Author
Shabbir AHMED*
Abstract
The paper aims to assess the role of the provincial government in collecting Sales Tax on Services(GST) following its devolution to provincial governments in Pakistan. Additionally, the paper compares fiscal efforts (excluding GST) after the implementation of the 7th National Finance Commission (NFC) award in 2009. The application of the Stone-Geary utility function establishes a strong foundation for empirical assessment. This approach not only allows for a more accurate and robust analysis but also makes a theoretical contribution to the existing literature. Furthermore, for empirical analysis, the Least Squares Dummy Variable (LSDV) regression, a panel data technique, is applied. The results indicate that after the devolution of service taxes, provincial governments have reduced their fiscal efforts, while the federal government has improved tax collection over the same period. Among the provinces, Balochistan and Sindh are more focused on collecting GST on services compared to other taxes in their provinces. After the 7th NFC award, the federal government has managed recurring expenses more effectively than the provincial governments. Additionally, Khyber Pakhtunkhwa has significantly increased its development expenditures, rising from Rs. 274 to Rs. 600 in real per capita terms during the same period. Overall, the paper concludes that the devolution of taxes in Pakistan has not significantly impacted tax performance (on the fiscal efforts of the provincial governments). The objectives of tax devolution may be better achieved if the federal government is linked with the performance of provincial governments. Specifically, federal transfers should be tied to the fiscal and socio-economic performance indicators of the provinces.
