On April 27, 2020, the 9th National Finance Commission (NFC), like 8th NFC, remained fruitless as the federation and its units failed to reach a consensus for distribution of fiscal resources. The official document [Budget in Brief] of budget 2016-17 says: "The 8th NFC was constituted on July 21, 2010, but it did not give any Award". Subsequently, the 9th NFC was constituted on April 24, 2015 followed by its demise on April 24, 2020. Now, the 10th NFC Award is reconstituted but till today no meeting has been held. This is a sad reflection on fulfilling a constitutional obligation on the part of the federal and provincial governments. In 2020, our economic managers are relying on 7th NFC Award signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010 [commonly called 18th Amendment].
The 9th NFC was the fifth since 1973 that unsuccessfully ended without consensus. So far only four NFCs have given awards. The 10th NFC was constituted on May 12, 2020 but later on reconstituted on July 21, 2020 by President of Pakistan as the earlier was set aside by Balochistan High Court on June 25, 2020. A number of writ petitions were filed in Sindh, Islamabad and Balochistan High Courts challenging its constitution and deviations from mandate under Article 160 of the Constitution of Islamic Republic of Pakistan ["the Constitution"]. In the new notification, Adviser to the Prime Minister on Finance and Secretary Finance have been removed. The terms of reference related to sharing expenditures on Azad Jammu and Kashmir, Gilgit-Baltistan, security, natural disaster, public debt servicing, subsidies and losses of state-owned enterprises have also been deleted. Now, the Prime Minister will chair the meetings of 10th NFC in the capacity of federal finance minister.
In fiscal year 2019-20, debt servicing by federal government was Rs. 2620 billion (domestic Rs. 2313 billion and foreign Rs. 307 billion) against net revenues of Rs. 3278 billion after transfer to the provinces. Debt servicing was 79% of total net revenues of the federal government and 65 % of tax collection of Federal Board of Revenue (FBR). This is the real dilemma and challenge on the fiscal front faced by Federal Government as Article 160(3A) of the Constitution, inserted by 18th Amendment, categorically says: "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".
In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the federation and its units.
Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues [Rs. 4748 billion] for the fiscal year 2019-20 [11.4% of GDP] was merely 8 percent and in overall national revenue base (tax and non-tax revenue) of Rs. 6272 billion [15% GDP] it was 9 percent against the total national expenditure of Rs. 9648 billion. All provinces together generated taxes of Rs. 414 billion and non-tax revenues of only Rs. 102 billion.
Extension of the 7th NFC Award, concluded on December 30, 2009 well into 2020 is not according to the Constitution as there exists time limitation of five years under Article 160(1) that says: "within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces."
The 7th NFC Award, termed as "landmark consensus", was announced after a gap of 19 years. The 7th NFC Award was acceded to by accommodating major adjustments in vertical as well as horizontal distributions between the centre and the provinces and between provinces themselves. The shares were worked out on the basis of a formula that covered population, incidence of poverty, collection of revenues, and generation of revenues. Population was given a weight of 82 percent, poverty 10.3 percent, revenue collection 2.5 percent, revenue generation 2.5 percent and inverse population density 2.7 percent.
The Pakistan People Party (PPP) till today takes a great pride in achieving consensus over 7th NFC Award and 18th Constitutional Amendment. Unfortunately, there are clear tensions and tussles between the federation and federating units over distribution of resources under the new NFC Award. Allegedly, the coalition government of Pakistan Tehreek-i-Insaf (PTI) before getting bailout from International Monetary Fund (IMF) assured that it would strike a deal with the provinces "to balance revenue and expenditure responsibilities." The provinces on the other hand are putting up fresh demands for increasing the divisible pool and compensation for hike in the weightage in the wake of Covid-19 endemic, for lack of infrastructure and challenges of uprooting of people and destruction of property and businesses in the aftermath of torrential rains, which they say is not provincial but national issue.
After the 7th Award, both the federal government and provinces failed to observe strict financial discipline. Monstrous size of governmental departments are causing colossal wastage of resources. The governments are spending recklessly and borrowing ruthlessly, tendencies that continue under civilian and military regimes alike since the last many decades.
The 7th NFC Award authorised the provinces to raise taxes from agriculture, property and services. It granted 57.5 percent of revenues to the provinces with the expectation that the provincial governments would use the resources efficiently to improve the living standards of their people-a promise that remains unfulfilled even after passage of a decade. Another disturbing area has been non-existence of functional local governments and lack of fiscal decentralisation that is non-compliance of Article 140A of the Constitution. Major fiscal powers are concentrated in the hands of the federal government. Even the Constitution denies provinces the right to levy sales tax on goods within their respective territories-a right available to the provinces before independence. The provinces have also shown apathy to devolve administrative and fiscal powers to local governments.
The fundamental issue of judicious and evenhanded distribution of taxation rights amongst federation and its units has never been touched by any party in the NFC's parleys held in Islamabad on August 27-28, 2009 or during the parleys on 18th Constitutional Amendment. The politicians of all the parties have failed to comprehend the real issue involved and how to empower provinces so that they could enjoy full autonomy in fiscal matters. Resultantly, the provincial governments continue to depend heavily on receivables from the NFC Award-commonly called Divisible Pool. In this scenario, both the federal and provincial governments have failed to reduce budget deficits, let alone achieve prosperity.
(To be continued on Sunday)
(The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are adjunct faculty of Lahore University of Management Sciences (LUMS))
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Table: Position under 7th NFC Award
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Salient features
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* Final share of provinces: Punjab 51.74 percent, Sindh
24.55 percent, Khyber Pakhtunkhwa (KPK) 14.62 percent and
Balochistan 9.09 percent.
* Federal collection charges to be reduced
from 5% to 1%
* Sindh to receive additional transfer of Rs. 6 billion
from federal government
* Provinces in agreement on multiple indicators and
respective weights
* Sales tax on services acknowledged as provincial
subject
* KP to be given additional 1% from federal
divisible pool
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Shares
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Vertical distribution
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7th NFC 6th NFC Change
Centre 44% 52.5% -8.5
Provinces 56% 47.5% +8.5
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Horizontal distribution
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7th NFC 6th NFC Change
Punjab 51.74% 53.01% -1.27%
Sindh 24.55% 24.94% -0.39%
KPK 14.62% 14.88% -0.26%
Balochistan 9.09% 7.17% +1.92%
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Amount (in billions). For FY 2021 as projected
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2019 2020 2021
Punjab 1160 1197 1432
Sindh 631 614 760
KPK 446 595 696
Balochistan 203 326 302
Copyright Business Recorder, 2020
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
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