wallace, and Musharraf Cyan (2008) Pakistan: Provincial Government Taxation, International Studies Programme, Georgia State University. (Working Paper 08-07).

Khan, Mir Ahmad (2009) Vying for Raising Tax GDP Ratio: Taxation of Services Sector in Pakistan. FBR Quarterly Review 8:3.

Martinez-Vanquez (2006) Pakistan: An Overview of Tax System in Pakistan. International Studies Programme, Andrew Young School of Policy Studies, Georgia State University, USA.

Pakistan, Government of (n.d.) The Constitution of Pakistan. <www.pakistani. org/pakistan/constitution/>

Pakistan, Government of (Various Issues) Pakistan Economic Survey. Islamabad: Ministry of Finance.

Pakistan, Government of (Various Issues), Federal Board of Revenue Yearbook. Islamabad: Ministry of Finance.

SPDC (1994) Sales Taxation of Services by Provincial Governments. Reported presented to Canadian High Commission as part of the Integrated Social Sector Planning Project, Social Policy and Development Centre.

Thirk, Wyne (2008) Tax Policy in Pakistan: An Assessment of Major Taxes and Options for Reforms. International Studies Programme, Andrew Young School of Policy Studies, Georgia State University, USA.

Comments

The paper delve into the critical issue faced by the over all revenue management in Pakistan. In the ambit of over all fiscal decentralisation milieus where a land mark achievement in the form of 7th NFC and 18th amendment has been achieved, still there remain issues which are critical both in terms of catering to the needs of the federating units and to the revenue efficiency.

The paper picks a potential topic for research, the decentralisation of revenues; and there the authors discuss in a holistic manner the issues pertaining to the decentralisation of GST on services. The 18th amendment exclusively holds the provision of revenue collection in this head to be the sole responsibility of the provinces as per the 1973 constitution and the paper focus on this issue.

The proponents of decentralisation argue the case of potential growth promoting effects on the basis of possible preference-matching, efficiency through competition and increased accountability. But the real question is that the assumptions behind this logic e.g. the local tax administration being more efficient and people responding to enhanced services in a reciprocal manner by paying more and others like the assumptions for a tie-bout model where people vote by migrating to the preferred constituencies require the perfect mobility of factors of production and wealth sources, which is next to impossible considering the term of government being on average 3-4 years and high economic and social cost of migration.

Even though the authors have very excellently prepared the case for reduction in vertical imbalance, which is very high as compared to other countries such as India (Expenditure share 50 and Revenue 37) but also mentioned the opposite Malaysia (8, 35). So it may not be the most common best practice (see Table below)

Over all Pakistan has the lowest C-efficiency (0.27, Sri Lanka 0.45), if devolved this may further reduce. In Pakistan the case for services decentralisation is propagated, as also mentioned by the author that most of GST on services is collected from telecommunication sector only (around 80 percent) and other large business head quarters. Mostly these are concentrated in Karachi, some would be in Lahore or in bigger cities, but I have doubt if there are many in whole of the Balochistan.

Further with these services related GST, again the issue of calling party arrangements matter, e.g. if a person is calling from Karachi and being received in Lahore, then both the Karachi and Lahore based network is being utilised, so how will they share the revenues, who will charge and how much it will retain. Although else where e.g. India sub national governments collects GST on goods as they are more tangible and leaves the value added based taxes to the centre as they are complex, but here the arrangements are the other way.

In the paper the authors have mentioned that if whole of the GST on services revenue is being devolved to the provinces and they collect the same as it is now then the vertical imbalances will reduce, let me ask here what is then the objective of NFC?, because essentially the GST is part of the divisible pool.

So the difference it will make, what I feel is that there will be less change in the vertical imbalance (the author may like to see the contribution of GST on services revenues towards the NFC) rather it will create a horizontal imbalance as provinces with lesser corporate office will loose.

So the decentralisation in GST on services may only bring about required results if the provinces start applying the different marginal rates (in a sense competing with other constituencies and considering the structural differences in bases and their buoyancies regarding the services base assigned to them) and improve the over all tax administration system.

