IN the early months of Pakistan, the federal government indulged in such legerdemain that one is tempted to quote Shakespeare in Measure for Measure, and say, ‘Federation, proud federation, dressed in a little brief authority, but most ignorant of provincial realities, played such fantastic tricks as make the provinces weep.’
The Government of India Act, 1935 remained the constitutional act of Pakistan till the latter hammered out a new constitution for itself. Under the Act, ‘Entry 48’ of List II (Provincial Legislative List) of the Seventh Schedule, vested the powers to levy ‘taxes on the sale of goods and advertisement’ in the provincial legislature to the exclusion of the central legislature. Despite the exclusive jurisdiction of provinces to levy sales tax, the British Indian government went up to the federal court of British India in 1938-39, against the levy of this tax on certain commodities by the central provinces and the Madras presidency. The federal court held, ‘The provincial legislature has the exclusive power to impose a tax on sales;’ ‘It was within the competence of the provincial legislature;’ and, ‘There was nothing wrong with the Madras Sales Tax Act.’
In India, after 1947, the sales tax has become the backbone of the fiscal structure of state governments, providing a good measure of elasticity and buoyancy to state revenues. But within seven months of the creation of Pakistan, the provincial fiscal landscape was entirely eroded and completely abraded.
While presenting the first budget on Feb 18, 1948, Finance Minister Ghulam Mohammad stated that since direct taxes could not yield any large additional revenue, the deficit would have to be covered by other forms of taxation. Continuing, he said, ‘A tax which has proved very productive … is the sales … tax. Hitherto, this tax has been in the provincial fold…. A central tax at a uniform rate presents obvious possibilities of increased revenues.
‘This question has been discussed with the provincial governments and it has been agreed that for the next two years they will vacate this field of taxation in favour of the central government, on the understanding that the latter will pay them certain amounts in lieu of the taxes which they might otherwise have collected under their own jurisdiction. In order to transfer the powers of taxation to the central government, it will be necessary to make certain modifications in the existing constitution….’
The attempt to convert the provincial square into the central circle continued, and Ghulam Mohammad, in his budget speech for 1950-51, put across that the centre took over the administration of sales tax from the provincial governments in 1948 for a period of two years, and those arrangements were due to expire at the end of the financial year.
He declared that in view of the fact that the financial position of the central government with its heavy defence commitments had not undergone any material change since the tax was first taken over, the question of its retention by the centre for a further period of two years had been taken up with the provinces. He announced that the provincial governments in West Pakistan agreed. But in East Bengal (mark this expression) it had not been possible to reach an agreement. And, yet, a bill was introduced for the continuance of the sales tax administration by the central government for the next two years!
The fiscal year 1952-53 was a fateful year for provincial autonomy and finances. In his budget speech, Finance Minister Mohammad Ali pronounced, ‘The present position under which sales tax is administered by the central government will be maintained.’ He affirmed that the temporary amendment of the Government of India Act, 1935, as adapted, would be given permanent effect. The Act 1935 had to be further amended.
What did this action entail? It extinguished the constitutional rights of the provinces to levy a provincial tax within their territorial jurisdiction (without the agreement of the then East Pakistan), first temporarily, and then permanently. It handed over the administration of an indirect tax to an organisation dealing with direct taxes! It assigned as a sop a portion of the net proceeds of this tax to the provinces. The Act 1935 had to be further amended to add a new ‘Entry 54 B’ to the List I (Federal Legislative List) reading ‘Taxes on the sale of goods,’ and the original ‘Entry 48’ in the List II (Provincial Legislative List) was limited to ‘Taxes on advertisement’ only.
To take away the fiscal powers of the provinces was an infringement of the principles of fiscal federalism and a transgression of provincial autonomy. This action was unjustified and unwarranted. And all the efforts of the provinces, especially the then East Pakistan, were frustrated and undermined by the rigid and apathetic attitude and approach of the chairman of the first National Finance Commission, (1962) who brusquely brushed aside a very reasonable demand to restore the subject of sales tax to the provinces.
Against the recommendations of five members from the then East Pakistan and two members from West Pakistan that the sales tax should revert to the provincial administration, the chairman of the commission, (secretary, economic affairs division, supported by two members representing the central government — a joint secretary, and the economic adviser to the State Bank of Pakistan) decided ‘that no change needs to be effected in respect of this tax.’
The system of provincial autonomy was sacrificed at the altar of Mammon. And this gave another strong push to the process of drifting away of the then East Pakistan from West Pakistan.
Graphic design blog, inspiring resoures for designers and developers. 