THE National Finance Commission (NFC) is in a deadlock. However, public interest remains high, with sundry comments coming every now and then from various quarters. Four strands can be discerned. One, the 7th NFC has eroded federal government fiscal space. Two, the high weight accorded to population in the 4-criteria NFC formula is an incentive for more population growth. Three, provinces have ignored the constitutional requirement for instituting local governments. And, four, the mechanism does not address climate vulnerabilities.

The federal fiscal base case is misleading. Federal finances have not been compromised because of the NFC. The 18th Amendment abolished the Concurrent List, thereby opening the door for the closure of more than 15 federal divisions that would have effected substantial fiscal savings. That step has not been taken and the fiscal crisis is being used as a smokescreen to target the NFC. Essentially, the fiscal base argument is driven by the powerful centrist lobby that is opposed to the very concept of provincial autonomy, and employs a variety of spurious arguments to run down the 18th Amendment and the NFC.

The population argument is fallacious. Couples do not decide on family size — by choice or by default — with the NFC population criterion at the back of their mind. And birth rates today impact population shares in the very long run, while governments in power are driven by more current variables.

Local governance is an altogether different subject and cannot be appended to the NFC debate. It is popular to berate provincial governments for failing to devolve below the province to the local level, and link this failure to the NFC. However, it is not the constitutional mandate of the NFC to address local governance.

The NFC is a federal constitutional body and does not possess the mandate to impose itself onto the subject. The Constitution leaves it to the provinces to define the structure, powers and functions, including financing, of local governments. As such, the subject of devolution to the local level needs to be addressed at the constitutional level.

There is, of course, a valid case for improving the NFC formula. A number of proposals for inclusion as criteria are on the table, formally and otherwise. Two such proposals are for ‘inverse share of cultivated area’ and for ‘provincial share of forests in total national forest cover’. The former is intended to benefit the two western provinces that have lost out on account of the transfer of general sales tax (GST) services to the provinces. The latter addresses the climate agenda.

Yet another proposal, to render the NFC more equity-oriented, is for the Centre to retain cent per cent income and corporate tax (net of withholding tax component), including income tax on agricultural income, and to share all indirect taxes (GST goods, customs duty and central excise duty) with the provinces on the original 80:20 basis; i.e., 80pc for the provinces and 20pc for the Centre.

Full retention of net income tax is likely to induce the federal government to apply greater effort in collecting taxes from the rich, thereby reducing the relative burden on the poor and rendering the tax structure more progressive. The transfer of income tax on agricultural income to the Centre will remove a distortion in the tax regime, with marginal loss to the provinces.

Kaiser Bengali Balochistan Representative to the 10th NFC Karachi

Published in Dawn, June 5th, 2023