SINCE 1973, after the promulgation of a consensus constitution by an elected and popular government, there have been three national finance commission awards enforced in 1974, 1991 and in 1997. But the three NFCs constituted in 1979, 1984 and 2,000 failed to reach consensus and ended in a deadlock.
Of the three commissions that failed, two were formed in 1979 and in 1984 during the military rule of late General Zia-ul-Haq and the third one, the current NFC was formed in the year 2,000 after General Musharraf took over the government in October 1999. This NFC continued functioning after the October 2002 elections with some changes in its composition.
The first NFC award was given in 1974 by the elected government of late Z.A. Bhutto. This award set population as the only criterion for revenue distribution among the provinces. Custom duties, the main revenue earner was kept out of the divisible pool and the sales tax was completely federalized.
The second NFC award was given in 1991 by a political government of PML headed by Mian Nawaz Sharif. This NFC award recognised for the first time, the rights of the provinces on natural resources and the provinces were given royalty and gas development surcharge on oil and gas.
And the third NFC award was declared in February 1997 by a caretaker government of Farooq Ahmed Leghari and Prime Minister late Malik Meraj Khalid. It turned out to be the most controversial NFC award, though still operative, despite the expiry of its five- year term in 2002.
“ It should be clear that the NFC has been functioning less by consensus and more by the federal government’s power to prevail on the provinces’’ observes an analytical study of the 1997 NFC award by Arshad Zaman, a former Chief Economist in the Planning Commission. He carried out a study of the impact on 1997 NFC award on behalf of the World Bank.
The late General Zia ul Haq remained completely indifferent to the revenue distribution issues from 1979 to 1988 and left everything to his finance minister Ghulam Ishaq Khan and then for a very brief period to late Dr Mahbub-ul Haq in 1988. Dr Haq tried his best to obtain consent of the government in Sindh but failed to convince it.
In sharp contrast to Zia’s attitude, General Musharraf has been keeping himself updated on the NFC deliberations. On occasions, he intervened and gave statements to soothe the nerves of the NFC members from different provinces. When Musharraf found some substance in demands of the provinces that their share in the federal tax pool be increased to 50 per cent from 37.5 per cent he did not take much time in endorsing this demand. The finance minister later explained that the share of provinces in the tax pool will be gradually raised from 47.5 per cent to 50 per cent.
As media reports suggest, current NFC too has failed to reach any consensus. The last NFC meeting, said to be an informal one on May 30 at Islamabad chaired by President Musharraf ended in a deadlock. President Musharraf is now said to be virtually arbitrating on the revenue distribution affairs himself and is quoted to have said that his verdict on revenue distribution formula will incorporate views of all the provinces.
The first and foremost issue was to raise the vertical share of provinces in the federal tax pool from 37.5 per cent to 50 per cent. The finance minister was initially hesitant but later gave in on persistent demands of the provinces to raise this share to 47.5 per cent. President Musharraf also pledged to give a 50 per cent share to the provinces which, the ministry of finance, felt could be done by annual half per cent increase over the next five years.
Provinces however, remained sharply divided when it came to horizontal division of the share of taxes from the tax pool. Punjab insists on making population as the sole basis of revenue distribution. The NWFP wants poverty be given due weightage while Balochistan wants its size—44 per cent land mass of Pakistan to be given consideration. Sindh wants tax collection to be a part of multiple criteria of the revenue distribution.
Punjab considers Sindh’s demand for making revenue collection as one of the key criteria of revenue distribution as “unconstitutional’.’ But no one in Punjab or in Islamabad has quoted any provision of the Constitution that declares revenue collection as one of the distribution criteria is ultra vires.
A peep into revenue distribution history of the sub continent reveals that sales tax was in exclusive domain of provincial governments before 1947. It was partly federalized to the extent of 50 per cent in 1948-49 budget, the first of independent Pakistan, to meet the impact of massive refugee influx in Karachi which was then the federal capital.
In 1951 Sir Jermy Raisman gave his award which gave East Pakistan 45 per cent share, Punjab 27 per cent, Sindh 12 per cent, NWFP 8 per cent, Bhawalpur 4 per cent, Khairpur 0.6 per cent, Balochistan states union 0.6 per cent and residual 2.8 per cent was for the princely states who may join Pakistan.
The sales tax was administered by the central government but the provincial governments were allowed to retain 50 per cent with them. Half of the sales tax collected in Karachi was distributed in all parts of West Pakistan. Punjab’s share was 54 per cent, Sindh’s was 16 per cent, NWFP 10 per cent, Balochistan States Union 1.5 per cent, Bhawalpur four per cent and 14.4 per cent was for Karachi and tribal areas.
After Ayub Khan took over, the first NFC in 1961-62 assigned 30 per cent of sales tax to the provinces in the same proportion as collection in their respective areas. Of the balance of 70 per cent, East Pakistan was given 54 per cent and West Pakistan 46 per cent. The next NFC in 1964 made some small changes and retained the provision of 30 per cent of sales tax be given to provinces in proportion of their collection.
The 1970 NFC award after the dissolution of One Unit also incorporated the provision of 30 per cent sales tax for the provinces in the proportion to their respective collection.
It was in 1974 NFC award that sales tax was completely federalized and the noises made in Karachi were ignored. It declared population as the only criterion for distribution of revenue.
The 1979 NFC hardly held any meeting and concluded its term in 1985 without giving any award. In 1985 another NFC was formed. It held nine meetings in three years. After Dr Mahbub-ul-Haq took over as finance minister for a brief period in 1988 he signed an agreement with the IMF and tried to obtain consent of the provinces. Sindh was the only province to oppose this move and suggested to wait for induction of an elected government.
The PPP government constituted an NFC in 1990 in which Dr Haq represented Punjab as a private member. This NFC could not hold any meeting as the PPP government was dismissed in August 1990.
The Nawaz Sharif government set up NFC in November 1991. It gave a consensus award in 1991 under which the net proceeds of development surcharge on natural gas was transferred to the provinces with effect from July 1, 1991.
The distribution of GDS was on production basis as well as heads after deducting two per cent collection charges. The federal petroleum ministry determines the net investment on exploration and transmission of gas and the sale proceeds after taking into account the international agreements.
In accordance with an advice from the Council of Common Interest in January 1991, the NFC declared payment of net profits on account of generation of hydro- power stations located in the provinces shall be paid to the provinces. The federal government was made responsible to ensure that Wapda makes payment every year.
By design or by default, the two key decisions have been made controversial. Balochistan and Sindh are contesting their case before the federal petroleum ministry. The hydro profit issue for the NWFP remains unresolved.