10th NFC Award and its Anomalies


Syed Tahir Rashdi:
Pakistan is a federation consisting of four provinces, federally administered tribal areas, northern areas and Islamabad Capital Territory. Pakistan is a federation but its government is highly centralized, so majority of the revenues are collected at the center and then re-distributed vertically between federal and provincial governments, and horizontally among provinces through National finance Commission (NFC) awards. Then the provinces further re-distribute the resources to local governments through a revenue-sharing formula framed by Provincial Finance Commission (PFC). National Finance Commission is constituted under Article 160(1) of the 1973 constitution for the smooth and thoughtful revenue transfers between Federal and Provincial governments. Constitutionally, it is to be held every 5 years by the President of Pakistan to review the resource sharing mechanism for the equitable fiscal transfers between Central and Provincial governments. Certain taxes collected from provinces are added in the distribution pool and then re-distributed to provinces according to the revenue sharing formula. NFC decides what percentage of the total revenues will be retained by the Federal government and what share will go to the provinces. What taxes to include in the distribution pool has always been a question of debate. The chairman of the commission is the Federal Finance Minister, and its members include all provincial finance ministers and experts to be nominated by the president of Pakistan in consultation with the provincial governors. The main charter of NFC is concerned with the following matters. President Arif Alvi has constituted the 10th National Finance Commission (NFC) to determine the new resource sharing formula between the provinces and the centre. Instead of whining about the eighteenth amendment the federal government should set its own house in order. Even before the pandemic, the economy was in dire straits. Now it will take a herculean effort even to set the ball rolling.Amidst the scourge of exponentially spreading coronavirus, the president has found the time to announce the constitution of the tenth National Finance Commission (NFC.) This was perhaps a constitutional obligation. It is unfortunate that stakeholders have failed to arrive at a new arrangement since the 7th NFC award all the way back in 2010. The new clauses introduced by the president are likely to set the agenda for deliberations. Without changing vertical distribution ratio among the federal government and provinces, the Centre plans deduction of up to 15 percent from the provinces’ shares into the Federal Divisible Pool (FDP) in the name of four major expenditure heads. It will result into distribution of resources among Centre and the provinces in a massive way. The existing share of provinces 42.5 percent and Centre’s share of 57.5 percent will be changed massively. Now the share of Centre will go up to 60 percent while the provinces’ share will shrink to 40 percent, a calculation done by renowned economist Dr Kaiser Bengali and shared with The News disclosed on Thursday. Post 18th Amendment, this is the first time the government plans to share cost with the provinces on four major expenditure heads, including debt servicing, defence/security, losses incurring to state-owned enterprises SOEs) and development of AJK/GB into terms of reference (ToRs) of the newly-constituted the NFC Award. The vertical distribution among the Centre and the provinces stood at 42.5 percent and 57.5 percent respectively under the existing operational 7th NFC Award. Under the 18th Amendment, the share of provinces cannot be reduced, so it will remain intact. However, the federal government desires that the share of provinces should be deducted from the existing 99 percent out of 57.5 percent to around 85 percent. There is 1 percent additional share already given to KP on account of the war of terror losses from the FDP in accordance with the 7th NFC Award, so the provinces get their remaining share out of total 99 percent of 57.5 percent of FDP. Earlier, during the second meeting of 9th NFC held under the chairmanship of former finance minister Ishaq Dar, the Centre had proposed to the provinces for deduction of 7 percent from their share, out of their 57.5 percent share. That would have included 3 percent on account of security and 4 percent for development of AJK/GB and FATA areas. Under that formula, the share of the provinces was proposed to be deducted by 7 percent from 99 percent to 92 percent out of the total share of 57.5 percent. This time around, the Centre wants to slash the share of provinces by up to 15 percent as currently 99 percent of total share of 57.5 percent among the provinces, would come down to 84 percent. Former non-official member of NFC and renowned economist Dr Kaiser Bengali has estimated the losses in the share of provinces and shared with The News by stating that the share of provinces might come down from 57.5 percent to 39.6 percent of total 99 percent with deduction in share up to 15 percent. So Punjab’s share would reduce to 29.43 percent of 57.5 percent to 24.99 percent, Sindh’s share would decrease from 13.98 percent to 11.86 percent, KP’s share would come down from 8.32 percent to 7.06 percent and Balochistan’s share from 5.17 percent to 4.39 percent. Similarly, some major changes have been made in part of ToRs of the 10th NFC as customs duty is proposed to be excluded from the Federal Divisible Pool (FDP), resulting into shrinking the size of the resource envelop. Hence the relatively easy route of constituting the 10tg National Finance Commission (NFC) has been adopted. However, its composition and TORs (terms of reference) are ominous. For example, for the first time, amidst the list of discussions, a new subject has been added under which the Centre wants provinces to be burdened with additional fiscal responsibilities. Under the new NFC a formula is to be evolved to, “explore ways to reduce losses of state-owned enterprises (SOEs) and agreeing on a mechanism for sharing these losses between the federal government and the provincial governments.” This is a classic case of the federal government conveniently passing the buck to the provinces for its own incompetence. If the Centre has consistently failed to raise revenue through taxes why should the provinces pay for this? Similarly, successive federal governments consistently failed to privatize loss making enterprises like PIA, Railways and the Steel Mills (amongst others). This costs the exchequer a whopping Rs5 billion rupees a year. Why should the provinces be made to pay? However Sindh government on Thursday rejected the recently-constituted 10th National Finance Commission (NFC) terming its formation unconstitutional. In a letter addressed to Prime Minister Imran Khan, Sindh Chief Minister Murad Ali Shah expressed his government’s reservations over the formation of the 10th NFC, aimed at announcing a new award for sharing of federal divisible resources between the Centre and provinces. The Sindh chief minister stated that the appointment of certain members of the commission was in contravention of the constitution, adding that the prime minister’s adviser on finance and revenue could not head the commission. “Only the finance minister is authorised to lead the commission,” he stated.Shah added that though it is the prerogative of the president to constitute the NFC, he has to appoint the provincial representatives after consulting the respective governors and chief ministers. He also said that since the Centre would bear the expenses of the Kashmir and Gilgit-Baltistan areas, it should increase the financial share of these areas. -The writer is a-Studying BS Pakistan Studies at University of Sindh.