The effective tax rate calculation needs to be adjusted for services sectors by adjusting it for the exemptions and inclusion of CED on telecommunication as identified by the authors themselves to be the hidden GST on telecommunication services.

In the end I would still congratulate the author to bring upon a good topic for discussion, but also encourage them to improve it in the light of above comments.

Mahmood Khalid

Pakistan Institute of Development Economics, Islamabad.

A Comparison of Selected Fiscal Systems

 Selected Indicators

 The Character Range of Local Local
Countries of Fiscal Government Fiscal
 Federalism Responsibilities Autonomy

Australia 2-tier Centralised Limited Fair

Brazil 3-tier Decentralised Extensive Fair

Canada 2-tier Decentralised Extensive Strong

Germany 2-tier Centralised
 Integrated Limited Fair

India 3-tier Centralised Limited Weak

Malaysia 2-tier Centralised Limited Weak

Nigeria 3-tier Centralised Limited Weak

Russia 2-tier Centralised Limited Fair

Spain 2-tier Centralised Limited Fair

South Africa 3-tier Centralised Limited Fair

Switzerland 2-tier Decentralised Extensive Strong

United States 2-tier Decentralised Extensive Strong

Source: Shah Anwar, 'Comparative Conclusions on Fiscal Federalism'.
Published in Edited Book: A Global Dialogue on Federalism.
Volume 4, 2007.

(1) See Martinez-Vanquez (2006) and Thirk (2008) for analysis of taxation and policies in Pakistan.

Iffat Ara <iffatara@spdc.org.pk> is Principal Economist, Social Policy and Development Centre (SPDC). Muhammad Sabir <muhammadsabir@spdc.org.pk> is Principal Economist, Social Policy and Development Centre (SPDC), Karachi.

Table 1
Federal Revenue Assignment as per Constitutional Provision

 Federal
Federal Taxes Legislative List

Direct Taxes
 Personal Income Tax (excl. Agricultural Income) subject 47
 Corporate Income Tax subject 48
 Capital Value Tax (excl. Immovable Property) subject 50
Indirect Taxes
 Duties of Customs (Including Export Duties) subject 43
 Excise Duty (Except on Alcohol, Narcotics) subject 44
 Taxes on the Sales and Purchases of Goods
 (Except Sales Tax on Services) subject 49
 Mineral Oil, Minerals, Natural Gas subject 51
 Tax on Production Capacity subject 52
 Terminal Taxes on Goods Transport and Passengers subject 53

Table 2
Provincial Revenue Assignment as per Constitutional Provision

Provincial Taxes Constitutional Scheme

Direct Taxes
 Property Tax Residuary but there is bar in the
 Federal List (subject 51)
 Capital Gains Assigned through bar on the federation
 in the Federal List (subject 50)
 Agriculture Income Tax Through bar on the federation in the
 Federal List (subject 47)

Indirect Taxes
 Excise Duty on Assigned to province by bar on the
 federation in the
 Alcohol/Liquor/Narcotics Federal List (subject 44)
 Sales Tax on Services Residuary assignment
 Tax on Professions Article 163 of the constitution
 Motor Vehicle Tax Residuary assignment
 Stamp Duty Residuary assignment
 Registration Fee Residuary assignment
 Mutation Fee Residuary assignment
 Natural Gas Excise Duty Article 161 of the constitution
 Net Hydro Profits Article 161 of the constitution
 Electricity Duty Article 157(2) (b)of the constitution

Table 3
Components of Federal Tax Revenue

(Rs Million)

 Total
 Tax Direct
Year Revenues Taxes

2000-01 392,277 124,585
2001-02 404,070 142,505
2002-03 460,627 151,898
2003-04 520,843 165,079
2004-05 590,387 183,372
2005-06 713,442 224,988
2006-07 847,236 333,737
2007-08 1,008,091 387,861
2008-09 1,161,150 443,548
2009-10 1,380,000 540,400

Average Annual Growth Rate (%)

