One of the many reasons the 7th National Finance Commission (NFC) award is often referred to as a milestone in the country’s history is that after decades of wrangling with other federating units, Punjab conceded to their demand for replacing the previous population-based formula for inter-provincial redistribution of funds from the federal tax divisible pool with multiple criteria.
Although population still dominates the new formula with a share of 82 per cent, Punjab’s concession ensured that backwardness was assigned a weight of 10.3pc, revenue generation 5pc and area 2.7pc. Consequently, Punjab’s overall share from the resource was cut by 1.27pc to 51.74pc.
However, the increase in the combined provincial share from the divisible pool from 47.5pc to 57.5pc ‘indirectly’ made up for the loss of the most populated province in absolute terms.
Now that the precedent has been set, many in Punjab believe the other provinces can demand further adjustments in the formula for horizontal distribution and cut in the weight of population when negotiations for the new award begin.
Dawn spoke to economist Dr Ayesha Ghaus-Pasha, who will represent Punjab in the NFC deliberations, about the viewpoint of the province on the issue and how she plans to approach the negotiations.
Following are the excerpts:
Q. What will be the demands of Punjab when the next NFC starts its deliberations?
A. It is premature to say anything about Punjab’s case. We’ve done our analysis and are in the process of finalising our demands and strategy. At the moment, it’ll suffice to say that Punjab has sacrificed a great deal in the last award to strengthen the federation. We’ve always played the role of ‘big brother’ for the sake of the federation. [As a consequence,] the development of our social and economic sectors has suffered a lot.
Q. There are indications that the other provinces may demand further downward adjustment in the weight assigned to population and increase in the weights of other criteria used for horizontal distribution of the combined provincial share from the federal tax divisible pool. What’s your take on this?
A. We will see to it if and when the demand is actually raised during the final NFC deliberations. But let me say here that Punjab is a very big province, the most populated one; we’ve a lot of work to do to lift our social and economic sectors. The [federal] transfers [under the present award] are inadequate [for our development requirements]. We’re hopeful that others [provinces] will think about and take care of our needs in the same way we have taken care of their requirements. How long will Punjab continue to be expected to sacrifice? It is high time the ‘younger brothers’ also realised their obligations, stepped forward and contributed their bit to strengthen the federation and the country.
We have to grow together as a nation; we will not get anywhere if we continue to pull one another’s legs. We need to develop the country as a whole, as one nation. We must think about the country first and shun parochial thoughts.
Q. There are people who believe the provinces have failed to implement their side of the deal to increase the provincial taxes as agreed with the federal government during the negotiations for the 7th award. How do you look at this criticism?
A. Indeed, all the stakeholders must fulfil their obligations and responsibilities. It’s true that the provinces have not been able to keep their side of the agreement; but the federal government has defaulted on its side of the bargain in a much bigger way. As a result, the tax-to-GDP ratio remains stagnant [at below 10pc].
That said, let me also inform you that Punjab has implemented several actions to reform its provincial tax administration and system to step up its tax effort. We have already set up the Punjab Revenue Authority (PRA) to collect General Sales Tax (GST) on services. We’ve broadened services under provincial GST and grown property tax base and collection.
We must get credit for our efforts to implement the long overdue structural reforms. We don’t want to compromise on our long-term objectives for immediate benefits. You should also appreciate the fact that the sectors such as services, property or agriculture available with the provinces for taxation are difficult to tax. On the other hand, the share of withholding and presumptive taxes in the federal direct taxes has been on the increase. In other words, the federal government is earning money without moving any of its limbs.
Our strategy in Punjab is to move forward in a proper way without delaying structural reforms and increase our tax collection by broadening the base and netting difficult areas that are not contributing enough tax revenues. The benefits of the reforms being implemented now will start appearing after some time.
Q. Almost every province, Punjab included, has objected to encroachment by the federal government upon the provincial tax base through budgetary measures. The federal requirement for provincial surpluses (to hold down consolidated budget deficit under the IMF loan agreement) is also considered against the spirit of the 7th award. Will Punjab raise these issues at the NFC forum?
A. Let me say it at the risk of repeating myself that all of us — the provinces and centre both — have to strengthen one another. We cannot move forward by strangling each other. These are the issues that we must address and resolve when we sit across the table if we want to get anywhere as a nation.
Published in Dawn, April 21st, 2015