As an obligation under Article 160 (1) of the 1973 Constitution, the federal government established the sixth National Finance Commission assigning it the task of evolving a formula under which national resources from the federal divisible pool are to be distributed between the center and provinces in addition to the Gilgit-Baltistan de-facto province and seven agencies in the Federally Administered Tribal Areas on an annual basis.
This pool comprises collections from income taxes, general sales tax, wealth tax, capital gains tax and custom duties. Resources collected in each province are pooled and then redistributed according to the NFC working formula. The nature of these taxes is being discussed by the sixth NFC at present with the purpose of evolving a unanimous formula. Indications are that the center will keep 20 percent of the national financial resources and the remaining 80 percent of them will go to the provinces.
The proposed resource-sharing formula reflects the federal government's desire and commitment to strengthen provinces by placing more resources at their disposal and transforming Pakistan into a genuine federation. What is even more important is that a rare unanimity of view has existed ever since the NFC deliberations started. The central and provincial governments have demonstrated an unprecedented spirit of accommodation and flexibility showing their keenness in evolving a unanimous award.
The recent NFC moot in Karachi demonstrated the same spirit, even conceding to the demands of the 'smaller' federal units. The sixth award is to be applicable from the fiscal year 2010-11. For all practical purposes, the NFC Award this time will be a landmark formula for the distribution of national resources in an atmosphere of a complete national consensus. Another significant aspect is that an NFC Award will be given after almost two decades.
Earlier awards were controversial for adopting population as the sole criterion, the demands by the smaller provinces were ignored. This time, it is the other way round, as the sixth NFC has already achieved a unanimity, as all provincial governments have, for the first time, demonstrated a serious resolve to solve problems in an atmosphere of goodwill and accommodation.
Finance Minister Shaukat Tarin also spelled out the atmosphere at NFC meeting saying at a dinner reception in Karachi that "the federation wants to provide finances to the provinces out of its share and impressed with this spirit, the provinces have also shown a sense of accommodation to each other.
We (center) have, for the first time, created an atmosphere of trust between the federation and provinces. We understand that people live in the provinces and with the development of provinces, the center will be strengthened". He said it was after 19 years that we are working on an NFC Award that would bear the fruits of judicious distribution of resources and its impact would be felt at the grassroots level. All the four chief ministers Mian Shahbaz Sharif, Amir Haider Khan Hoti, Aslam Raisani and host Syed Qaim Ali appeared satisfied with the emerging consensus.
CHRONOLOGY OF AWARDS: Prior to independence, the Niemeyer Award, given under the 1935 Act, distributed resources between the federal and provincial governments of British India and it said that the sales tax was a provincial subject. Income tax collections redistribution was prescribed as 50 percent of the total collection. This formula remained effective till March 1952. It was in December 1947 that Sir Jeremy Raisman, who gave the first-ever Pakistani award on April 1, 1952, determining an equal share for the federation and federating units.
Half of the share, mostly out of the sales tax, was given to the federal government to overcome its poor financial situation arising from partition. The Raisman formula allocated 50 percent out of the federal divisible pool, out of the income tax to East Pakistan, while 45 percent revenue was the share of all provinces in West Pakistan. This revenue was further distributed among West Punjab (27 percent), Sindh (12 percent) NWFP (eight percent) and Balochistan (four percent). No allocations were made for Bahawalpur and Khairpur provinces.
THE 1961 AWARD: Under this Award, formulated under the 1956 constitution, East Pakistan received 54 percent of the resources of the divisible pool (70 percent of sales tax plus other taxes) while West Pakistan got 46 percent. Another 30 percent of sales tax was specified to the provinces on the basis of collections, in addition to duties on agriculture land and capital value tax.
THE 1964 AWARD: The 1964 National Finance Commission was set up under Article 144 of the 1962 Constitution. The divisible pool comprised collection from income tax, sales tax, excise duty and export duty and 30 percent of the sales tax was distributed in accordance with its tax collection.
The center was allocated 35 percent and the province 65 percent of the pool. Once again, the share of East Pakistan was 54 percent and that of West Pakistan provinces 45 percent. However, on July 1, 1970 West Pakistan was disbanded to become One-Unit and its share was determined at 56.5 percent for Punjab, 23.5 percent for Sindh, 15.5 percent for NWFP and 4.5 percent for Balochistan.
THE 1970 AWARD: This year, a committee determined a provisional share of the federal divisible pool allocating 20 percent to the center and 80 percent for the provinces. East Pakistan's share remained unchanged at 54 percent and other provinces got the remaining 45 percent with the same proportion as in 1964. However, after the separation of East Pakistan, the provinces that constituted West Pakistan continued to receive their shares as before.
THE 1973 CONSTITUTION AND THE NFC: The first NFC: After the adoption of the 1973 Constitution, a National Finance Commission was established under Article 160. An award was given that decided that Income tax, sales tax, export and import duties would form the federal divisible pool. The first NFC Award under the new constitution was population-based and was given in 1974. It distributed 56.50 percent resources to Punjab, 22.5 percent to Sindh 13.39 percent to NWFP and 3.86 percent to Balochistan.
THE 1979 AWARD: General Ziaul Haq's regime set up a National Finance Commission in 1979, which was subsequently dispensed with, because the provinces did not agree to its formula and share in national resources. The regime ultimately gave an interim award which followed the 1974 award in its entirety. The Zia regime constituted another NFC in 1985 to once again witness its failure as provinces were still in disagreement even after three-year deliberations. As a consequence, the award of 1974 continued to remain effective.
THE NFC AWARD 1990: The Commission, the first by a Nawaz Sharif government, was headed by finance minister Sartaj Aziz. It expanded the federal divisible pool and the share of provinces was raised. Still, population remained the main criterion and, as a result, Punjab's share was increased to 57.88 percent. Sindh's share was 23.28, NWFP got 13.54 percent and Balochistan 5.3 percent.
THE 1996 NFC AWARD: The constitution of NFC was announced in December 1996 and gave its award in February 1997. The provincial share remained more or less the same as in the past. However, this was a financial arrangement rather than an award as the caretaker government of Malik Meraj Khalid had to make special grants to NWFP (Rs 3.3 billion) and Balochistan (Rs 4 billion) in view of their poor financial condition.
NFC AWARD 2000 AND INTERIM AWARD 2006: General Pervez Musharraf's regime constituted the NFC under Shaukat Aziz as finance minister, on July 22, 2000. The commission failed in evolving a resource distribution formula because the provinces had been demanding a higher share (up to 50 percent) and an agreement could not be achieved.
The regime made another attempt by setting up the new NFC on July 21, 2005, but its deliberation also remained inconclusive and General Musharraf himself announced an "interim award" in 2006 through an ordinance by amending Article 160, adding clause (6), changing the Distribution of Revenues and Grants-in-Aid Order, 1997. This award fixed Punjab's share at 57 percent, Sindh 36.23 percent, NWFP 13.82 percent and Balochistan 5.11 percent.
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