The present state of fiscal federalism is embedded with lingering features of over-centralisation in its transition from a unitary system to a yet uncharted course towards full autonomy of the provinces within a sovereign Pakistan.

Yet the National Finance Commission awards, given from to time, have put out ingredients whose ratios have to be adjusted judiciously to lay a sounder, more durable fiscal distribution formula. That opportunity is provided by NFC awards stipulated every five years.

The underlying core issues in both the vertical and horizontal distribution of the Federal Divisible Pool are: rights, linked responsibilities and needs of the federation and the provinces.

No doubt in times of distress the provinces and federation have to help each other in the best spirit of fiscal federalism

While there is no disagreement on protecting the constitutionally mandated existing cumulative share/right of the provinces in the federal dividable pool (57.5pc), Sindh wants collection of sales tax on goods, royalty etc to be transferred to the provinces.

If a consensus is reached, which seems unlikely at this point in time going by press reports, exclusion of sales tax on goods will reduce the Pool size with different impacts on individual provinces. Hence the same demand has not been echoed by other federating units.

The simplest thing would be to hand over, to the provinces, the collection of such taxes as are related to straight transfers (like royalty) where the Federal Board of Revenue is just a collection agency and the proceeds go directly to the province from where it is collected. It is the right of a province to collect its taxes or delegate some agency to do it on its behalf.

However, the provinces are on the same page on demanding an increase in their share in vertical distribution of the Divisible Pool owing to the additional responsibilities entrusted to them under the Eighteenth Constitutional Amendment. This comes under the category of needs. Under the existing NFC award, the federation and the provinces share 42.5pc and 57.5pc of the resources respectively.

Finance Minister Ishaq Dar’s proposal to create a National Security Fund with 3pc of the gross Divisible Pool — asking the provinces to share ‘national responsibilities’ — follows his successful effort to persuade the federating units to produce budget surpluses in order to take care of what is labelled as ‘fiscal deficit’; which is in essence the financing of the federal budget deficit. No doubt in times of distress the provinces and federation have to help each other in the best spirit of fiscal federalism.

In the earlier NFC award the militancy- affected KP was provided 1pc of the Pool which the provincial government now wants raised to 5pc. Sindh is seeking an additional share of 5pc for the Rangers’ presence and operation in the province. It is not known how the Pool would be distributed among various provinces; the best course being assessed needs while remaining within the given resources allocated in the new award.

It appears there is a similar stress on vertical and horizontal re-distribution of the Divisible Pool, according to the assessed and perceived needs of stakeholders. Under the existing formula, the pool is horizontally distributed as follows: size of population 82pc, poverty 10.5pc, revenue collection and generation 5pc and inverse population ratio 2.7pc.

The current proposals pertain mostly to the change in the ratios in which the resources are being distributed. For example, KP wants the ratio relating to the population to be reduced from 82pc to 60pc.

Keeping aside the merit of these proposals, it cannot be denied that the NFC distribution formula needs to revised according to the stage of economic development of each province and removal of regional disparities and poverty.

The distribution of resources on the basis of population at first appears to be holistic and must have had at least some merit when it was adopted but it is losing its legitimacy in the light of the painfully slow pace of regional development in the fastest growing provincial economy. It is only a few segments of population and some growth centres that benefit from such an arrangement.

Probably while step by step reducing resource distribution on the basis of population, the amount could be earmarked for need-based balanced regional development within each province. And Punjab qualifies for this given the economic backwardness of its Saraiki and Baluch speaking areas, though the entrenched feudal and tribal system is as much responsible for the fate of the poor millions there. A similar situation prevails in rural Sindh.

But the most important thing in the whole game is the organic unity of three ingredients in a fair distribution formula of rights, linked responsibilities and needs, and their changing ratios. The trade-off has to be equitable to lay a strong foundation of fiscal federalism.

In this era of self-determination of nations and individuals from which the issue of autonomy has resurfaced with such greater intensity, the provinces must also realise that they need to rapidly raise their own resources to exercise their constitutional autonomy effectively. The best opportunity lies in taxing agricultural incomes with far more seriousness than has been done so far. The digitalisation of land records would go a long way to help them.

While fighting for fiscal autonomy, the federating units also have over-centralised tax collection and distribution at the provincial level. They deny the district and local governments their right to collect and spend the proceeds for public welfare in their own jurisdiction, to make them accountable to the local taxpayers rather than to a weak provincial administration.

Gradually and step by step, resources and authority need to be devolved at the grass root level according to its changing capacity to shoulder its responsibilities and deliver public goods. Local wisdom must be fully harnessed.

Published in Dawn, Business & Finance weekly, December 12th, 2016