2001-05 11.29 10.21
2006-10 17.94 25.19
2001-10 14.91 17.45

 Indirect Taxes

 GST
 Excise Import
Year Total Duties Duties Total Goods Services

2000-01 267,692 49,080 65,047 153,565 144,981 8,584
2001-02 261,565 47,186 47,818 166,561 154,787 11,774
2002-03 308,729 44,754 68,836 195,139 180,991 14,148
2003-04 355,764 45,552 91,045 219,167 203,713 15,454
2004-05 407,015 53,104 115,374 238,537 214,519 24,018
2005-06 488,454 55,272 138,384 294,798 263,767 31,031
2006-07 513,499 71,804 132,299 309,396 267,531 41,865
2007-08 620,230 92,137 150,663 377,430 325,752 51,678
2008-09 717,602 117,455 148,403 451,744 395,154 56,590
2009-10 839,600 134,400 164,900 540,300 473,474 66,826

Average Annual Growth Rate (%)

2001-05 11.94 -0.53 16.39 15.67 10.39 30.49
2006-10 14.65 25.03 4.77 16.56 16.08 21.49
2001-10 13.83 10.15 12.10 16.82 14.31 26.35

Source: Federal Board of Revenue, Yearbook (Various Issues).

Table 4
Trend in Tax-to-GDP Ratio

(Percent)

 Total
 Tax Direct
Year Revenues Taxes

2000-01 9.32 2.96
2001-02 9.07 3.20
2002-03 9.45 3.12
2003-04 9.23 2.93
2004-05 9.08 2.82
2005-06 9.36 2.95
2006-07 9.77 3.85
2007-08 9.84 3:79
2008-09 9.11 3.48
2009-10 9.41 3.68

Average Annual Ratios

2001-05 9.23 3.00
2006-10 9.50 3.55
2001-10 9.36 3.28

 Indirect Taxes

 GST
 Excise Import
Year Total Duties Duties Total Goods Services

2000-01 6.36 1.17 1.55 3.65 3.44 0.20
2001-02 5.87 1.06 1.07 3.74 3.48 0.26
2002-03 6.33 0.92 1.41 4.00 3.71 0.29
2003-04 6.31 0.81 1.61 3.89 3.61 0.27
2004-05 6.26 0.82 1.78 3.67 3.30 0.37
2005-06 6.41 0.73 1.82 3.87 3.46 0.41
2006-07 5.92 0.83 1.53 3.57 3.08 0.48
2007-08 6.06 0.90 1.47 3.68 3.18 0.50
2008-09 5.63 0.92 1.16 3.55 3.10 0.44
2009-10 5.72 0.92 1.12 3.68 3.23 0.46

Average Annual Ratios

2001-05 6.23 0.95 1.48 3.79 3.51 0.28
2006-10 5.95 0.86 1.42 3.67 3.21 0.46
2001-10 6.09 0.91 1.45 3.73 3.36 0.37

Source: Federal Board of Revenue, Yearbook (Various Issues).

Table 5
Provincial Revenues

(Rs Million)

Year Tax Non-Tax Total

2000-01 19,100 19,900 39,000
2001-02 18,800 21,300 40,100
2002-03 21,800 25,400 47,200
2003-04 28,000 25,000 53,000
2004-05 34,710 22,404 57,114
2005-06 36,800 47,600 84,400
2006-07 36,819 45,408 82,227
2007-08 40,794 77,987 118,781
2008-09 46,084 83,789 129,873
2009-10 70,000 95,000 165,000

Average Annual Growth Rates (%)

2001-05 13.68 7.59 10.46
2006-10 16.35 40.08 25.21
2000-10 15.01 23.84 17.84

Source: GoP, Economic Survey.

Table 6
Revenue Collection of Federal and Provincial Governments

 Total Revenues (Rs Million) Share in Revenues (%)

Year Federal Provincial Total Federal Provincial

2000-01 514,000 39,000 553,000 92.9 7.1
2001-02 584,000 40,100 624,100 93.6 6.4
2002-03 673,600 47,200 720,800 93.5 6.5
2003-04 741,000 53,000 794,000 93.3 6.7
2004-05 842,900 57,114 900,014 93.7 6.3
2005-06 992,200 84,400 1,076,600 92.2 7.8
2006-07 1,215,730 82,227 1,297,957 93.7 6.3
2007-08 1,380,599 118,781 1,499,380 92.1 7.9
2008-09 1,721,028 129,873 1,850,901 93.0 7.0
2009-10 1,990,387 165,000 2,155,387 92.3 7.7

Source: GoP, Economic Survey (Various Issues).

