Finance Minister Dr Abdul Hafeez Shaikh explained that lower transfers under the NFC to the provincial governments during the first-half (July-Dec) of the current fiscal year were mainly because of lower revenue collection which stood at Rs621 billion. – File Photo by AFP

ISLAMABAD: With provinces getting 22 per cent lower revenue share than allocated in the 7th National Finance Commission award, the federal government formally asked them on Monday to effectively tax agricultural income, real estate and wealth and curtail their expenditures by 30 per cent.

On top of that, as the federal and provincial governments conceded missing the constitutional requirement of holding regular meetings of the NFC and submission of its half-yearly report to parliament, the Sindh government insisted on retaining the responsibility of collecting general sales tax on services and declined to allow the centre to have control over GST collection on services.

The provincial governments fail to understand how could they be expected to provide a cash surplus of more than Rs100 billion during the current fiscal year as repeatedly demanded by the federal government when they fail to get their NFC shares -- the basis of their budget estimates.

The first review meeting of the federal and provincial finance ministers and their secretaries was held here on Monday with Finance Minister Dr Abdul Hafeez Shaikh in the chair.

The finance ministry, according to officials, reminded the provincial governments that mandatory quarterly meetings of the NFC could not be held because of pending nominations to the commission from Punjab and Sindh.

The meeting decided to prepare a sector-wise report of revenue collection under the federal divisible pool and its transfer to the provinces in consultation with their governments and submit it to the National Assembly in its forthcoming session.

According to sources, the provinces asked the centre to resolve the lingering issue of tax on services and its sharing mechanism as Sindh refused to change its stance on sales tax on services. Punjab's Senior Minister Sardar Zulfiqar Khosa suggested that the GST on services should continue to be collected by the centre during the current year and a provincial mechanism be worked out in the next budget.

The federal government said the NFC award had accepted the principle of allowing the provinces' control over GST on services. Since the tax had been linked to the RGST, a status quo (collection by the Federal Board of Revenue) was maintained for the current year after taking the provincial secretaries into confidence.

Dr Hafeez explained that lower transfers under the NFC to the provincial governments during the first-half (July-Dec) of the current fiscal year were mainly because of lower revenue collection which stood at Rs621 billion. He said that releases were being made to the provinces strictly in accordance with the monthly and fortnightly schedules.

He asked the provinces to introduce an effective system of taxing agricultural income, real estate and wealth to honour their commitments made in the 7th NFC award and find new areas for taxation.

The meeting was informed that the provincial governments had introduced land revenue act in 2000 to tax agricultural income through a verification of growers' income but had done nothing to collect it. Under the act, an income of Rs80,000 per crop is exempted from the tax. Five per cent tax is applicable on an income of Rs100,000, 10 per cent on income of up to Rs200,000 and 15 per cent on all agricultural incomes exceeding Rs200,000.

The finance minister, according to the sources, regretted that the provinces had done little to benefit from the legislation made 11 years ago and asked them to make income returns mandatory for effective recovery of tax on agricultural income.

In its presentation, the finance ministry said that after a deduction of one per cent collection charges and excise duty on gas, the net divisible pool amount in the first six months of the current year stood at Rs588 billion. After the payment of one per cent (Rs5.9 billion) to Khyber Pakhtunkhwa on account of war on terror expenses, the net divisible amount stood at Rs582 billion. Of this, Rs326 billion (56 per cent) was transferred to the provinces and Rs256 billion (44 per cent) retained by the federal government.