THE Sindh Assembly wants that the sixth National Finance Commission be reconstituted and has proposed a radical change in the existing NFC formula.

Through a resolution, the assembly has called for reduction of the federal share in the divisible pool from 62.5 per cent to 55 per cent. More significantly, it seeks to fix the contribution, by each province, to the pool on the basis of its population, and not, as present, on the basis of the tax revenue collected within jurisdiction.

The share proposed for the federation is close to the figure indicated in the NFC package prepared by the outgoing government that would be placed before the re-constituted NFC expected to be set up soon after the Senate elections.

On the eve of the October general elections, then finance minister and current finance adviser Shaukat Aziz had told reporters he would hand over a suggested package to the new government. Almost all the major issues had been decided, he said and added that two pending issues of the NFC formula distribution of 2.5 per cent GST among the provinces and the row between the NWFP and Wapda on hydel power royalty would be resolved.

The proposed package, which the reconstituted NFC has the right to accept or reject, had stipulated that the share of the provinces would go up in the range of 42-44 per cent if the Rs32 billion on account of 2.5 per cent GST earmarked for the districts and the proposed Rs20 billion subvention for three smaller provinces, were included.

The critical issue that the Sindh Assembly resolution has raised is that the contribution to the divisible pool made by the federating units should be on the basis of population. The resolution argues that “if the federation distributes the share of the provinces on the basis of the provinces’ population, it should collect taxes on the same basis from the provinces”.

The resolution envisages that after payment of its share to the federation on a population basis, each province will be entitled to retain the amount of divisible pool taxes collected in its jurisdiction and credited to its account.

At present, the tax revenues, collected countrywide, are put into the federal divisible pool and are treated, for all practical purposes, as national financial assets and are shared among the provinces and the federation. The assembly has claimed that Sindh contributed Rs189.461 billion to the divisible pool in tax revenues and got a mere Rs27.3 billion in 1999-2000. Two provincial ministers have also asserted that Sindh contributes 70 per cent to the pool and gets a mere 23.71 per cent. One differing estimate is that Sindh’s contribution is around 50 per cent.

Sindh will have to make gigantic efforts to convince the federation and other provinces of how its claims are justified in a complex and complicated business world. Secondly, any such adjustments can take place, fully or partially, only as part of a gradual process. The demand may be a good bargaining counter but, in the immediate context, nothing beyond it.

The relevant figures apart, the underlying principle is far more significant. The Sindh Assembly wants control of its tax resources that runs counter to what has been happening so far. The federal government first took over sales tax from the provinces. Then octroi tax, the primary source of revenue for district governments, was abolished and sales tax was increased from 12.5 per cent to 15 per cent to cater to the needs of local governments.

Under the present system, funds flow first to the centre, from where they are distributed to the periphery — the provinces and to the district governments. The way the coalition governments were cobbled together specially in Sindh shows how much the central government believes in federalism.

Even, in the recent past, the composition of taxes in the divisible pool and the revenue sharing formula has been changed to suit the federal government. The customs duty, whose proceeds went to the federation, declined sharply over the years and was included in the pool to share the fastest growing yields from sales tax, which, along with income tax and excise, was primarily shared (80 per cent) by the provinces. The distribution formula between the federation and the provinces was then changed to 62.5 per cent and 37.5 per cent, respectively.

Assuming that the contribution to the federation by the provinces will be determined on the basis of population, the province-wise share would be: Punjab 57.36 per cent, Sindh 13.71 per cent, NWFP 18.32 per cent and Balochistan 5.11 per cent.

Some press reports say that the current province-wise contribution to the pool is as follows: Sindh 50 per cent, Punjab 41 per cent, NWFP six per cent and Balochistan three per cent. As it would appear, Sindh is the worst to suffer under the existing NFC Award and needs to be compensated. The real solution, as is the practice in other federal states around the globe, is to transfer sales tax to the federating units. But Pakistan is a federal state in name only.

There are two main drawbacks in federalization of tax collection and distribution. The rates of taxation are adjusted or fixed by the federation without any consultation or consideration of its impact on the provinces. Secondly, for prudent spending by the provinces, it is necessary that they collect their own taxes and are made responsible to the taxpayer.

Currently, the revenue collecting machinery in the provinces is in disarray or not in place, as is evident from the poor tax yield from farm incomes.

The tax GDP-ratio is low because big farmers do not pay taxes, denying the provinces much needed funds for nation-building. The contribution of agriculture in the GDP is 25 per cent, much larger than around 18 per cent for manufacturing.

The Sindh Assembly is however silent on the issue of centralized collection of taxes because the federation has relatively a more efficient tax collection machinery.

Elsewhere, in the world, the sole criteria of sharing tax revenues is not population alone. There is a more diverse and equitable formula based on collection, contribution, needs and the level of under-development and poverty.

The issue of fiscal federalism has embittered relations between the provinces and the federation, and it is the time that sharing of tax resources is designed in order to foster inter-provincial harmony.

The Farmers Association of Pakistan (FAP) has demanded a raise in the official price of wheat in view of the high costs of inputs. It has suggested that the price should be increased from the present Rs300 per bag of 40 kg to Rs350 for the same quantity.

Another organization that backs a raise in wheat price is Kissan Board, which is quite active among farmers.

The demand is not merely justified it is substantially on the lower side considering the rise in the cost of inputs since the last time wheat price was fixed. That was towards end 1999, soon after the takeover of the government by General Pervez Musharraf. Realizing that wheat price of Rs265 per 40 kg was not a fair deal for the farmers the government raised it by 35 rupee per bag of that quantity.

The result was bumper crops because the farmers were motivated by the incentive given by the government. Although the procurement system left a lot to be desired, the farmers managed to get rid of some of their debts and continued their efforts the next year also because they found the dispensation relatively equitable.

Conditions have however changed in the ensuing time. The price of Rs300 for a bag of 40 kg has pushed the farmers to the wall because the cost of inputs has simply multiplied since 1999.

High-speed diesel was available at Rs12 per litre in 1999 while its price has almost doubled since then as it currently sells at Rs22 per litre. Meanwhile, mechanized farming has increased which implies more use of diesel for running tractors, harvesters and thrashers.

Water shortage has forced many farmers to meet irrigation needs of crops by pumping out underground water. As the quality of this water has been deteriorating due to excessive use and depletion of resources, farmers are mixing it with fresh water. But conjunctive use means more intensive dependence on tube wells and as a result, higher use of electricity.

Electricity was previously available at a flat rate to farmers but its cost has sky rocketed since then. According to farmers, the rise has been astronomical, as their electricity bills have gone up by nearly ten times.

Urea is a vital input for strengthening the crop and its price per bag has risen from Rs.260 to Rs420 since 1999. Farmers use three to four bags of urea for wheat and thus spend an additional amount of about Rs650 on urea. The cost of potash has similarly gone up from Rs450 per bag of 50 kg to Rs650.

All this adds up to the bill of investment of growers. In addition, they are as badly affected by inflation as other citizens for meeting personal and family expenses. The official price of wheat that had looked fair at Rs300 in 1999 has clearly become an exploitative deal for farmers in 2003.

The wheat crop is currently at an early stage in the fields. This is late in the season raising its price. This should have been done at the time of sowing. That would have been an incentive for the farmers. Still, a raise in price at this stage plus efforts to ensure that procurement is above board and protects the grower’s interests would provide a boost to the standing wheat crop.

Wheat growers are likely to be visited by an additional pressure this season due to discontinuation of gas supply to fertilizer plants. That may cause a shortage of urea in the market and increase its price, further raising the input bill for farmers. This is another factor justifying a raise in the official price of wheat.