Table 7
Tax Collection of Federal and Provincial Governments

 Total Taxes (Rs Million) Share in Taxes (%)

Year Federal Provincial Total Federal Provincial

1999-00 386,800 18,800 405,600 95.4 4.6
2000-01 422,500 19,100 441,600 95.7 4.3
2001-02 459,300 18,800 478,100 96.1 3.9
2002-03 534,000 21,800 555,800 96.1 3.9
2003-04 583,000 28,000 611,000 95.4 4.6
2004-05 624,700 34,710 659,410 94.7 5.3
2005-06 766,900 36,800 803,700 95.4 4.6
2006-07 852,866 36,819 889,685 95.9 4.1
2007-08 1,009,902 40,794 1,050,696 96.1 3.9
2008-09 1,158,586 46,084 1,204,670 96.2 3.8
2009-10 1,523,497 70,000 1,593,497 95.6 4.4

Source: GoP, Economic Survey (Various Issues).

Table 8
Current Expenditures of Federal and Provincial Governments

 Total Current Expenditure Share (%)
 (Rs Million)

Year Federal Provincial Total Federal Provincial

1999-00 477,900 148,500 626,400 76.3 23.7
2000-01 479,000 166,700 645,700 74.2 25.8
2001-02 524,600 175,600 700,200 74.9 25.1
2002-03 599,800 191,900 791,700 75.8 24.2
2003-04 557,000 218,000 775,000 71.9 28.1
2004-05 664,200 200,300 864,500 76.8 23.2
2005-06 789,100 245,600 1,034,700 76.3 23.7
2006-07 973,130 402,215 1,375,345 70.8 29.2
2007-08 1,416,015 437,132 1,853,147 76.4 23.6
2008-09 1,495,873 545,697 2,041,570 73.3 26.7
2009-10 1,670,963 590,000 2,260,963 73.9 26.1

Source: GoP, Economic Survey (Various Issues).

Table 9
Contribution of GST on Goods and Services

(Percent)

 GST on Goods as GST on Services as
 Proportion of Total Proportion of Total

 Indirect Tax Indirect Tax
Year GST Tax Revenue GST Tax Revenue

2000-01 94.41 54.16 36.96 5.59 3.21 2.19
2001-02 92.93 59.18 38.31 7.07 4.50 2.91
2002-03 92.75 58.62 39.29 7.25 4.58 3.07
2003-04 92.95 57.26 39.11 7.05 4.34 2.97
2004-05 89.93 52.71 36.34 10.07 5.90 4.07
2005-06 89.47 54.00 36.97 10.53 6.35 4.35
2006-07 86.47 52.10 31.58 13.53 8.15 4.94
2007-08 86.31 52.52 32.31 13.69 8.33 5.13
2008-09 87.47 55.07 34.03 12.53 7.89 4.87
2009-10 87.63 56.39 34.31 12.37 7.96 4.84

Average Annual Shares

2001-05 92.59 56.39 38.00 7.41 4.51 3.04
2006-10 87.47 54.02 33.84 12.53 7.74 4.83

Source: Federal Board of Revenue, Yearbook (Various Issues).

