Pakistan is a federal democracy. In order to maintain a productive intergovernmental 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 and the provincial governments. 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 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 on a 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 for smaller provinces.

A special feature of the 7th NFC Award is 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 Rs83 billion during FY12, which was more than double from the actual divisible pool share of FY10. It was also 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 then made up by the federal government out of its own share. This arrangement has been in practice since FY12 and is continuing till the 7th NFC Award, which is currently in use.

The 7th NFC Award was notified by President Asif Ali Zardari in 2010 and was to be enforced from the first day of July 2010 till the 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 constitutional requirements. But both these NFCs 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 the refusal to budge even an inch thereon.

The present federal government had constituted the 10th National Finance Commission just a couple of months ahead of the presentation of the federal budget for FY21. 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 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 provincial governments, and any other persons that 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, 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.

The allocation of shares out of the divisible pool, 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 percent), poverty backwardness (10.3 percent), revenue collection (5 percent) and inverse population (2.7 percent).

The sum assigned to the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa (KP) 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 percent), Sindh (24.55 percent), Khyber Pakhtunkhwa (14.62 percent) and Balochistan (9.09 percent).

Besides the share in the divisible pool, the federal government also makes straight transfers to the provinces on account of royalties on crude oil, natural gas, gas development surcharge and an excise duty on natural gas.

In accordance with the framework for the distribution of resources, as structured by the 7th NFC Award, provincial allotment through federal taxes, duties and straight transfers to provinces are estimated at Rs2873718.740 million for FY21.

The province-wise share, inclusive of both the divisible pool and straight transfers is; Punjab (Rs1429116.169 million), Sindh (Rs742029.973 million), Khyber Pakhtunkhwa (Rs477518.558 million-inclusive of 1 percent due to the war on terror) and Balochistan (Rs265054.040 million).

Net transfers by the federal government to the provinces would, however, be Rs3009196 million after subtracting payments of Rs115868 million to the federal government on account of interest payments and loan repayments.

The share of the provinces in the divisible pool 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 four units forming the federation of Pakistan, for accelerating developmental activities and undertaking relief measures for the people .Needless to mention, that revenue generation and the collection of taxes and duties by all agencies had fallen short of targets due to COVID-19 and other factors during the third quarter of FY20 and this has been duly reflected in the provinces’ share in the divisible pool of resources for the ensuing FY21.