The National Finance Commission (NFC) appears to have reached a near-consensus on the ratios of tax revenues in divisible pool to be shared between the federation and the provinces.
Although federal Finance Minister Shaukat Aziz has not committed himself on exact ratios, the provincial finance ministers indicated to newsmen that it would be on 50:50 basis, up from 37.5 per cent for the provinces under the 1997 NFC Award and just over 40 per cent under the existing formula.
Whereas the share of provinces in the divisible pool will increase, the two minority provinces NWFP and Balochistan will loose subventions and grants amounting to Rs8.5 billion set aside for them by the previous NFC Award. The agreed Rs20 bn subventions and grants for the new award to which the federation was to contribute Rs15 and the provinces Rs5 bn, the lion's share coming from Punjab, is to be shelved. In this case,the beneficiaries would have been the three minority provinces.
Earlier, officials estimated that the proposed Rs20 bn subvention and grants combined with 2.5 per cent of shares in General Sales Tax, assessed at around Rs40 bn, would have inflated the share of the provinces in the divisible pool to 44.6 pc.
The federal government is now in a position to spare more money for the provinces in view of the enlarged fiscal space, prompted by mounting public pressures to address the problem of rising poverty and unemployment. Nation-building is primarily in provincial domain.
If the share of the provinces is raised to 50 pc, it would be a significant step towards fiscal autonomy of the provinces. The system of patronage, a product of feudal mind-set, will be replaced by the eligibility of funds based on partial recognition of rights of the federating units.
Prior to 1990 Award, the entire fiscal deficits of the provinces were picked up by the central government, breeding fiscal indiscipline and making provinces heavily dependent on Islamabad. Later, this led to freezing of provincial expenditures.
The national financial system was designed to serve the unitary military government. The 1979 and 1985 NFC awards were not notified and nor were the provinces informed about any NFC decisions. For the first time, the 1990 Award laid some stress on self-reliance to improve fiscal management. It was a small step towards fiscal federalism.
But the 1997 Award deprived the provinces of a fair share of a fast growing revenue source- sales tax. Federal taxes were included in the divisible pool and the share of provinces was cut from 80 per cent to 37.5 per cent by an interim government having no public mandate. The surcharge on petroleum that yields Rs50-60 bn annually was kept out of the pool which Punjab rightly wants now to be included.
The 1997 Award was a device to shore up the depleting tax revenue of the federal government, eroded by rapid reduction in customs tariff under pressure of multilateral donors.
The Award also terminated the cash development loans given by the federal government to the provinces. However, it gave a strong message that each province would have to manage its own resources within the centrally defined resource distribution framework.
Given the fiscal space, there are strong chances that fiscal devolution may gain momentum under prime minister Zafarullah Khan Jamali who enjoys good equation with his coalition partners.
Fiscal federalism is currently very weak. There is massive imbalance between taxes collected by the provinces(20 pc) and the federation(80 pc). All rich revenue yielding taxes are collected by a centralized authority. And the rate and incidence of taxes are adjusted, from time to time, by Islamabad with varying impacts on different provinces.
In India, fiscal federalism has been strengthened by allowing provinces to collect sales tax while retaining it as part of the divisible pool. Fifty per cent of the sales tax proceeds are transferred to the central government by the provinces, says Dr Ayub Meher. Such an arrangement can help to stabilise erratic financial flows to the provinces.
The provincial governments have failed to tax effectively incomes on agriculture which contributes about a quarter of the country's Gross Domestic Product. It could become a major source of tax revenue, if properly tapped.
The current centralized system separates the taxing and spending authority for reasons of efficiency (that is questionable) and erodes accountability of the provincial governments to tax payers and of elected representatives to the electorate.
And again to quote an official," the central government periodically determines on the basis of needs, both the level of fiscal transfers and the method of distribution." It damages provincial harmony.
As an understanding between the provinces and the federation on sharing of finances under the divisible pool seems to have been largely settled, the next NFC meeting ( scheduled for February 5 in Karachi but may be postponed due to holiday), will take up the issues of inter-provincial distribution. And indications are that sharing of pool money on the population basis may be replaced by a multiple factored formula such as population, backwardness, revenue generation and area.
With subventions and grants abolished, the money saved can be apportioned on the basis of provincial backwardness.
Currently, the divisible pool is shared between the provinces on the sole criteria of population: Punjab gets 57.88, Sindh 23.28, NWFP 13.54 and Balochistan 5.30 per cent.
Conceptually though not ratio-wise,it is not unlikely that inter-province distribution of resources may begin to follow the pattern set by provincial finance commissions(PFCs) for current expenditure.
Under the PFCs awards, 60 per cent of the net proceeds of the provincial pool is retained by the provinces and 40 per cent, with marginal variations, is distributed among the districts. The federation and the provinces currently share federal divisible pool on the same basis.
The pool money is given to the districts on the basis of the following formula: Population 50 per cent, backwardness 17.5 per cent, tax collection 7.5 per cent and transitional transfer 25 per cent.
Under the PFC awards for development expenditure, the first" legitimate charge" is to provide counterpart rupee to foreign aided projects. Five per cent from the left- over amount is set aside for compensating those districts which may get less revenue through formula-driven fiscal transfers.
The remaining amount is distributed in the ratio of 30:70 between provincial based schemes and district government projects.And district allocations for development are shared as follows: Population 50 per cent, backwardness 30 per cent, backlog of ongoing schemes 10 per cent and equal share 10 per cent. Karachi gets two and a half times higher than any district in equal share.
Khushhal Pakistan Programmes are distributed in the ratio: population 70 per cent and backwardness 30 per cent.
The formula for distribution of resources between the provinces and districts takes care of regional backwardness within each province. Similarly, there is some realization within the NFC that the divisible pool needs to be distributed on the basis of different stages of development of each province and its specific needs in the spirit of federalism.
Yet, fiscal federalism has multi-dimensional facets and poses problems which can only be resolved step by step. One aspect is the method of fiscal transfers and controls that makes financial flows erratic and retards the pace of project execution and economic development.
Limits have been set for approval of projects by provincial (upto Rs200 million) and districts (Rs20 million). Projects costing over Rs200 million are sanctioned by the federal government. First of all, ceilings are pretty low and need to be revised from time to time.
Secondly, the efficiency at all levels requires that the three tiers of the government should be answerable to each other. Accountability should be a two-way street to become effective. The centralized system under which lower tiers of government are responsible to a centralized authority has failed to impart efficiency and enhanced productivity.