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National finance omissions

The search for consensus on the 9th NFC award continues as experts warn against the federal government’s plan to cut the provinces’ share

National finance omissions

Article-160(1) of the Constitution of Pakistan clearly says that “within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance commission.” The NFC is supposed to make the distribution between the federation and the provinces of the net proceeds of the taxes; and making of grants-in-aid by the federal government to the provincial governments. The taxes in question are collected by the federal government and a part of these is distributed among provinces according to a mutually agreed upon formula.

However, there has been no 8th NFC award for the past three years. The 7th NFC Award expired in 2014-15 after completing its five-year term. Since then, the same 7th award has been extended for interim periods and there was no consensus to set up the 8th NFC award.

Following the 18th Amendment, there is not much formal fiscal devolution. Practically, there is the impression that provinces received more resources and the federal government is left with a meager share. This issue became the major problem in setting up the 8th NFC award after 2015. The then federal government wanted more share of tax revenue while provinces were not willing to reduce their due share. Ultimately, the award remained inconclusive and the government continued to extend the 7th award on an interim basis.

“The then federal government of Pakistan Muslim League-Nawaz (PML-N) wanted a bigger share of tax revenue from the provinces while the provinces did not agree. Even the provincial government of the same party in Punjab province declined to fulfill the demand of the federal government,” says Pervez Tahir, senior economist, while talking to The News on Sunday (TNS).

The constitution disapproves of reduction in the share of provinces in the NFC award. If we look at Article 160 (3A), it clearly states: “The share of the Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award.” Tahir says the provinces took a stand in a bid to protect their share and that was the major reason why the 6th award remained undecided.

The NFC, in real terms, is considered a struggle between the federal government and provinces to get constitutionally/legally defined share of tax revenue and grants-in-aid allocations.

“The real challenge to the NFC award is federal government’s willingness to increase its tax tariff and reduce its expenses,” says Tahir. He says it “should abolish extra ministries and discontinue retaining devolved ministries and departments”. For example, he says, when health and education have been devolved in the 18th Amendment, why is the federal government retaining health and education departments, ministries and sections? “If the federal government forgoes this practice, the financial burden on it will ease.”

Following the stalemate in forming the 8th NFC award, the new PTI government has started working on the next NFC award. Many people are not even sure whether this should be called the 9th NFC award. However, a big issue being discussed in the new NFC award meetings is the proposed 3 per cent increase for the Federally Administered Tribal Areas (FATA) after its merger with the Khyber Pakhtunkhwa (KP).

Provinces have been approached by the federal government for the formation of the 9th NFC award and nomination of their members but provinces’ response is far from encouraging. The fact that the caretaker finance minister, Shamshad Akhtar, and the new government have both hinted at reducing the share of the provinces have made them possessive of their share.

While the provinces fear losing some of their share to the federal government, they are also wary of the likely change in their respective shares due to the demographic fluctuations identified in the latest population census.

Shahbaz Rana, a journalist based in Islamabad, says in order to reduce the share of the provinces, “the government will have to go for a constitutional amendment, which does not seem possible at this point in time. “What the government is mulling at the moment is to go for a technical solution and seek help of the president of Pakistan,” he says.

Rana explains that under the Constitution of Pakistan, the president has the right to choose different taxes to be included in the divisible pool. “So, if the president reduces the size of the divisible pool and removes certain taxes from it, the share going to the provinces will reduce in absolute terms though the ratio will remain the same (57.5) per cent or more.” No doubt this will “leave the funds collected from the excluded taxes with the federal government but it may draw ire of the province.”

It is also possible that funds received by provinces are less Thean expected because they are based on projected revenue collection. “If there is a revenue shortfall, the funds will reduce though the percentage may remain the same,” says Rana.

Dr Nadeem ul Haque, senior economist, thinks “it is unrealistic of the federal government to expect the provinces to part with their share in the divisible pool.

Haque suggests that instead of fighting for more share, the federal government and the provinces must put their house in order and learn to spend their funds properly. “If the federal government cannot get rid of the Circular dept or keeps losing money due to a flawed gas policy, its financial liabilities will continue to increase. Similarly, the federal government must review the logic of maintaining 44 divisions despite the passage of the 18th Amendment.”

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Haque believes provincial governments must also set their priorities right and spend judiciously in different sectors. For example, he says, “flushed with money the Punjab government spent hefty amounts on Metro Bus, Orange Line Train and roads network at the cost of important sectors like health and education.”

Despite the renewed debate on new NFC award, it is quite likely that the stalemate will continue because the outstanding issues are very much there. Kaiser Bengali, senior economist, believes the previous government deliberately abstained from holding consultations on NFC “because it received demand from the top to allocate 3 per cent for security and 4 per cent for territories upfront. In the presence of similar demands, the response of the provinces is likely to remain as lacklusture as before.”

On the need to revise the share of different provinces from 57.5 per cent after last year’s census, Bengali says “it is too early to talk about this. Deliberations and revisions are possible once provinces appoint technical members and agree to sit on the table.”

The current formula, he says, “is such that 82 per cent weightage is given to the population of a particular province, 5 per cent to revenue collection from there, 3 per cent to the level of poverty, 2.7 per cent to the geographical area and so on. One per cent of the divisible pool goes to KP to compensate for the damages it has faced due to terrorism and militancy.”


Shahzada Irfan Ahmed

shahzada irfan
The author is a staff reporter and can be reached at [email protected]

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