In the wake of expiration of 7th National Finance Commission (NFC) Award, the federal and provincial governments failed to evolve a consensus due to belated start of negotiations for the new NFC Award. Why was the new NFC set up so late? The answer is: our rulers are callous and incompetent. For them, violation of constitutional provisions is not a significant matter. Day and night they give lectures on constitutionalism and rule of law and then keep on betraying their own words while the nation and courts are becoming immune to all this. This apathetic attitude of the civil society is merely encouraging rulers to flout the supreme law of the land with impunity.
According to a Press report, the federal government "withheld Rs 56.6 billion of the provincial governments during six months of the current fiscal year." It only released Rs 868.12 billion to the provinces instead of projected amount of Rs 924.7 billion. According to official sources, during the first six months of the current year tax collection shortfall of Federal Board of Revenue (FBR) went down to Rs 5 billion from Rs 40 billion of the July-September period. Though FBR collected Rs 1385 billion during first half of the current financial year as against the target of Rs 1390 billion, yet provinces did not receive full funds as promised.
The report further says that an official of the Sindh government said that they would "lodge protest against the federal government for not giving our due right, which is creating financial constraints for the province." The Sindh Chief Minister intends to raise the issue in the forthcoming meeting of Council of Common Interests (CCI), scheduled to be held on February 29, 2016.
The documents placed on the website of the Federal Ministry of Finance show that Punjab received Rs 415.6 billion during July-December, which is 46.5 percent of its budgeted share of Rs 894.7 billion. Sindh received Rs 227.06 billion or 47 percent of its share of Rs 482.8 billion. Khyber Pakhtunkhwa received Rs 140.02 billion or 46.6 percent of its share of Rs 300.4 billion and Balochistan got Rs 85.4 billion or 49.8 percent of its expected share of Rs 171.49 billion. Under the expired but extended NFC Award, the shares of provincial governments are: Punjab 51.74 percent, Sindh 24.55 percent, Khyber Pakhtunkhwa 14.62 percent and Balochistan 9.09 percent [see Table for details].
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Table: Position under 7th NFC Award
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Salient features Shares
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* Final share of provinces: Punjab Vertical distribution
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7th NFC 6th NFC Change
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51.74 percent, Sindh 24.55
percent, Khyber Pakhtunkhwa Centre 44% 52.5% -8.5
(KPK) 14.62 percent and Provinces 56% 47.5% +8.5
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Balochistan 9.09 percent. Horizontal distribution
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7th NFC 6th NFC Change
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* Federal collection charges to be
reduced from 5% to 1% Punjab 51.74% 53.01% -1.27%
* Sindh to receive additional Sindh 24.55% 24.94% -0.39%
transfer of Rs 6 billion from KPK 14.62% 14.88% -0.26%
federal government Balochistan 9.09% 7.17% +1.92%
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* Provinces in agreement on Projected amount (in billions)
multiple indicators and
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2009 2010 2014
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respective weights Punjab 419 471 938
* Sales tax acknowledged as Sindh 197 223 445
provincial subject KPK 118 133 265
* KPK to be given additional 1% Balochistan 53 83 165
from federal divisible pool
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There are allegations that the federal government has not been serious to finalise the new NFC Award in time. There are also apprehensions that even now the federal government is using negative tactics in the name of "seeking a better balance in the demarcation of revenue and expenditure responsibilities and encourage improvement in provincial revenue collection" to defer the matter that amounts to a flagrant violation of constitution.
While the Finance Minister, Muhammad Ishaq Dar, is toeing the commands of the International Monetary Fund (IMF) like "reduce fragmentation in tax administration and improve cooperation with provincial tax authorities," the Punjab government is persuading him "to cut down the cash surplus target for Punjab for the current fiscal year to allow the province spike public investment on large energy and infrastructure projects."
The finance minister of Punjab confirmed to a newspaper that the "province planned to soon initiate a dialogue with the centre for downward revision of the cash surplus target." The federal government requires Punjab to yield a surplus of Rs 160 billion, just a little over half percentage point of GDP at the end of the year. Punjab's cash surplus target is 53% of the total balance of Rs 297 billion, almost 1% the size of the economy, that Islamabad wants the provinces to generate "to cut down the country's consolidated budget deficit to 4.35% this year under the three-year $6.7 billion loan arrangement with the IMF." The finance minister of Punjab is reported to have said, "We will try to generate as much balance at the end of the year as possible without compromising on our growth targets. We don't want to jeopardise the centre's arrangement with the IMF, but, at the same time, we have our own growth framework and priorities."
The figures released by Federal Finance Ministry on fiscal operations during the first half of the current fiscal year show that the provinces generated cash surplus of Rs 155 billion to help keep the consolidated fiscal deficit at 1.7% of GDP, well below the target of 2.1% agreed with the IMF. Sindh led the other provinces with a surplus of Rs 77.39 billion or 36% of its total expenditure during the first six months. Balochistan's balance stood at Rs 18.4 billion or 24% of its total expenditure while Khyber Pakhtunkhwa contributed a surplus of Rs 16.4 billion or 11% of its total spending. Punjab has shown the lowest surplus as percentage of total expenditure, Rs 43 billion or 9.5% of its current and development spending.
