Pakistan is a federal democracy. In order to maintain 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 so constituted 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 Pukhtoonkhwah (formerly NWFP) and Balochistan. The recommendations of the NFC when submitted to the President and approved by him 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 subsequently also be extended on 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 on horizontal basis whereas in all the previous NFC Awards, population had remained the sole criterion for determination and distribution of the provinces” shares with special grants as subventions to the smaller provinces.
A special feature of the 7th NFC Award is long overdue recognition of the requirements of most backward and area-wise the largest with sparsely populated province of Balochistan. Its share out of the Divisible Pool of Taxeexts and Duties was notified and guaranteed at Rs 83 billion during the financial year 2011-12 which was more than double from the actual divisible pool share of financial year 2009-10. It was also ensured that Balochistan province will be receiving its share in the divisible pool, based on the budgetary projections instead of actual collection by the federal government’s main tax generation and collection agency, Federal Board of Revenue (FBR). Shortfall, if any, based on the actual collection, which may be reported by FBR, is then made up by the Federal Government out of its own share. This arrangement is in practice since financial year 2011-12 and is continuing till 7th NFC Award is operative.
The 7th NFC Award was notified by President Asif Ali Zardari in 2010 and it was to be enforced from first day of July 2010 till 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 was to come into force on the first day of July 2015 and remain in force till further orders.
The 8th and 9th NFCs were constituted from time to time to meet the constitutional requirements. But both these NFCs could not make any headway beyond couple of initial meetings and formation of some working groups mainly due to the strong stances adopted by the stakeholders on one or the other points and refusal to budge an inch even thereon.
The present federal government had constituted 10th National Finance Commission just couple of months ahead of the presentation of the federal budget for financial year 2020-21. It was humanly impossible to accomplish this task within such a limited time and as such the 7th NFC Award was further extended for another year.
According to the provisions of the Article 160 of the Constitution, a National Finance Commission is to consist of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces. Traditionally, the NFC also includes one private member of each province as a technical member.
Composition of the 10th NFC as announced by the federal government has since been challenged in the superior courts as it is headed by the Advisor to the Prime Minister on Finance. In the absence of a full-fledged Finance Minister, the Prime Minister is supposed to hold the portfolio of Finance also among others.
The pool of taxes and duties, which are collected by the federal government, 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.
Allocation of shares out of the Divisible Pool of Taxes and Duties to the Provincial Governments, as per the 7th NFC Award which continues to be in force, are based on multiple indicators. The indicators and their respect weights are:
Population: 82.00 per cent
Poverty Backwardness: 10.3 per cent
Revenue collection of generation 5.00 per cent
Inverse population: 2.7 per cent
The sum assigned to the Provincial Governments of Punjab,Sindh, Khyber Pukhtoonkhwah and Balochistan, as per the constitutional provisions, are distributed among the provinces on the basis of the percentage specified against each as given below;
Punjab: 51.74 per cent
Sindh: 24.55 per cent
Khyber Pukhtoonkhwah: 14.62 per cent
Balochistan: 9.09 per cent
Besides share in the Divisible Pool of Resources, the Federal Government also makes Straight Transfers to the provinces on account of Royalty on Crude Oil, Royalty on Natural Gas, Gas Development Surcharge and Excise Duty on Natural Gas.
In accordance with the framework for distribution of resources, as structured by the 7th NFC Award, provincial in in the federal taxes and duties and straight transfers to the provinces are estimated at Rs 2873718. 740 million for new financial year 2020-21.
Province-wise share inclusive of both Divisible Pool of Taxes and Duties and Straight Transfers is as given below:
Punjab: Rs 1429116.169 million
Sindh: Rs 742029.973 million
Khyber Pukhtoonkhwah: Rs 477518.558 million
(Inclusive of 1 per cent War on Terror)
Balochistan: Rs 265054.040 million
Net transfers by the federal government to the provinces would, however, be Rs 3009196 million after less payments of Rs 115868 million to the federal government on account of Interest Payments and Loans Repayments.
Provinces share in the divisible pool of taxes and duties and straight transfers for financial year 2019-20 were as mentioned below:
Budget Revised
Punjab: Rs 1611364.406 million Rs 1135447.137 million
Sindh: Rs 814916.371 million Rs 592321.379 million
Khyber Pukhtoonkhwah: Rs 633261.496 millionRs 379097.257 million
Balochistan: Rs 294983.403 million Rs 295214.314 million
Share of the provinces in the Divisible Pool of Resources keeps moving upward or downward depending on the efficient or otherwise performance of the main tax collection agency FBR. Quite obviously, higher tax collection augurs well for all the four units forming the Federation of Pakistan for accelerating developmental activities and undertaking relief measures for the people .Needless to mention here that revenue generation and collection of taxes and duties by all agencies had fallen short of targets due to COVID-19 pandemic attack in Pakistan and other allied factors during third quarter of the financial year 2019-20 and this has been duly reflected in the provinces share in the divisible pool of resources for ensuing financial year 2020-21.
The writer is Lahore-based Freelance Journalist, Columnist and retired Deputy Controller (News) Radio Pakistan Islamabad and can be reached at zahidriffat@gmail.com
