Flaws in 7th NFC Award pinpointed

ISLAMABAD  (December 30, 2010) : A former official of the International Monetary Fund (IMF) Dr Ehtisham Ahmed here on Wednesday pinpointed flaws in 7th NFC Award saying that services base under GST is not stable, as the GST enforcement on certain services could be blocked by any province which may result in tax wars among provinces.

During the conference of Pakistan Institute of Development Economics (PIDE) here, Dr Ehtisham Ahmed said devolution process which has begun in Pakistan with 18th amendment presents a great opportunity to change the way that public policy is formulated in Pakistan, and hopefully make it more responsive to the needs of the population.

He however cautioned that if the GST reforms do not succeed, given the various opposition by the vested interests who have been benefited by exemptions and zero rating at this point of time, the entire devolution process would run into trouble, as would be current NFC Award. This seriously risks the imposition of existing inter-governmental fiscal systems.

He said that patchwork needed to make constitutional assignment to provinces of the services base under the GST is not stable, can be blocked by any province in isolation and could generate tax wars between the provinces. This will necessitate innovative solution, that are more suitable, but which provide provinces with significant tax handles that are needed for greater accountability for sub-national spending and fiscal arrangement.

Inevitably, solution would be more complex and may mirror the need to integrate the GST along the lines discussed in the context of the Indian Finance Commission, and recommendations for reforming the Brazilian system. This may have to involve “Piggy-Backing” or dual arrangements, such as the IRAP that meet the needs of large and complex provinces, he explained.

He said that such measures would need accompanied by an equalisation framework for the poorer provinces to reduce the disincentives for distortions that are inherent in the current revenue sharing and transfer design mechanism. This would represent a significant research agenda that could usefully be followed by the policy makers and researchers in preparations of the next Finance Commission.

Punjab Finance Minister Tanvir Ashraf Kaira informed the conference that enforcement of the RGST is necessary for the country and federal government is trying to build consensus among the major political parties of the country. Not only the coalition partners, but, the opposition parties are opposing the approval of the RGST in the National Assembly.

Presiding over session on Allama Iqbal Lecture, Kaira said that there is trust deficit between the federating units and country is passing through constitutional and physical restructuring. He said that 7th NFC Award, 18th Amendment is the main achievements in this direction – Brecorder