The main cause of NFC’s failure is that the parties concerned have no principle to share the pie and they negotiate on the basis of give and take, and everyone wants a higher share
TOO much secrecy and lack of transparency within the mechanism of the National Finance Commission (NFC) leads to controversies that serve no one’s cause, says MAH. While NFC in India seeks comments of intellectuals, political parties, academicians, experts in the fields of accounts, finance, economy and public administration, chambers of commerce, trade bodies, individuals, organizations, heads of all government ministries, states and local bodies, including the Intelligence Bureau and police, “the NFC in Pakistan is a hermetically closed, partisan, ingrown body whose reports are always kept secret and it creates controversies,” he argues.
Though a known and much respected columnist, MAH loves his privacy to the extent that he refuses to divulge even his full name, what to talk of a photograph. But that takes nothing away from the relevance of his views on the subject. He has with him reports of all the eleven Indian and five Pakistani NFC awards, and argues his case well. Given below are the excerpts from the interview:
Q. Do you think that the current composition of NFC should remain intact as some believe it should be an independent body of professionals and experts because all the members currently have vested interests of their official positions?
A. The cornerstone of the federal-provincial relationship is the gap between their respective fiscal needs and resources to discharge their responsibilities. So the NFC should be free from interference. This being the chief arbitrator to resources and related problems, it has to strike a balance to determine the quantum of transfer and principles and then allocate the resources to meet needs of both.
To perform this, the commission should be completely independent of government influence so that it could conduct these duties in an impartial, independent, neutral and objective manner so that it could inspire the confidence of the provinces. But NFC in Pakistan is not an independent and neutral body at all. All the parties to the cause are members. They want to have a share in the pie and at the same time they are the judges and adjudicators. The body is subservient to the government and has no independent secretariat, and thus looses its independence.
Q. In your opinion what should be the parameters of distribution of resources. Should revenue-generation, poverty and inverse population density should have some weight in the distribution of divisible pool among the provinces?
A. The problem started when Pakistan did not have a constitution until 1956. The government had to look around to see what should be kept with the Centre and what be transferred to the provinces. Under the Raisman Financial Inquiries Report, 50 per cent of the taxes on income was to be distributed to the provinces, of which 45 per cent was given to East Pakistan, and 55 per cent to West Pakistan.
The government tried to federalize the sales tax, of which 30 per cent was assigned as collection in that particular province. We have been doing overall distribution on the basis of crude population starting from the first NFC constituted in December 1961 before the Ayub Khan’s constitution was introduced. The report of the first commission was very contentious because the commission mostly comprised civil servants, and that created bad blood in East and West Pakistan. So much was the disagreement that the chairman, who was the finance secretary, had to write his separate report which was agreed to by his subordinates, while members representing West Pakistan submitted their separate report.
He recommended that 50 per cent of the net proceeds of the taxes on income be allocated to the provinces, of which 45 per cent was to go to East Pakistan and 55 per cent to West Pakistan, which was not even on a population basis. Similarly, 75 per cent of the net proceeds of the excise duty on tea, tobacco and beetle nut be given to the provinces, of which 45 per cent to East and 55 per cent to West Pakistan, and that too was not on the basis of population.
As much as 60 per cent of the sales tax was to go the province concerned, and 62.5 per cent of the export duty on jute and jute products to East Pakistan. But the government did not agree to this, and decided that 50 per cent of taxes on income, 60 per cent of sales tax, 60 per cent of excise duty should go to the provinces, while 100 per cent of the export duty on jute was given to East Pakistan.
In case of sales tax, 30 per cent was given according to collection in the particular province, and 70 per cent on the basis of population. Thus East Pakistan got 54 per cent and West Pakistan got 46 per cent. The rest of the taxes were distributed between the provinces on population basis. Almost the same was kept intact under the 1962 constitution.
I don’t agree that population should be the only criteria for the distribution of resources between the federation and the provinces. We must understand that in certain areas, the density is high and in some it is abnormally low, so weight should be given to these factors as well.
Economists of the world are of the opinion that this is the most unsatisfactory manner for distribution of resources among the provinces on the basis of population. The finance commission should take into account various factors and should give weight both for super-normal and subnormal density because both the factors give additional cost to administration.
Australia discarded the criterion of population way back in 1926. In India, they started with distributing income tax on two factors of population and contribution as measured by collection. In the first finance commission, India gave 80 per cent weight to population and 20 per cent on collection from the states, while in case of excise duty the population was the only factor.
Later, they also included per capita gross value of agriculture production, per capita value of manufacture, percentage of workers in total population, percentage of enrolment in classes 1-5 to the total population in the age group of 6-11, population per hospital bed, percentage of rural population and percentage of population of schedule casts, length of railway and road per 100km, domestic product of the states, and area.
