Pakistan is a federal democracy and for the inter-governmental fiscal relationship between the federal and provincial governments, Article 160 of the Constitution provides for setting up of a National Finance Commission (NFC) with intervals not exceeding five years. The mandate of the NFC so constituted is to make recommendations to the President regarding distribution of resources between the Federal Government and Provincial Governments of Punjab, Sindh, Khyber Pukhtoonkhwah and Balochistan. The recommendations of the NFC and submitted to the President, are given legal cover through a Presidential Order and commonly known as NFC Award which is initially valid for five years and can subsequently be extended year to year basis till new NFC Award is announced.
Presently, 7th NFC Award is in practice and through this Award, the financial autonomy of all the four provinces has been duly ensured by increasing their share in the Divisible Pool of Taxes from 46.5 per cent to 57.5 per cent from 2011-12 onwards.
For the first time in the history of the country, multiple indicators were adopted for distribution of provincial shares on the basis of horizontal distribution in the divisible pool of taxes whereas in all the previous NFC Awards, population had remained the sole criterion for distribution of the provinces’ share with special subventions to the smaller provinces.
A special feature of the 7th NFC Award is long overdue recognition for requirements of most backward and area-wise largest with sparsely populated province of Balochistan. Its share out of the Divisible Pool of Taxes was guaranteed at Rs 53 billion during financial year 2011-12 which was more than double from the actual divisible pool share of finance year 2009-10. It has also been ensured that Balochistan province will be receiving its share in the divisible pool , based on the budgetary projections instead of actual Federal Board of Revenue (FBR), the main tax collection agency, collection. 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 will continue till 7th NFC Award remains in field. In this regard, , an amount of Rs 79.672 billion have been provided to the Balochistan Government , as additionally, from fiscal 2010-11 to 2017-18(up to March 30, 2018).
The 8th National Finance Commission was constituted on July 21, 2010. But it failed to come up with any consensus recommendations to be submitted to the President for notifying an NFC Award accordingly. The 9th NFC was constituted on April 24, 2015 and its first meeting was held on April 28, 2015 and it had constituted four working groups to undertake thematic studies to assist the NFC making its deliberations meaningful. The reports of the Working Groups were presented and duly deliberated in the NFC meeting on December 19, 2016. The deliberations for new NFC Award are under active consideration at the appropriate level and the new NFC Award is expected to be announced as soon as the consensus among all stakeholders is reached. Quite obviously, the present NFC Award will remain operative till a new NFC Award is concluded, notified through Presidential Order and implemented for its stipulated five years. In the absence of any fresh NFC Award due to the stakeholders failing to reach any consensus, the 7th NFC Award is extended every year through President’s Order at the time of presentation of the new federal budget.
The 9 member NFC is headed by the Federal Finance Minister and comprises Finance Ministers of the four provinces as official members and one private member of each of the province as technical member.
The pool of divisible taxes, which are collected by the federal government, include 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 of Taxes to the Provincial Governments is based on multiple indicators. The indicators are their respective weights are:-
Population: 82.0 per cent. Poverty or backwardness: 10.3 per cent. Revenue collection or generation: 5.0 per cent. Inverse population: 2.7 per cent
The sum assigned to the Provincial Governments of Punjab, Sindh, Khyber Pukhtunkhwa and Balochistan under Article 3 of the Constitution are distributed among the provinces on the basis of the percentage specified against each:-
Balochistan: 9.09 per cent. Khyber Pukhtunkhwa: 14.62 per cent. Punjab: 51.74 per cent. Sindh: 24.55 per cent.
Besides share in the Divisible Pool of Resources, the Federal Government also makes Straight Transfers on account of Royalty on Crude Oil, Royalty on Natural Gas, Gas Development Surcharge and Excise Duty on Natural Gas.
According to the data available from official sources, provinces share out of Divisible Pool of Resources and Straight Transfers in the Federal Budget 2017-18 amounted to Rs 2384243 million which was somehow revised downward marginally to Rs 2316080 million.
In the just announced Federal Budget for financial year 2018-19, provinces share in Divisible Pool of Taxes is substantially higher at Rs 2508834 million and Straight Transfer bit low than revised figures are placed at Rs 81232 million. Both totaled Rs 2590066 million.
Province-wise share inclusive of both Divisible Pool of Taxes and Straight Transfers is:
Punjab: Rs 1281980 million. Sindh: Rs 648813 million. Khyber Pukhtunkhwa: Rs 426095 million (inclusive War or Terror 1 per cent). Balochistan: 233177 million
It is quite commendable and appreciable to note that transfers from the federal government to provinces of Punjab, Sindh, Khyber Pukhtunkhwa and Balochistan out of the Divisible Poll of Taxes have increased as much as 50 per cent during the last four years of the incumbent regime under the extended National Finance Commission Award.
The federal government on coming into power during the fiscal 2012-13 had transferred Rs 1.299 trillion out of the pool of divisible resources and transferred Rs 465 trillion in 2013-14, Rs 1.593 trillion in 2014-15 , Rs 1.905 trillion in 2015-16 and Rs 1.996 trillion during financial year 2016-17.
Share of the provinces in the Divisible Pool of Resources keeps moving upward every year depending on the improved and efficient performance of the main tax collection agency FBR .Higher the tax collection augurs well for the federating units of the Federation of Pakistan.
n The writer is Lahore-based Freelance Journalist, Columnist and retired Deputy Controller (News) Radio Pakistan, Islamabad.