10th National Finance Commission constituted

Updated 13 May 2020

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Last NFC, formed in April 2015, failed to conclude a new award. — AFP/File
Last NFC, formed in April 2015, failed to conclude a new award. — AFP/File

ISLAMABAD: Amid a fresh political debate on constitutional and financial powers of the federation and its units, the government on Tuesday constituted the 10th National Finance Commission (NFC) to announce a new award for sharing of federal divisible resources between the Centre and the provinces.

The Ministry of Finance formally notified the constitution of the 11-member commission after approval by federal and provincial members and its terms of reference by President Arif Alvi as required under Article 160 (1) of the Constitution.

However, the commission will effectively comprise 10 members given the president has also authorised the adviser to the prime minister on finance and revenue to chair meetings of the NFC in the absence of the federal finance minister. Otherwise, there is no room for the PM’s adviser to be even a member of the commission under the Constitution. The commission will have four provincial finance ministers and four non-statutory members representing the provinces and the federal finance secretary as official expert.

Last NFC, formed in April 2015, failed to conclude a new award

The non-statutory members, one from each province, include Tariq Bajwa from Punjab, who resigned as governor of the State Bank of Pakistan when Dr Hafeez Shaikh was made adviser to the PM on finance and had previously served as federal finance secretary and chairman of the Federal Board of Revenue. He has replaced Dr Salman Shah who represented Punjab in the NFC that expired on April 23 this year.

Javed Jabbar, another heavyweight and former politician/minister, has been added to the new NFC as a non-statutory member from Balochistan in place of former provincial finance secretary Mahfooz Ali Khan in the previous NFC. Sindh and Khyber Pakhtunkhwa have continued with their past members Asad Sayeed and Musharraf Rasool Cyan, respectively.

The ToR set under clause 2 of Article 160 require the 10th NFC to distribute between the Centre and the provinces the net proceeds of five major tax categories, besides looking into expenditure requirements for special areas and special needs of the country. These include taxes on income, including corporation tax but not taxes on income consisting of remuneration paid out of the Federal Consolidated Fund. Also included in the list are taxes on sale and purchase of goods imported, exported, produced, manufactured or consumed and export duties on cotton, and such other export duties as may be specified by the president. It also includes excise duties and any other taxes as may be specified by the president.

For the first time a new subject has been added to the list of discussions suggesting that the Centre wants the provinces to bear some additional fiscal responsibilities. This pertains to “exploring ways to reduce losses of state-owned enterprises and agreeing on mechanism for sharing these losses between the federal government and the provincial governments”.

The NFC will also be required to make grants-in-aid by the federal government to the provincial governments and set powers and conditions for the federal and provincial governments for borrowing, besides assessing and allocating resources to meet expenditures relating to Azad Jammu and Kashmir, Gilgit-Baltistan and newly merged districts of Khyber Pakhtunkhwa (erstwhile Fata).

The notification also requires the NFC to assess and allocate resources to meet expenditures made on security and natural disasters/calamities and will be responsible for assessment of total public debt and allocation of resources for its repayment. The 10th NFC will be expected to rationalise subsidies given by the federal and provincial governments in their budgets and agreeing on a mechanism to finance them.

The new NFC is anticipated to face a major legal challenge in the absence of a formal notification of results of the National Population Census 2017 owing to concerns expressed by various stakeholders, particularly about Karachi.

The parameters of the next NFC award are expected to change for various provinces, particularly after addition of about five million people from the tribal region to Khyber Pakhtunkhwa. This requires a meeting of the Council of Common Interests to endorse census results, notwithstanding objections, because a massive exercise of census could neither be repeated nor ignored.

The 9th NFC was constituted on April 24, 2015 and reconstituted a couple of times in 2016, 2018 and 2019 owing to change in governments and replacement of non-statutory members, but it failed to conclude a new award as no meaningful and structured dialogue could be sustained.

As a result, multiple calls from various quarters, including the finance ministry, the armed forces and the International Monetary Fund, to rebalance the transfer of a larger chunk of the divisible pool resources to the provinces under 7th NFC Award have remained unaddressed. Also, the 7th NFC Award announced in 2009 continued with annual extensions and remains in place even now instead of constitutional term of five years that came to an end on June 30, 2015. The Constitution promises that provincial shares in each NFC award could not be reduced.

Under the 7th NFC Award, the four provinces are collectively entitled to 57.5 per cent of divisible pool taxes, besides the revenue from income tax, wealth tax, capital value tax, general sales tax, customs duties and federal excise duty. The provincial governments get their horizontal shares on the basis of population, poverty, revenue collection and inverse population density, allowing Punjab to get 51.74pc, Sindh 24.55pc, Khyber Pakhtunkhwa 14.62pc and Balochistan 9.09pc share.

Published in Dawn, May 13th, 2020