In the 11th award, which is still applicable, India gave only 10 per cent weight to population, 62.5 per cent to income distribution, 7.5 per cent each to area and infrastructure, five per cent for tax effort, and 7.5 per cent to fiscal discipline of the respective states. So the population has gradually given way to other factors in India, which could also be followed keeping in mind the domestic situation. Q. What is the texture of NFC-like institutions in other countries of the world?
A. In India, the finance commission has a chairman and four other members appointed by the government under a law of parliament that determines the qualifications of the chairman as well as the members. Under India’s Finance Commission (Miscellaneous) Provision Act of 1951, the chairman is selected from amongst persons who have had experience of public affairs, and four other members who are, or have been qualified as judges of the high commission, or specified knowledge of accounts, wide experience in financial matters and in administration, or have special knowledge of economics. So most of the chairmen of NFC in India have been people who have been in the limelight in public work except three or four politicians.
Under another provision, the finance commission in India is a quasi judicial body, which has powers of a civil court so that it can summon anybody and seek any government document.
In Pakistan, NFC is a hermetically sealed body, a close ingrown body and nobody from outside can appear, nothing is known to the public about what they discuss. All the members are sort of interested parties and yet judges and adjudicators, and cannot be expected to be fair. Hence, there have been problems all along between the Centre and the provinces.
In India, President Rajindar Parshad saw to it that there was no interference at all in the working of the finance commission and even offered to house the commission in the Rashtria Pati Bhawan and in the end it was established completely outside government control.
Q. Do you agree with the argument that the federation should devolve the responsibilities of interior, education, local governments and other such things to the provinces as part of fiscal devolution to reduce its civil expenditure?
A. Pakistan has introduced a half-baked copy of Indian devolution plan. India has panchayat, local bodies, district boards and municipal bodies in every state functional and working, while in Pakistan this system had broken down much earlier.
India has separate finance commissions for each state that recommend to the provincial government how to augment the resources and what should be the needs of the local governments, panchayats and municipal committees etc. Simultaneously, the national finance commission of India recommends measures to augment the consolidate fund of a state to supplement resources of panchayat, municipal committee and so on in that state on the basis of recommendations of the state finance commissions.
So this system, besides the transfer of taxes, recommended to ensure Rs1,600 crore for panchayat and Rs400 crore for each municipal committee every year starting with 2000. This is shared on the basis of 40 per cent weight to population, 20 per cent to the index of decentralization, 20 per cent to distance from the highest per capita income state, 10 per cent to revenue effort and 10 per cent to geographical area.
Q. Some quarters argue that the federal finance minister should not act as chairman of the NFC as it was against the constitution, and because he was also a party to the financial benefits. What is your opinion?
A. I would say that finance ministers should not be members of the NFC at all because they are the parties. How can a party decide about the share. They settle on the basis of give and take. The constitution has not nominated the federal finance minister as chairman of the NFC, but anybody from amongst the members can be appointed as chairman.
Q. What in your view is the main cause for the failure of NFC to reach a consensus award?
A. The main cause is that they are all parties to the cause and have no principle to share the pie, and they negotiate on the basis of give and take and everybody wants a higher share.
Q. Are you satisfied with the current ingredients of the divisible pool. Do you think that the demand of the provinces for the inclusion of petroleum revenue in the pool is justified?
A. Under our constitution, only those taxes are sharable that are included in Article 160, but the Petroleum Development Levy is not a constitutional tax. An amendment could be made to bring all taxes in the divisible pool, as is the case in India which has now amended its constitution to share all union taxes and duties with the states.
Q. The federal government is currently charging provinces five per cent collection charges on taxes. Do you think this rate is justified?
A. The CBR cost of tax collection is, perhaps, the lowest in the world at around two per cent or less. Under the constitution, this cost has to be ascertained by the auditor-general of Pakistan every year. The CBR is deducting two per cent collection charges on excise and royalty on oil and gas. How can there be a difference of three per cent in the collection of other taxes when the agency is the same. This should be distributed among the provinces.
Q. What should be the linkage among the NFC, GDS and hydel profits?
A. Article 161 of the Constitution is very clear. Excise duty and royalty on gas are not part of the consolidated fund and, hence, not part of the divisible pool and are not to be dealt with by the NFC. Hydel profit should go straight to the province concerned. It is for the Council of Common Interest to determine the hydel profit and an appeal could be made against the CCI decision to a joint sitting of parliament within one of month of the decision. Since no appeal was made, it is now binding.
The GDS should also go to the province concerned on the basis of location of the well-head because it is an extension of the CED, which is collected at the well-head. It is against the law to distribute the GDS among the provinces. It should go to the province concerned alone.
