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No Finance Commission

The mind-boggling complexities of resource distribution in a federation like Pakistan

No Finance Commission

Distribution of financial resources in a federation like Pakistan involves mind-boggling complexities. Pakistan carries a baggage of mistrust between the provinces and the centre. Particularly three smaller provinces have been complaining of an autocratic attitude of the federal government in every sphere of governance, more specifically in the resource distribution arena.

The country paid a colossal price when exploitation of resources and an appalling repudiation of Bengalis’ political rights culminated in the secession of East Pakistan in 1971. Ironically, the desired sanity did not dawn on the ruling elite even after the dismemberment of the country.

Population was made the sole criterion for vertical distribution of financial resources to benefit the most populated province Punjab which had been a protagonist of parity till Bengal was a majority population province of Pakistan. This exploitative formula continued till 2009 when the 7th National Finance Commission took a historic departure by reducing population-based share to 82.5 per cent. Although the weightage assigned to population is still unreasonably high, it was a seminal structural shift. India allocates only 20 per cent of resources on the basis of population. To further allay the concerns of federating units, India tied the population-based share with the census of 1970.

The 7th NFC Award, for the first time, recognised some other factors for allocation of resources, redefining the basic structure of the resource distribution formula. The award introduced some major changes e.g. size of the divisible pool was enlarged by reducing collection charges of the federal government from five to one per cent.

Provinces’ share was increased from 46.25 per cent to 57.5 per cent, effectively reducing the federal government’s share to 42.5 per cent. KP received one per cent extra from the divisible pool as a frontline province against the war on terror. General Sales Tax (GST) on services was made a provincial tax. This has inspired the provinces to negotiate more fiscal gains in the 8th national financial award. This time, the provinces are rolling their sleeves to jostle for greater share on various accounts.

Failure in providing a long awaited finance award would be a blot on a democratic dispensation and the PML-N will invite harsh criticism from the provinces for its patent remiss on this critical agenda. Completing five years’ desultory rule without a new finance award and population census would be an indelible stigma for the current government.

Following the footprints of KP, Sindh has decided to demand five per cent of the national purse to meet its security expenses, particularly for hosting Rangers in the province. It has also demanded right to directly collect royalty on oil and gas. The province has also demanded jurisdiction over collection of GST on goods. Additionally, Sindh has hinted at demanding compensation for hosting a large number of legal and illegal immigrants from other provinces and countries, which is a burden on the provincial government. In India, the proposal for 14th Finance Commission recognises this factor. The proposal reads “as the states are subjected to more and more interstate migrant workers and illegal migrants from the neighbouring countries, the Finance Commission shall give appropriate weightage in distribution of the total taxes to the states based on these criteria.”

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Balochistan has prepared a case seeking five per cent share of all revenues to be generated from the CPEC projects. The province is also pushing for increasing weightage for the indicator of geographical area. KP is demanding to further curtail weightage of the population indicator to 60 per cent and bolster weightage of poverty indicator to 15 per cent.

The provinces justifiably demand an increased share due to transfer of subjects under the 18th Amendment. Under the amendment, 47 subjects of the erstwhile concurrent list were devolved to the provinces. It resulted in selling salary and pension bill, liabilities of maintaining the existing and constructing new infrastructure of the devolved departments and additional expenditure on operation, maintenance and procurements.

After the 7th Award, the federal government’s public sector development programme does not allocate adequate resources for schemes pertaining to the devolved subjects. The Council of Common Interest, in its meeting held in April 2011, decided that all projects located in the provinces, except being carried out under the president and prime minister’s directives, would be financed by the provinces. Social Policy and Development Centre’s (SPDC) report “Devolution and Social Development” reveals that total cost of the projects transferred to the provinces stood at Rs108 billion.

The federal government, on the other hand, has asked the provinces to surrender three per cent of the divisible pool to meet security exigencies of the country. The provinces would certainly resent this demand because their resources are also under stress due to spiraling security expenditure within their own limits. Ironically, the federal government continues to retain several subjects assigned to the Council of Common Interests (CCI). As a corollary, the federal government not only encroaches upon the domain of provinces but also shoulders considerable financial burden.

The provinces’ interests have been further undermined by keeping the CCI dormant. The present regime convened only five meetings of the CCI in a brazen violation of constitutional stipulation of a quarterly meeting. The council has been limping without a proper secretariat and thereby reduced to a spineless forum. It would be politically and financially appropriate that the federal government should shun its obsession with a centralised governance approach and a surreptitious reversal of the 18th Amendment. By underpinning the CCI’s role and abolishing ministries unconstitutionally created against devolved functions, the federal government can divert precious resources to confront a relentless security challenge and ever-mounting debt liabilities.

Whereas Article 160 guarantees that the share of the provinces in every new award shall not be less than the share given to the provinces in the previous award, the NFC has to recommend taxes to be made part of the shared basket. Constitution stipulates certain taxes explicitly and provides discretion to the president to include any other taxes and duties to constitute the divisible pool. It will be politically difficult for the federal government to reduce the share of provinces. In a highly polarised political landscape, it will be imperative for the government to seek consensus from all the federating units.

Subsequent governments have been grappling with the thorny issue of agreeing on a reasonable share between the centre and the provinces. The problem will continue vexing governments unless some radical initiatives are taken to widen the tax base to generate additional resources and do away with an archaic and unjust taxation system in vogue for decades. Stagnant tax collection, mounting debt and tumbling exports will always preclude an amicable consensus between the centre and the provinces.

Against this backdrop, the government ostensibly wants to eschew this complicated decision and has, therefore, resorted to dilatory tactics on the new award. The PML-N government is now close to complete its fourth year in power, yet there are no signs of the new finance award.

A recent meeting of the NFC held on November 28 was only the second huddle of the Commission in 20 months. In all likelihood, the process will not be completed before the next calendar year. Normally, the budget formulation process is started in January and in absence of the fresh award, allocation of the provincial share will continue to be based on the previous award. After a few months, the government will enter the last year of its tenure and election fever will soon obscure other pressing issues like the NFC Award.

Failure in providing a long awaited finance award would be a blot on a democratic dispensation and the PML-N will invite harsh criticism from the provinces for its patent remiss on this critical agenda. Completing five years’ desultory rule without a new finance award and population census would be an indelible stigma for the current government.

Naseer Memon

naseer memon
Naseer Memon is a human rights activist and civil society professional. He may be reached at [email protected]

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