No Headway

Pakistan is a federal democracy. In order to maintain a productive inter-governmental fiscal relationship between the federal and provincial governments, Article 160 of the Constitution provides for the setting up of a National Finance Commission (NFC) with intervals not exceeding five years. The NFC is mandated to make recommendations after due deliberations to the President for the determination and distribution of resources between the federal government and the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan.

The recommendations of the NFC, when submitted to the President and approved by him after due consideration, are then given legal cover through a Presidential Order, commonly known as the NFC Award, which is initially valid for a period of five years. However, it can also be subsequently extended on a year-to-year basis till a new NFC Award is notified.

For the first time in the politically chequered history of Pakistan, multiple indicators were adopted in the 7th NFC Award for determination and distribution of provincial shares in the divisible pool of taxes and duties, whereas in all the previous NFC Awards, population was the sole criterion for determination and distribution of the provincial shares with special grants as subventions for smaller provinces.

A special feature of the 7th NFC Award, which continues to be extended every year after its expiry in 2015 in the absence of a new NFC Award, was the long overdue recognition of the requirements of the most backward and largest (area-wise, albeit with a sparse population) province of Balochistan. Its share out of the divisible pool of taxes and duties was notified and guaranteed at Rs 83 billion during FY2012, which was more than double the actual divisible pool share of FY2010. It has also been ensured that Balochistan will be receiving its share in the divisible pool, based on budgetary projections, instead of actual collection by the federal government’s main tax generation and collection agency, the Federal Board of Revenue (FBR). A shortfall, if any, based on the actual collection, which may be reported by FBR, is made up by the federal government out of its own share. This arrangement has been in practice since FY2012 and is continuing till the 7th NFC Award continues to be used as of the current fiscal year.

The 7th NFC Award was notifield by President Asif Ali Zardari in 2010 and enforced from the first day of July 2010 for a stipulated period of five years. Since no new NFC Award was notified despite some half-hearted efforts, the 7th NFC Award was extended through the Distribution of Revenues and Grants-in-Aid (Amendment ) Order 2015 by President Mamnoon Hussain. It came into force on July 1, 2015 and continues to be in force, being extended every year in the absence of a new NFC Award.

The 8th and 9th NFCs were constituted from time to time to meet the constitutional requirements. But both these NFCs somehow could not make any headway beyond a couple of initial meetings and the formation of some working groups, mainly due to the strong stances adopted by the stakeholders on one or the other points and their refusal to budge even an inch from the stances so taken.

The present federal government had constituted the 10th National Finance Commission in May 2020 ahead of the federal budget for FY21. Quite obviously it was humanly not possible for the 10th NFC to accomplish the task in such a short time and as such, the 7th NFC Award was and continues to be extended every year.

According to the provision of Article 160 of the Constitution, a National Finance Commission is to consist of the Federal Finance Minister and Finance Ministers of the provinces and any other persons that may be appointed by the President after consultation with the governors of the provinces. Each province is also represented in the NFC by a non-statutory member while the Federal Finance Secretary acts as the official expert.

Composition of the 10th NFC was challenged in the superior courts as it was headed by the Advisor to the Prime Minister on Finance and Revenue, Dr Abdul Hafeez Shaikh. In the absence of a full-fledged Finance Minister, the Prime Minister is supposed to hold the portfolio of finance. The Advisor status was accordingly upped and made Federal Minister. Presently, the Federal Minister for Finance and Revenue, Shaukat Tarin heads the NFC.

The pool of taxes and duties imposed by the federal government’s tax collection agency includes taxes on income; wealth tax; capital value tax; taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed; export duties on cotton; customs duties; federal excise duties, excluding the excise duty on gas charged at well-head, and any other tax which may be levied by the federal government.

The allocation of shares out of the divisible pool, as per the 7th NFC Award which continues to be forced, is based on the multiple indicators. The indicators and their respective weights are: population 82.0 per cent, poverty backwardness 10.3 per cent, revenue collection 5 per cent and inverse population density 2.7 per cent.

The sum assigned to the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan, as per constitutional provisions, are distributed among the provinces on the basis of the percentage specified against each as given here: Punjab 51.74 per cent, Sindh 24.55 per cent, Khyber Pakhtunkhwa 14.62 per cent and Balochistan 9.09 per cent.

The federal government also makes straight transfers to the provinces on account of royalties on crude oil, natural gas, gas development surcharge and excise duty on natural gas.

In accordance with the framework for the distribution of resources as structured by the 7th NFC Award, allocation for the provinces through federal taxes, duties and straight transfers, are estimated at Rs 3411858.471 million as budgeted for financial year 2021-22 as against revised figures of Rs 2704163.854 million for financial year 2020-21.

The province-wise share for 2021-22, inclusive of both the divisible pool of taxes and duties and straight transfers is: Punjab Rs 1691097.914 million, Sindh Rs 848208.127 million, Khyber Pakhtunkhwa Rs 559256.621 million (inclusive of 1 % War on Terror) and Balochistan Rs 313295.609 million.

The share of the provinces in the divisible pool keeps moving upwards and downwards, depending on the efficient or otherwise poor performance of the main tax collection agency FBR on any account. Quite obviously, higher tax collection augurs well for all four units forming the Federation of Pakistan for accelerating developmental activities and undertaking relief measures for the people in their respective jurisdictions.

Hopefully, the 10th NFC will be able to accomplish its task by working speedily and well in time and making its recommendations as early as possible so that the President can notify the 10th NFC Award in time for financial year 2022-23, ending the year to year basis extension of the 7th NFC Award. The next NFC Award will also be quite interesting figures-wise as this will be based on the official results of Population Census 2017 since notified, though the ratio may remain unchanged.