National Finance Commission Award

Intro

Article 160 of the constitution of Pakistan says that after every five years the president shall constitute a National Finance Commission.

This National Finance Commission will review the formula for the distribution of funds, taxes and other monetary assets among the Center and the Provinces and among the four federating units of Pakistan namely, Punjab, Sindh, Balochistan, Khyber Pakhtunkhawa.

The NFC Award or National Finance Commission Award, is the distribution of financial resources among the provinces of Pakistan by the federal government on an annual basis.

Certain types of taxes collected in each province are pooled, then redistributed according to the NFC formula.

What taxes to include in the distribution pool and the distribution formula is a subject of debate.

Taxes included in the pool are

 income taxes  general sales tax  wealth taxes  capital gains taxes  custom duties

Background and History

In 1971, Pakistan was cut into two and East Pakistan was lost to Bangladesh.

There are many reasons that can be attributed to the 1971 incident but one of the major one is the “Distribution of Resources” among the provinces i.e East Pakistan and West Pakistan.

Source: Reports of the Advisory Panels for the Fourth Five Year Plan 1970-75, Vol.I, published by the planning commission of Pakistan.

After the disintegration of Pakistan into Bangladesh and Pakistan in 1971, people in the center learned their lesson to a certain extent and hence to stop it from happening again, a National Finance Commission or NFC as it is commonly called was constituted.

The National Finance Commission was given the sole objective of resource redistribution.

Mechanics of National Finance Commission Award in Pakistan:

The purpose of NFC award is the re-distribution of resources among the provinces. NFC is established by law for the smooth and judicious re-distribution of resources collected by centre according to the need and goals for development of federation and federating units.

NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be held at the intervals of five years.

Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President may appoint after consultation with provincial Governors.

The main charter of NFC is to recommend on the following The distribution of specified taxes, duties

between federation and provinces. The disbursement of grants to provincial

governments. The borrowing powers exercised by

federal and provincial governments. Any other financial matter referred to

commission.

As per law NFC is intended to have an amicable mechanism for resource sharing formula between the federation and provinces and amongst the provinces.

Since 1960’s, Punjab is getting around 60%, Sindh is getting around 24%, NWFP is getting around 12% while Baluchistan is getting around 4% from the Federal Divisible pool.

The Problem

The basis for distribution of resources among various provinces of Pakistan has always been a boon of contention.

It also became one major reason for the separation of Bangladesh and even today it is one major reason of friction among different provinces of Pakistan.

Population had remained the sole criteria for resource distribution the whole time, which is not the best practice around the world.

Throughout the period, smaller provinces have asked for adoption of a judicious formula with the inclusion of factors such as revenue generation, poverty, backwardness, area etc. in the revenue distribution criterion but nothing concrete have taken place.

There is a need for inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, environment, etc. to be taken into account for justifiable of resource distribution.

Even if we look at our neighboring country India,

various criteria are used for resource distribution from central to provincial governments.

So, in order to achieve equity, such policies should be devised which take different aspects of development into its account while distributing the resources.

Most Tax Receipts are collected from Punjab and Sindh.

Almost all custom duties are collected at the Port of Karachi. Most of the pooled taxes in the 1997 Award are collected in Sindh province. 

Hence the NFC award redistributes taxes from Sindh to the rest of Pakistan.  

Based on the average of the years 1997 through 2000, the approximate percentages of pooled taxes collected by each province are 65% Sindh 25% Punjab 7% Khyber-Pakhtunkhwa 3% Balochistan

The approximate actual distribution of pooled taxes to the provinces and to the federal government is 9% Sindh 23% Punjab 6% Khyber-Pakhtunkhwa 2% Balochistan 59% Federal.

A new NFC Award cannot be announced because the four provinces have failed to develop consensus.

Consensus has not been reached because Punjab province insists resource distribution on the basis of population alone whereas the other three province, namely Khyber-Pakhtunkhwa, Sindh and Balochistan demand giving importance to the revenue generation by each province, level of poverty in smaller provinces and other related factors as well, while distributing the national resources among provinces through National Finance Commission.

7th NFC Award

After a gap of 8 years (1997 NFC Award expired in 2002), consensus has been reached between Federal and Provincial Governments regarding distribution of revenues.

The financial implications of this Award for the federal and provincial governments are vast and long-lasting with a substantial increase in transfers from the federal government to provinces due to the following reasons.

1. The collection charges of the federal government are decreased from 5 percent to 1 percent; thereby, enlarging the overall size of the divisible pool.

2. The federal government and all the four provincial governments recognized the role of KPK as a frontline province against the war on terror. One percent of net proceedings of the divisible pool are therefore earmarked for KPK during the entire award period.

For instance, in 2010-11, KPK will receive an additional amount of Rs15 billion as a frontline state for war on terror.

3. The remaining proceeds of the provincial share of the divisible pool are increased from 46.25 percent to 56 percent in 2010-11 and then to 57.5 percent for rest of the award period. This means that the share of federal government in the net divisible pool would be 44 percent in 2010-11 and 42.5 percent in rest of the award period.

4. This award ensure that Balochistan will get at least Rs83 billion under divisible pool transfers.

In case the estimated share of Baluchistan is less than Rs83 billion than rest of the money would be contributed by federal government.

GST on services collected in the CE mode is also transferred to the provincial governments under the straight transfer mode – implying that revenues collected from a province would be transferred to that province on the basis of collection. The budget 2010-11, however, did not adhere to this principle.

In addition, the NFC Award 2010 also allows GDS arrears retroactively to be paid to Balochistan on the basis of the new formula and for the payment of long held up hydel profits to KPK.

Comparison of NFC Award 2010 with NFC Award 1997:

The table indicates that federal government would receive almost Rs.1055 billion in 2010-11 if the 1997 NFC Award would continue.

However, due to revision in resource distribution formula in 2010 federal government would get Rs.685 billion.

As a result of NFC Award 2010 federal revenues would decline by Rs.370 billion in 2010-11 compared to revenues under NFC Award 1997.

The province-wise financial implications of the NFC Awards 2010 in comparison with NFC Award 1997.

The province-wise federal transfers show that in absolute terms, Punjab is likely to receive Rs.152 billion additional revenues in 2010-11 as per NFC Award 2010 compared to 1997 NFC Award.

 The comparative picture of other provinces show that Sindh, KPK and Balochistan are likely to receive Rs90 billion, Rs.70 billion and Rs.57 billion additional revenues in 2010-11 as per NFC 2010 compared to NFC Award 1997.

Conclusion

Although, federally constituted, but with its ad hoc nature, NFC has failed to provide ideal resource distribution criteria.

There should be a permanent body of NFC, with professionals of the subject as consultants to regularly monitor and evaluate the equitable utilization of the award.

Visits should be made to different areas and stakeholder consultation should be made to have a real look at the situation prevailing there so that the resource allocation can be made more appropriate.

NFC Awards are regularly constituted after every five years under article 160 of the constitution.

However, there are fewer examples of conclusive NFC Awards due to lack of consensus among federating units. In this regard, NFC Award 2010 is a big success of present democratic regime.

This Award successfully made substantial changes in the design of resource distribution mechanism.