Decentralisation of GST services and vertical imbalances in Pakistan

Abstract

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.