KARACHI, Dec 28: The Sindh government has raised serious objections on the method and the amount of compensatory grant in lieu of octroi and zila tax (OZT) being given by the federal government and has won the support of other provinces on the issue.

Knowledgeable sources say that the issue of compensatory OZT grant will be taken up by the Inter Provincial Coordination Committee (IPCC) whenever it holds meeting. The IPCC is an administrative body headed by the federal finance minister and include finance and other ministers of all the four provinces.

Incidentally, the decision to abolish the octroi and zila tax in all the four provinces was taken by the IPCC held in May 1999. In the 1999-2000 budget, the then Nawaz Sharif government decided to raise the sales tax rate from 12.5 per cent to 15 per cent. The revenue loss suffered by the provinces on account of abolition of OZT was to be met from 2.5 per cent increase in the GST.

The federal government announced to provide a matching OTZ grant of Rs6.44 billion while the Sindh government was asked to contribute Rs1.59 billion to the local councils from its resources. A complicated formula worked out by Islamabad put federal government’s contribution in this compensatory OTZ grant at 80 per cent and asked the Sindh government to give 20 per cent. But midway, the federal government reduced its share to 79 per cent, bringing down its share of grant to Rs6.30 billion and asked the provincial government to increase its share to Rs1.70 billion.

In the following year of 2000-01, the federal government on its own cut down its share in compensatory grant to 68 per cent and provided Rs4.53 billion while provincial government was asked to give Rs2.07 billion.

The federal government has in fact reduced the overall size of OZT grant from Rs8 billion in 1999-2000 to Rs6.6 billion and has further reduced it in the current fiscal year. This unilateral reduction has virtually crippled the Karachi city government and other local institutions in the province.

“Since August last when the city government took over, we are getting 25 per cent less in our monthly instalment of this grant,” Shoib Siddiqui, EDO Karachi city government, informed Dawn by telephone. City Nazim Naimatullah Khan is reported to have raised this issue with President Gen Pervez Musharraf.

The Sindh government’s contention is to treat actual receipts of octroi and zila tax in Karachi and all other local councils in 1998-99 as benchmark. The historical trend of growth on OZT receipts has been 15 per cent, which should be continue to be taken in the computation of grant in the coming years.

The Sindh government has worked out OZT at Rs7.83 billion in 1999-2000, Rs9.00 billion 2000-01, Rs10.35 billion in 2001-02, Rs11.91 billion in 2002-03 and Rs13.70 billion in 2003-04.

It is not only the amount of OZT grant that has been questioned. The Sindh government has raised a fundamental issue. The IPCC decision on May 3, 1999 stipulated that after abolition of OZT in all the four provinces the loss would be met from 2.5 per cent increase in GST.

“These funds would be entirely for the provincial government (except for 5 per cent retention by federal government as recovery charges) and from part of divisible pool for one year, following which the position would be reviewed. This additional tax will be entirely transferred to the provinces and it will be ensured that the local taxes being currently collected are guaranteed from this recovery and the balance will go to the divisible pool with remaining 12.5 per cent GST,” the IPCC decision said in 1999.

According to Sindh government’s interpretation, the incremental 2.5 per cent GST formed part of the divisible pool for only one year in 1999-2000 and a review of this position is now over due. “The 2.5 per cent of 15 per cent GST is solely the provincial component of OZT and should not be treated as a part of the divisible pool” is the crux of the Sindh government’s position on this issue.

Way back in late September, the finance secretaries of all the four provinces had endorsed Sindh government’s position and wanted a review by the IPCC. But then neither the IPCC has been constituted and notified nor the Monitoring Committee of the National Finance Commission (NFC) hold its quarterly meetings as provided in the NFC award of 1997.