The negotiations for the 8th National Finance Commission award, which would govern the vertical distribution of tax resources between the centre and the provinces and the horizontal redistribution of the combined provincial share among the federating units, are projected to be quite tough.

The existing award resolved many issues. It raised the provinces’ share from the divisible tax pool from 46.25pc to 57.5pc; conceded the provinces’ right on General Sales Tax (GST) on services; altered the horizontal redistribution formula to accommodate the demands of the smaller provinces; agreed to pay back arrears (under the head of straight transfers) on account of net hydropower profit to Khyber Pakhtunkhwa and of the gas development surcharge to Balochistan etc.

Nonetheless, new issues have emerged over the award’s life from 2010-11 to 2014-15, which, the provinces and experts argue, the next award must address.

Such issues, among others, concern the cost of functions devolved to the provinces under the 18th constitution amendment and the implications of Islamabad’s commitments with the International Monetary Fund (IMF) regarding provincial budget surpluses, noted Muhammad Sabir, the principal economist at the Social Policy and Development Centre.

“The provinces are of the view that the 7th award did not take into account the additional liabilities transferred to them, as the 18th amendment was passed after the finalisation of the award,” he said.

Then there are issues related to straight transfers, which are not covered under the NFC. “After repaying net hydropower profit arrears of Rs100bn to KP as agreed during discussions on the 7th award, the federal government, for example, again froze the amount at the previous level of Rs6bn. KP will raise this issue [as indicated by the provincial government on several occasions],” Sabir said.

The discussions on the horizontal distribution of funds is most likely to generate demand from the smaller provinces to further cut the weight assigned to their populations and increase the weight of other indicators, like poverty, revenue collection and inverse population density

The discussions on the horizontal distribution of funds is most likely to generate demand from the smaller provinces to further cut the weight assigned to their population (from the existing 82pc) to increase the weight of other indicators (poverty/backwardness from 10.3pc, revenue collection/generation from 5pc and inverse population density from 2.7pc) in the formula.

“Further adjustments in horizontal distribution might be the main contentious issue during the negotiations for the next award,” economist Faisal Bari emphasised.

He said Punjab had conceded in negotiations for the last award that population shouldn’t be the only criterion.

“Now, it should prepare itself for demands of further cuts in the weight assigned to population and to make greater room for other criteria. The principle of equity also requires that the weight of other indicators be raised to determine each province’s share from the divisible pool funds.”

Sindh has already indicated that it could seek changes in the weights assigned to various indicators on the basis of which funds are shared by the provinces, by demanding a reduction in the weight of population. KP is expected to push for a heavier weight for backwardness and demand more compensation for losses to its economy because of terrorism.

Balochistan says it will disclose its demands when the negotiations for the award start. But an official said by phone that he understood that Dr Abdul Malik’s government is most likely to seek greater weightage for inverse population density and backwardness, besides demanding the province’s share on the basis of the revenue projections made in the award rather than on the actual revenue generated by the federal government.

Punjab plans to raise at least two issues when the commission starts its deliberations: the federal requirement from the provinces to create budget surpluses to meet the IMF’s demand, and the imposition of excise duty on provincial services.

“While the issue related to provincial surpluses is affecting Punjab’s capacity to spend on its development, the excise duty on services is impacting the collection of provincial GST on services,” a Punjab official said on the condition of anonymity. “Both the federal acts are against the spirit of the NFC award and unlawful.”

He was hopeful of getting support from the other provinces on both the issues.

While most contentious issues discussed during the negotiations for the 7th NFC award were resolved without any bitterness between the provinces, few expect the proceedings for the next award to be smooth.

“The then-finance minister Shaukat Tareen had an ear for everyone. I cannot say the same for Ishaq Dar, who has strong views [of his own on everything],” Sabir said.

Published in Dawn, Economic & Business, April 20th , 2015

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