Murad calls for revisiting NFC criteria by decreasing weightage to population, increasing to revenue generation.

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KARACHI: Sindh Chief Minister Syed Murad Ali Shah presiding over a preparatory meeting for forthcoming National Finance Commission (NFC) meeting to be held in Islamabad on February 6 has called for revisiting NFC Criteria.

He said that the ratio of NFC tied to performance be increased and weightage given to population should also be reduced and Revenue generation be give more weightage.
He was preparing a Sindh case in consultation with his finance, planning & development and Sindh Board of Revenue (SRB) team for next NFC meeting. The meeting was attended by Principal Secretary to Cm Sajid Jamal Abro, Secretary Finance Najam Shah, Sr Member SRB Noor Alam, Dr Asad Syed, Dr Naeem Zafar Chief Economist of SRB, Mushtaq kazmi Consltant to SRB, Nawaz Leghari, Qazi Masood NFC Consultant, Dr Syed Ashraf Wasti, Dr Ashraf Wasti Additional Secretary Finance and Altaf Soomro Director NFC.

He said, wholesale and retail sales are categorized as services, but the Federal Board of Revenue (FBR) collects Sales Tax on them and these taxes are grossly under-covered. The Sindh Revenue Board (SRB) can do better due to its close proximity to the tax base.
Mr Shah said collection of Sales Tax on Goods should be assigned to the SRB to make this levy more efficient. SRB can collect that tax on behalf of the FBR and retain service charge. Similarly, the federal government collects Capital Gains Tax (CGT) on immovable property. The CGT 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 said.

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 added the Excise Duty on Crude Oil and Natural Gas as per Article 161 of the Constitution need to be devolved to the provinces.

He said that he would talk to the federal government and urge them that Excise Duty on Natural Gas should be enhanced. “It was fixed in 7th NFC at Rs.10 per MMBTU and it should be charged ad valorem,” he said. Talking about royalty on Crude Oil/ Natural Gas, Murad Shah said that the federal government collects Royalty on Crude Oil/ Natural Gas and charges two percent of the receipts as collection fee. Now, the provinces should be allowed to collect that tax themselves, he demanded. Mr Shah talking about his government stand on Octroi & n Zila Tax (OZT) 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 further said that for the purpose, the federal government enhanced the rate of sales tax from 12.5 percent to 15 percent and the extra 2.5 percent 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, etc., which reduced Sindh’s share to 0.66 Percent. He urged the federal government to enhance Sindh’s share of OZT to at least 2 percent.

Tax Reforms: Suggesting Tax Reform, the chief minister said that FBR tax revenue projection should be on net of all refunds allowed/ paid and not on gross basis as FBR withholds refunds to inflate their receipts. He added that they [FBR] make necessary adjustments owing to refunds after 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, waiving or changing tax rates. Giving an example, Mr 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) be reduced, as they alter 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.

Oppose special pool: Sindh Chief Minister Murad Ali Shah said, 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. He categorically said that the Sindh government could not accede to this proposal because Khyber Pakhtunkhwa was allowed an additional one percent share on account of its losses in the war on terror. However, most of the terrorists moved to Karachi, causing the provincial government to enhance manifold its expenditure on security.

He said that Article 148 of the constitution requires the federal government to maintain law and order. Therefore, he urged the federal government for reimbursement 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.

Mr Shah talking about Rationalization of Equalization Payments said that Equalization [of payments] are cash payments made to less developed provinces/ 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 proposed that Equalization of payments, however, may induce “perverse incentives” to subnational governments to reduce fiscal effort.

He gave some international instances and said Australia gives horizontal Fiscal Equalization, Belgium makes National Solidarity Intervention, Canada gives Fiscal Capacity Equalization (FCE), Germany makes Post-Unification Equalization Payments. He added that these incentives could not go indefinitely and have to have a sunset requirement, as in Germany where equalization system would end in 2020.

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