Addressing the Senate Standing Committee on Planning and Development earlier this week, senators from Balochistan and Khyber Pakhtunkhwa demanded that instead of population the distribution of taxes under the National Finance Commission (NFC) award should be based on poverty, backwardness and other socio-economic indicators to develop the left-behind regions. Is that view tenable?
The need to lift those who are left behind in the race called progress and development cannot be denied. But doing away with population as the main basis of distribution can be an exercise in imprudence, because majority of the people of Pakistan live in areas that are better developed.
The various criteria for inter-governmental transfers globally can be categorised in four main types: (a) Expenditure need (such as indicators like population, inverse-population density, demographic change); (b) Equity (such as backwardness, income distance, inverse per capita income, poverty, infrastructure distance); (c) Efficiency/Performance (such as fiscal contribution, tax effort, fiscal self-reliance); and (d) fiscal disability (such as forest cover).
Unless there is a reassignment of taxes between the centre and provinces, under which adequate number of buoyant taxes are assigned to provinces, the distribution of taxes under the NFC will eventually have to be heavily based on population; population being the proxy for need.
Recall that in Tarin’s NFC award, the centre had to give up more share in vertical distribution to make up for the loss that Punjab accrued by reducing the weight of population in the horizontal distribution formula. While no official statistics have been made public, persons close to the NFC negotiations reveal that if the weight of population was to be brought down to 78 percent or lower, then even Sindh would have had to be compensated for the loss, because Sindh too has too many mouths to feed. And further reduction in centre’s share under vertical distribution would have left Islamabad fiscally much weaker than it already is.
Ergo, drastic reduction in the weight of population as the basis of revenue transfers is both fiscally and politically difficult for Sindh, Punjab and Islamabad. The respected Senators instead should demand the increase in tax collected by the centre, where it is worth reminding that both provinces and the centre had agreed under Tarin’s NFC award that the tax to GDP would be raised to 15 percent over the period of the award. There was also a verbal agreement to raise that ratio to 19 percent by 2019.
This was to be a combined effort of the provinces and Islamabad; the latter for obvious reasons, and the former because taxation of two of the most tax-evasion-friendly areas - agriculture and real estate – lie in the provincial domain. However, both the provinces and the centre are guilty for not respecting that agreement.
The non-revenue transfers such as a major part of the spending under federal PSDP can and should be mainly based on poverty or developmental needs as a part of an equalization exercise by Islamabad. But the revenue-transfers cannot due to reasons discussed above unless there is a reassignment of taxes subject to further debate and analysis. Instead, the honourable senators should vehemently demand the centre to increase the size of the divisible pool of taxes, and the provinces to do their part in so far as farming and real estate taxation is concerned. Unless the size of the pie is increased, no amount of slick distribution formula will work for either of the parties.
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