KARACHI, Oct 3: Politicians and bureaucrats in Karachi fear that the National Finance Commission (NFC) deliberations may again witness friction and fireworks and eventually end up with a ‘no-consensus’ as Punjab’s interests are best served by a status quo, and senior officials in Islamabad secretariat are not indicating any change of their mindset as is well reflected in the terms of reference issued from Islamabad.

“The terms of reference are the same on which the previous NFC was formed in 2006 which never held any meeting, and former President Pervez Musharraf gave his interim award that stipulates distribution of resources on the basis of population only,’’ argued a well-placed source, who is also a member of the special committee formed by the Sindh government to draw up a strategy and prepare a position paper for two official nominees on the NFC—Chief Minister Syed Qaim Ali Shah and private non-statutory member Dr Kaiser Bengali.

He wondered as to why bureaucrats in Islamabad did not get input from elected politicians in the federal government before issuing any terms of reference for the recently constituted NFC.

The committee has seven members who include three provincial ministers (Agha Siraj Durrani, Saifullah Dharejo and Syed Murad Ali Shah), a former finance minister, Syed Sardar Ahmad, a former Senator who also represented Sindh on NFC Taj Haider, a retired additional finance secretary Nawaz Leghari and Dr Kaiser Bengali.

The committee has held its first meeting and plans to meet again sometimes next week in Karachi.

Contacts made with a few committee members revealed that the Sindh government is understood to have serious objections on the inclusion of gas development surcharge issue in the terms of reference of the recently constituted National Finance Commission (NFC).

The considered view of the politicians and senior bureaucrats in Karachi is that the NFC should focus only on the vertical and horizontal distribution of federal pool of taxes.

For this, the elected representatives of all four provinces in a meeting on June 6 in Lahore had already announced that henceforth the Federal Board of Revenue (FBR) will not retain tax collection charges at five per cent.

“It is Rs70 billion when the federal government will retrain five per cent of the budgeted taxes of Rs1.25 trillion,’’ the source said.

In actual terms, the total tax collection in 2008-09 is going to be somewhere Rs1.75 trillion because of depreciation of Pakistan rupee exchange value and impact of inflation.

The federal government’s retention at five per cent will be in the close neighborhood of about Rs100 billion which belongs to provinces.

Provinces now want 50 to 55 per cent of the total tax pool which should not include straight transfers from gas development surcharge, excise and royalty on gas and oil.

“It is true that the 1991 NFC award recognised rights of the provinces on their respective natural resources, like gas and oil,’’ a well-placed source said. Nonetheless, the oil and gas-related revenue is not a part of the pool of federal taxes on which the NFC will focus for vertical and horizontal distribution. His argument is that resources generated from hydel electric power are not part of the pool and Punjab and NWFP will get their share.

Secondly, the Sindh government plans to take up seriously the issue of distribution of 2.5 per cent sales tax collection in place of octroi and zila tax strictly in accordance with the decision of Inter-Provincial Coordination Committee (IPCC) in the year 2000 which stipulates shares of every province on the basis of actual collection.

Following the abolition of octroi and zila tax in 1999, the federal government increased sales tax rate from 12.5 per cent to 15 per cent with a provision that proceeds of additional 2.5 per cent sales tax be given to the provinces to compensate for the loss suffered.

But the federal government and former President Pervez Musharraf is his interim award in 2006 decided to distribute 50 per cent of the 2.5 per cent on the basis of population and the remaining 50 per cent on actual collection.

A study by the Sindh government shows loss of Rs45 billion in the last five years because of deviation from the principle spelt out by the IPCC in 2000 for distribution of 2.5 per cent sales tax proceeds.

While the Sindh government is preparing its position paper, the nominee of the Balochistan government, Mr Gulfaraz, who is a former federal secretary has drawn up an arrangement which stipulates distribution of resources on the basis of inverse population density, backwardness, revenue generation efforts and population.

He is involved in informal consultation with the representatives of all provinces so that a “quick consensus’’ is obtained in the NFC.

The PPP is virtually there in all the four provinces and in the federation which should be a positive factor for reaching a consensus.

“In Punjab, the presence of the PPP in the cabinet is being taken as a bitter pill by the ruling PML-N and may cause friction,’’ a source in Karachi fears.

“The constitutional procedure for NFC is pregnant with built-in conflicts and frictions,’’ Syed Sardar Ahmad, a former finance minister of Sindh who argued Sindh’s case in last five years had said in the year 2006. He advocates Indian model for distribution of resources.

In India, the NFC is formed for five years and comprises independent members who visit all provinces and inter-act with all stake-holders before giving their award.

In India, the population carries only 30 per cent weight in resource-distribution and backwardness has more weight.