January 30, 2006	Monday	Zilhaj 29, 1426

The 6th National Finance Commission completed its five-year term on July 21 this last without giving award as to sharing federal divisible pool income among provinces. Earlier, the Chief Ministers had announced that they would accept the award given by the President, notwithstanding inter-provincial differences.

Meantime, provincial and local governments lost additional amounts which would have accrued to them if the award of the Sixth NFC was revised upwards. Delay in announcing the seventh NFC award would result in further losses to the federating units.

Consequently, finances of local governments, hence their empowerment would be affected. Provision of civic amenities, poverty alleviation programmes and growth would slow down. It may be noted that the Khushal Pakistan programme funds are not part of local fund. The NFC in the 50’s did consider local finance as a component of public finance. A local government finance committee was set up with Governor State Bank Mr Abdul Qadir as its chairman.

The committee produced a comprehensive report unparalleled yet. It considered taxes of local bodies ( as these were called ) as residual in nature, although this observation was made when taxation powers of these bodies were broader than under the devolution plan at present.

Agricultural produce market committees along with funds were proposed to be merged with district boards. Various recommendations of the committee were supported by experts committee on Problems of Local Taxation (1964), Local Government Reorganization Committee set up in Punjab in 1972. Fakhar Imam’s Local Government Commission (1983) was also supportive of the recommendations of the Abdul Qadir Committee. The state of local finance was considered by NFC in eighties, but no recommendations were made. Since then finances of local governments have not figured on the agendas of NFCs.

National Reconstruction Bureau has failed to develop viable financial system for local governments, with the result that ad-hoc measures are being taken in the matter and dependence on federal and foreign assistance and loans has increased as never before.

Statutory provincial local government commissions are handicapped because these get indicative allocations, which as always, are the residues spared by provinces. Vulnerability of local finance is apparent, which could accentuate with shifting priorities at other levels. Finances of local governments are national reserves usable in emergencies like war or calamities, although as a last resort.

However, such reserves are no longer available. Assured flow of funds would have enabled participation of local governments in the current earthquake related relief operations without loss of time. Consideration of local finance as a constitutional function of NFC would improve the situation. Currently, the Constitution does not take note of local finance as integral component of public finance. If properly developed, local finance could help reduce budget deficits and boost up the economy in several ways. The terms of reference of NFC exclude reference to local finance. Finance managers have yet to realize the importance of local government finance in development and administration.

The situation calls for constitutional amendment to provide security to local councils against uncalled for dissolutions, adequate finances and financial powers, and other substantive matters. We could make advance over 73rd amendment in the Indian Constitution by making such provisions mandatory.

The 7thth NFC needs to deliberate upon the financial condition and performance of local governments, in particular the union councils, which are the most representative bodies, yet have greatly suffered because of unfair financial dispensation in the Devolution Plan. These councils are being supplanted by un-elected citizens’ community boards.

However, primary data on various parameters are no longer available as the Ministry of Local Government has stopped computerizing local government budgets , once described as gold mine of fiscal data by World Bank experts. The constitutional amendments as proposed would ensure that problems of local finance receive continuing thought. As important as local revenues is the need for rationalizing patterns of expenditure. Recognition of excessive sales tax collected by the federation could influence provincial shares. At present, 2.5 per cent of GST collections are given to local governments, through provincial governments, in lieu of octroi tax since abolished.

A study made in collaboration with Central Board of Revenue in Gujar Khan municipality had shown that even after exempting milk and vegetables, a levy of local sales tax at one per cent could generate income sufficient to compensate for loss of octroi income.

Thus, if local governments are allowed to levy local sales tax, at one per cent, the GST could be reduced by 1.5 per cent. This would give much needed relief to businesses and would set in motion multiplier effect on the economy. This would also restore financial autonomy of local governments to some extent.

Transfer of funds of agricultural produce market committees to district councils is long over-due. Maintenance of local government boards is eating into the funds of local governments like termites. There was little justification for retention of local council service under the devolution plan. In the foregoing, certain issues have been raised which, directly or indirectly, would influence the NFC award. If local finance as a subject is not deliberated upon by the 7th NFC, its award would remain lopsided. It would also fall short of the requirements for developing symbiotic fiscal dynamics at local – provincial – federal levels.