The 18th Amendment and the NFC Award have been a hot topic of debate in the country since the Federal Minister for Planning and Development Asad Umar called for revisiting this significant constitutional amendment after pointing out some flaws during a TV talk show last week. Responding quickly to this development, the opposition parties have warned the government against any move to reverse or repeal this historic amendment. At the moment, one can’t precisely comment on this matter as the government has yet not officially proposed any amendment to the Constitution to alter or undo the 18th Amendment. It is advisable that the government must not indulge in unnecessary controversies regarding a constitutional amendment which essentially shapes the contours of federalism in Pakistan. However, there are many reasons why the government should carefully revisit the current disposition of the NFC Award and the dispersal of economic resources under this arrangement in the country.

The National Finance Commission (NFC) is an important peculiarity of the federation of Pakistan. It is formulated every five years and it is meant to distribute resources between the centre and provinces (vertical distribution), and among the four provinces (horizontal distribution). Under the last NFC Award, the centre gets 42.5 percent of the divisible pool while the remaining 57.5 percent is distributed among the provinces on the basis of multiple indicators. The formula includes the population (82 percent), poverty and backwardness (10.3 percent), revenue collection (5 percent), and inverse population density (2.7 percent). As the federal government is going to constitute the 10th NFC to finalise an award for the next five years, there should be some serious deliberations on the vertical distribution side with a view to enhancing the federal government’s share in the divisible pool.

Pakistan’s accumulated public debt has more than doubled during the last 5 years. The total debt and liabilities have crossed Rs41 trillion that are now almost 95 percent of the country’s GDP. The federal government is obviously responsible for debt servicing and repayment of this massive debt. The government usually has to go from pillar to post to get its debt liabilities rescheduled from international lenders, particularly the IMF. Sometimes, while doing this, the country’s economic sovereignty is also compromised. Similarly, over a period of time, there has also been a substantial increase in Pakistan’s defence spending owing to India’s aggressive military posture against it as well as the rapidly-changing geostrategic realties in the region.

Pakistan has been an overly centralised country. The original 1973 Constitution, and the 18th Amendment subsequently passed in 2010, were indeed the important milestones towards a federal form of government in Pakistan. Nevertheless, Pakistan is still not a perfect federation. The federal government is currently running a large number of ministries and departments exclusively or in parallel with the provinces. Similarly, there are also a lot of federal government’s initiatives for the infrastructural development, public health and social development, and poverty alleviation etc. in the country. Moreover, the federal government also provides funds to the AJK and Gilgit-Baltistan areas from its own share of the NFC Award.

The federal government also proactively assists the provinces in the wake of any national disaster or natural calamity in the country. It has been spearheading the entire anti-pandemic campaign since the coronavirus outbreak in Pakistan in February this year. It has announced a ‘financial stimulus package’ to the tune of Rs1.25 trillion. Since the imposition of a nationwide lockdown, the government has disbursed tens of billions of rupees to millions of needy families across the country under its Ehsaas Emergency Cash Programme. The provinces, in fact, are primarily responsible for providing such financial assistance to their people in these testing times. Ironically enough, the provinces look more interested in securing provincial autonomy and financial resources from the centre than assuming their responsibilities under the 18th Amendment.

There is a clear constitutional division between the centre and provinces when it comes to imposing and collecting taxes in Pakistan. The federal government can levy and collect income tax, customs duty, sales tax on goods, CED etc., while a provincial government is authorised to impose a large number of taxes like property tax, agricultural income tax, sales tax on services, professional tax, excise duty, motor vehicle tax, tax on transfer of property, capital value tax and stamp duty in addition to a number of judicial and no-judicial fees in the province. The provincial governments, however, never seriously try to improve their tax collection to enhance their revenues. Instead, they have always been just eyeing their respective share from the NFC Award to conveniently meet their expenses. If we take a look at Punjab’s annual budget statement for 2019-20, the province will be collecting only less than Rs400 billion from its tax and non-tax sources while it is expecting to get approximately Rs1600 billion from the federal divisible pool. Thus, it will be generating less than 20 percent of its total revenue receipts through its own resources.

In Punjab, Excise, Taxation & Narcotics Control Department and Punjab Revenue Authority (PRA) are the two major public departments responsible for collecting provincial taxes. Unluckily, the performance of both departments is anything but satisfactory. Corruption and large-scale inefficiencies just rule the roost there.

The Federal Board of Revenue (FBR) is the only public tax agency which collects the entire taxes for Federal Divisible Pool in Pakistan. Thus, it alone collects revenues for running the affairs of the federal government, four provincial governments in addition to the governments of AJK and GB. FBR mostly finds it hard to achieve its tax collection targets in the absence of a documented economy and healthy tax culture in the country.

It is high time to pragmatically reformulate the NFC Award to equitably distribute economic resources between the centre and the provinces. It will be advisable to just reverse the current configuration ratio of 42.5:57.5 in the vertical distribution of Award. However, initially, such ratio may also be fixed as 50:50 until each province improves its tax collection system. The federal government can initiate a dialogue process to persuade all provincial governments to accept the proposed NFC Award. The ruling PTI party will also have to win other parliamentary parties’ support since there will be needed a constitutional amendment for a downward revision in the provinces’ share in the NFC Award. The provinces must focus on improving the general state of their tax collection mechanism. Definitely, they must readily assume their responsibilities before claiming their rights under the 18th Amendment.