One wonders why targets of showing surpluses are assigned to the four provinces after the 18th Constitutional Amendment. It shows that provinces are still victims of Islamabad's highhandedness. What is the rationale of federal demand for provincial surpluses to bridge its fiscal deficit as part of the deal with the IMF? Nobody has debated this issue in the Parliament. In fiscal year 2013-14, the provinces managed to achieve a large surplus of Rs 283 billion against the budgeted target of Rs 23 billion. The next year the federating units generated a balance of Rs 3.50 billion against a target of Rs 289.29 billion. The federal government is unlawfully and unjustifiably squeezing the resources available to the provinces at the expense of their development and public service delivery.
The extension of the 7th NFC Award, concluded on December 30, 2009 in Gwadar, was not according to the constitution as there is a time limitation of five years under Article 160(1) which 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 "landmark consensus", was announced after a gap of 19 years. The 7th NFC Award was reached 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 area 2.7 percent. The PPP coalition government till today takes a great pride in achieving consensus over 7th NFC Award and the 18th Constitutional Amendment.
Unfortunately, there are again indications of tussles between the centre and over the distribution of resources. The federal government has reportedly assured the IMF 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 for lack of infrastructure and challenges of terrorism that is a national issue. Recently, the finance minister of Khyber Pakhtunkhwa warned that "any attempt by the federal government to minimise provincial resources or asking it to finance federal expenditures would be resisted."
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, a tendency that continues under civilian and military regimes, alike.
During the last 8 years, rising debt servicing, defence and security related expenditures have continuously reduced fiscal space for the federation. A cash-strapped government of the Pakistan Muslim League (Nawaz) is pursuing mega projects that cannot be implemented without foreign investment and external debt. It has also launched many ambitious schemes like youth loans. It has shown increasing appetite for foreign credit and local borrowings. There is no will to reduce wasteful expenses and revise fancy projects or bring down defence expenses by cultivating friendly relations with neighbours through effective diplomacy. 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. Expectations that the provincial governments would use the resources efficiently to improve the living standards of their people were never fulfilled. The provincial governments continue to depend heavily on receivables from the divisible pool. Political exigencies stop them from raising provincial taxes. In this scenario, both the federal and provincial governments have failed to prosper.
Though there is always a gap between estimated and actual disbursement of funds earmarked for development spending, the targeted budget surpluses of the provinces impact adversely on public spending for socio-economic uplift of the teeming millions. On the other hand the provincial governments have failed to effectively collect agricultural income tax for which there is a substantial potential.
Another disturbing area has been non-existence of local governments and lack of fiscal decentralisation. Major fiscal powers are concentrated in the hands of 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 the independence. The provinces also have shown apathy to devolve administrative and fiscal powers to local governments.
The fundamental issue of judicious and even-handed distribution of taxation rights amongst Centre and provinces was not touched by any party in the NFC's parleys held in Islamabad on August 27-28, 2009 or during the 18th Constitutional Amendment. The representatives of provinces and Federal Finance Minister showed "satisfaction" over deliberations. There was a mood of jubilation in official quarters over "consensus award." This exposed the hollowness of our ruling classes which could not comprehend the real issue involved that was how to empower the provinces so that they could enjoy full autonomy in fiscal matters.
The core issue in the next NFC Award should be defining and incorporating measures that would make devolution under Article 140A of the Constitution more meaningful in raising the living standards of the common citizens, something which can be achieved only by empowering people at the grass-root level to enable them to fend for themselves. This requires representative local governments and empowered communities.
There is something fundamentally wrong with Pakistan's constitutional structure of distribution of taxing powers between the federation and the federating units. In Pakistan, the Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948-none of the provinces has ever raised a voice to take it back.
The federal government has been shamelessly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to reduce the burgeoning fiscal deficit. Had the provinces been allowed to generate their own resources, the present chaotic situation could have been averted. FBR has the audacity to claim that provinces lack infrastructure to efficiently collect taxes. Who has given authority to FBR to issue such statements? Are people sitting in FBR above the Constitution enjoying the right to belie a sovereign parliament?
On the one hand, the provinces have not been allowed to levy taxes on goods generated within their boundaries and on the other, the federal government has utterly failed to tap the real revenue potential, which is not less than Rs 8 trillion. The failure of FBR on this account adversely and directly affects the provinces as they are wholly dependent on what the Centre collects and transfers to them from the divisible pool. Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights while itself collecting too little, and in turn the provinces are unable to generate sufficient resources for the welfare of their poor people, who are the real sufferers in the prevalent Centre-Provincial conflict.
FBR's track record shows remote possibility of collecting even Rs 6 trillion in the next three years to give fiscal space both to the Centre and the provinces to come out of the present economic mess, thus extending some relief to the poor, trade and industry. Under the given scenario, federation-provinces taxing tangle will continue. Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, there is an urgent need to reconsider an equitable distribution of taxing powers between federation and the provinces. Provincial autonomy without taxation rights and equitable distribution of income and wealth amongst all the federating units is meaningless. We cannot come out of perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenues and exclusive right to utilise them for the welfare of their inhabitants.
Article 160 of the Constitution, dealing with the NFC Award, does not prescribe any particular formula for distributing the net tax proceeds among provinces. It, in fact, requires an equitable sharing and distribution of resources among federation and provinces. The issue is thus not that of vertical or horizontal distributions of taxes and resources, for which two committees have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying taxes on goods and services emanating in their respective areas. The Centre, at present, is transgressing on this constitutional right of provinces and then out of so-called divisible pool-comprising unlawfully collected taxes belonging to provinces-gives them peanuts as charity. This is a lamentable act that should be stopped immediately. The ownership of all the resources of a province and their exploitation for the benefit of people of that province is the real issue that our parliament must address on an emergent basis before it is too late.
(The writers, lawyers and partners in law firm HUZAIMA IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)