A ray of hope for new NFC award

Updated 22 Sep 2018


WHEREAS the new National Finance Commission award (NFC) has long remained elusive, the evolving common approach of the PPP and the PTI leadership on improving the multiple criteria for horizontal distribution of resources among the provinces augurs well.

The devil, however, lies in the details. A press report quotes President Arif Alvi as saying that “multiple indices are an evolutionary process, we can improve it.”

Finance Minister Asad Umar has invited the provinces to re-nominate the non-statutory members to the NFC as new provincial governments have assumed power in three provinces, and Sindh’s NFC member Salem Mandviwalla has become the deputy speaker of the National Assembly.

The demand for a change in the ratios of multiple criteria revolves round a hike in resource distribution for the uplift of the vast backward regions with rampant poverty teamed up with more weightage to revenue collection/generation by the provinces.

In his book A cry for justice — empirical insights from Balochistan, Mr Kaiser Bengali says the “fiscal autonomy (granted by the 18th Constitutional Amendment and the 7th NFC award) has proved an empty shell” for the province.

Bengali, who represented Balochistan as a non-statutory member in the NFC, suggests “a degree of reverse resource transfer for a decade or so” to remedy the situation.

With the PTI coming into power at the centre and two provinces and being a coalition government partner in Balochistan with a regional party, there has been a bit of the tilt in the power balance in favour of the two smaller provinces.

The new power equation may lend a stronger voice to their demand for more resources. That may include adjustments in the NFC formula.

While 18 per cent of the net NFC’s divisible pool is earmarked for revenue collection/generation (5pc), poverty (10.3pc), inverse population density (2.7pc ), the remaining 82pc is distributed on the basis of population.

The Sindh government has also scaled up its demand for a bigger share in the divisible pool following recent developments including the reported recommendation by former caretaker finance minister Dr Shamshad Akhtar to reduce provincial allocation by Rs212 billion and Fata’s merger with Khyber Pakhtunkhwa.

Talking to the media at the Quaid’s mausoleum soon after taking oath, Chief Minister of Sindh Syed Murad Ali Shah said, “We have already told the federal government in writing that Sindh contributes 60pc revenue to the divisible pool, therefore it should get it’s due share.”

The “due share” was not an issue earlier at the NFC forum though Sindh government representatives did complain that they contributed much more tax revenues to the divisible pool than they were receiving from it.

Many lingering issues need to be resolved for a smooth functioning of the taxation system and imparting efficiency to boost revenue from sub-national taxation

It appears that the PTI government is having second thoughts on dividing Punjab which would also have an impact on any future NFC award. According to Punjab’s senior minster Abdul Aleem Khan, a committee headed by foreign minister Shah Mahmood Qureshi will prepare a roadmap to South Punjab province “along with other alternatives” by Oct 15 this year. He did not spell out what the other alternatives would be.

Apparently, it would not be possible to secure a two-third majority in the provincial assembly without the support of the PML-N. The former ruling party favours the creation of two provinces, South Punjab and Bahawalpur, and is not much inclined to divide Punjab.

Sindh’s Chief Minister has also reiterated his long-standing demand that the collection of sales tax on goods be transferred- now collected by the Federal Board of Revenue — to the provinces.

The latest statement has perhaps been prompted by the fact the interim federal government is reported to have withheld fiscal transfers of Rs140bn over the last three months, depriving the provincial government of the real-time value of money.

To quote additional collector, KP Revenue Authority, Rashid Javaid Rana, “the world over, VAT on goods and services is generally administered by the same authority. In Pakistan, however, a hybrid system has evolved, in which it is bifurcated between the provinces (services) and the centre (goods). A crippled VAT system has evolved...”

Mr Rana refrained from advocating the transfer of sales tax on goods to the provinces probably because the KP government has reservations on the proposal.

Commenting on the issue Kaiser Bengali recently said that the federal government will definitely oppose Sindh’s proposal of allowing the provinces to collect GST on goods.


Published in Dawn, The Business and Finance Weekly, September 17th, 2018