KARACHI: The ninth National Finance Commission (NFC) award has been in deadlock since July 1, 2015, and at a conference on Thursday, experts gathered to identify reasons why and suggest measures to rectify this major lapse on the part of the federal and provincial governments.

The NFC is a constitutional body formed every five years that is tasked to determine the respective share of the federation and the provinces of the specified federal tax reverence. The Policy Research Institute of Market Economy (PRIME), an economic policy think tank based in Islamabad, organised the conference where various suggestions were put forth.

According to Dr Kaiser Bengali (Technical Member NFC, Balochistan), the reason behind the deadlock is that the federal government wants an upfront “share of 7 per cent from the divisible pool to meet security and development expenditures of Fata, Gilgit-Baltistan, and Azad Kashmir, but the provinces are not willing to accept this.”

Devolution of tax collection to provinces suggested for better revenue

All NFC formulas, he explained, have been static as they deal only with one objective — distribution. According to Dr Bengali, there is an urgent need to make the NFC dynamic.

“It is time to make NFC dynamic to achieve socio-economic objectives — equity, enhanced revenue, and social development.”

It is important to include equity in the NFC, Dr Bengali said.

“40pc of tax revenue is accrued from direct taxes and 60pc from indirect taxes. Numerous studies suggest that direct taxes are progressive and indirect taxes are regressive. One report by SPDC (2004) states that the entire tax system is regressive as a greater proportion of the burden falls on the poor. The richest 10pc of the population pays 10pc of their income in taxes, but the poorest 10pc pay 16pc.”

Dr Bengali highlighted a major lapse of the federal government as it tended to rely rather heavily on indirect taxes for its revenue needs which is easy administratively and politically to collect.

His proposal includes “removing income and corporation tax from the divisible pool, provide for provincial share in non-tax revenue to compensate for provincial loss on account of (net) income tax exclusion, and move income tax on agricultural income from the provincial to federal domain.”

Dr Idrees Khawaja, dean of management sciences at Air University, said given the “charged political atmosphere, it is not advisable to do away with the unanimity principle in the NFC, whereby an award can only be announced with the assent of all four provinces.”

He proposed a two-tier structure for the NFC whereby the “first tier should consist of technical experts who would present their recommendations to the second tier comprising provincial representatives, for their deliberations and approval.”

Another proposition that Dr Khawaja made was devolve tax collection to the provinces. “There will be an increase in tax collection because of a sense of competition between the provinces. If one province manages to collect more, then there would be pressure on the other provinces to make more efforts to collect taxes.”

Sohaib Jamali, editor of Business Recorder Research, put forth an unconventional proposal to remove the deadlock. “We need change in the law to allow built-in mechanisms to create political incentives that will prevent such deadlocks in the future. I would suggest a multi-term award with pre-agreed evolving criteria — 15-year award with changing formulas every five years.”

Other suggestions he put forward were to allow release of minutes of NFC meetings, sharing of technical reports, involving the centre and the media to broadcast the implications of federalist structure, and devolution and the 18th amendment. “All these will allow a set of criteria to evolve that have components of transparency and public reasoning.”

Published in Dawn, January 26th, 2018