THE much maligned, currently operational, NFC award on the distribution of the national pool of resources has run its course, and deliberations between the federal and the provincial governments have started working on the contours and formulae for the sharing arrangements for the next NFC award.

The Constitution of Pakistan gives the federal government the power to levy the most productive taxes under present conditions — taxes on non-agricultural incomes, taxes on import, production or excise duties and sales taxes. For reasons of efficiency as well as economy, taxation powers relating to import duties, income tax, excise duties and sales tax on the principles of GST (or VAT) have to be centralized. Decentralized administration of customs-related duties, sales tax and excise duties, while feasible, would impede the free flow of goods and services. Once collected, these taxes are then shared between the federal government and the provinces according to the formula adopted by the NFC.

The main advantage of tax devolution on the basis of a formula is that it provides for a predictable source of revenue and the provinces can benefit automatically from an increase in the size of the divisible pool. Another advantage of the fixed principle of distribution is that of certainty, whereby situations of conflict and continuous bargaining can be avoided.

The 1996 NFC Award with all its other weaknesses in terms of the inequity of the shares between the federation and the provinces represented a major departure from the past in that all taxes (except revenues from the surcharge on oil) now form part of the divisible pool. The implication is obvious any formula that keeps some taxes outside the pool provides an incentive to the federal government to place heavier dependence on taxes that do not form part of the pool. The experience of recent years demonstrates just that: the centre increased its reliance on oil surcharges to generate revenues.

Historically, the federal government has had more resources at its disposal. There has, therefore, been a mismatch between the assigned responsibilities of the provinces and the wherewithal available to them to discharge these obligations. There has been a lack of symmetry in the fiscal powers and expenditure responsibilities. Fiscal transfers from the federal government are supposed to correct this imbalance.

From the national divisible revenues the federal government first takes 5% as its charge for collecting these revenues. Under the 1996 arrangement for the balance, 62.5% goes to Islamabad, while the provinces wi