Table 10
GST Base-to-GDP Ratio

(Percent)

Year Total GST GST Goods GST Services

2000-01 48.41 27.81 20.60
2001-02 47.56 26.47 21.08
2002-03 48.27 26.96 21.31
2003-04 50.95 30.58 20.37
2004-05 54.35 34.18 20.17
2005-06 57.78 37.29 20.49
2006-07 56.84 36.41 20.44
2007-08 59.53 39.12 20.41
2008-09 56.03 33.59 22.44
2009-10 54.45 31.56 22.89

Average Annual Ratio

2001-05 49.9 29.2 20.7
2006-10 56.9 35.6 21.3

Table 11
Effective Tax Rate

(Percent)
 Indirect Taxes

 GST
 Direct Excise Imports
Year Taxes Duty Duty Goods Services

2000-01 4.18 4.72 17.77 12.38 0.99
2001-02 4.48 4.25 11.95 13.13 1.25
2002-03 4.37 3.62 14.83 13.77 1.36
2003-04 4.04 3.11 14.25 11.81 1.35
2004-05 3.81 2.93 13.30 9.65 1.83
2005-06 3.95 2.43 12.05 9.28 1.99
2006-07 5.10 2.75 10.49 8.47 2.36
2007-08 4.91 2.90 9.92 8.13 2.47
2008-09 4.68 3.13 8.89 9.23 1.98
2009-10 4.99 3.15 9.57 10.23 1.99

Average Annual Rate

2001-05 4.18 3.73 14.42 12.15 1.36
2006-10 4.72 2.87 10.19 9.07 2.16

Table 12
Provincial Revenues With or Without GST Services

(Percent)

 Provincial Share in Revenues

 Without GST With GST Difference
Year Services Services

2000-01 7.1 8.6 1.6
2001-02 6.4 8.3 1.9
2002-03 6.5 8.5 2.0
2003-04 6.7 8.6 1.9
2004-05 6.3 9.0 2.7
2005-06 7.8 10.7 2.9
2006-07 6.3 9.6 3.2
2007-08 7.9 11.4 3.4
2008-09 7.0 10.1 3.1
2009-10 7.7 10.8 3.1

 Average Annual Shares

2001-05 6.6 8.6 2.0
2006-10 7.3 10.5 3.1

 Provincial Share in Taxes

 Without GST With GST Difference
Year Services Services

2000-01 4.3 6.3 1.9
2001-02 3.9 6.4 2.5
2002-03 3.9 6.5 2.5
2003-04 4.6 7.1 2.5
2004-05 5.3 8.9 3.6
2005-06 4.6 8.4 3.9
2006-07 4.1 8.8 4.7
2007-08 3.9 8.8 4.9
2008-09 3.8 8.5 4.7
2009-10 4.4 8.6 4.2

 Average Annual Shares

2001-05 4.4 7.0 2.6
2006-10 4.2 8.6 4.5

Source: Authors' estimates based on FBR Yearbook.

Table 13

Vertical Imbalances in Pakistan
(Percent)

Year Without GST Services

 Revenue Expenditure Surplus/
 Share Share Deficit

2006-07

 Federal 93.7 66.5 27.2

 Provincial 6.3 33.5 -27.2

2007-08

 Federal 92.1 73.6 18.4

 Provincial 7.9 26.4 -18.4

2008-09

 Federal 93.0 70.4 22.6

 Provincial 7.0 29.6 -22.6

2009-10

 Federal 92.3 68.0 24.3

 Provincial 7.7 32.0 -24.3

Year With GST Services

 Revenue Expenditure Surplus/
 Share Share Deficit

2006-07

 Federal 90.4 66.5 23.9

 Provincial 9.6 33.5 -23.9

2007-08

 Federal 88.6 73.6 15.0

 Provincial 11.4 26.4 -15.0

2008-09

 Federal 89.9 70.4 19.6

 Provincial 10.1 29.6 -19.6

2009-10

 Federal 89.2 68.0 21.2

 Provincial 10.8 32.0 -21.2

Source: Authors' estimates based on FBR Yearbook.

Table 14
General Sales Tax on Services--2009-10

 Tax Collection Share
Sector (Rs Million) (%)

Telecommunications 44,852.5 70.4
Banking and Insurance 5,969.8 9.4
Community and Social Services 5,368.9 8.4
Transport and Communication 4,453.2 7.0
Hotels, Recreation and Entertainment 2,347.7 3.7
Wholesale and Retail Trade 468.8 0.7
Other 222.6 0.3
Total 63,683.5 100.0

Source: Federal Board of Revenue.

Note: Banking and Insurance largely includes federal excise duty.