Daily Times

The announcement of the 7th NFC award in 2009 was a major step towards provincial autonomy, which assigned 56.5 per cent share of the divisible pool to provinces for the year 2010-11 and 57.7 per cent for the remaining four years of the award. The 7th NFC award is still effective as both 8th and 9th NFC awards stand inconclusive.

After the separation of East Pakistan (Bangladesh) in 1971, the population had been sole criterion for distribution of divisible profit among four provinces until the 7th NFC award, which is based on four parameters. It has the following salient features and gives substantial financial autonomy to the provinces:

(I) It has enhanced the share of vertical distribution to 57.5 per cent among the four provinces.

(II) It set aside one per cent of the divisible pool for KP in connection with the war on terror. Up till 2019, the KP government has received Rs. 1.894 trillion in this connection.

(III) The provision of an extra 0.66% for Sindh to offset the losses due to the abolition of Octroi and Zila Tax back in 1997.

(IV) The use of four parameters for horizontal distribution: Population (82 per cent); Poverty and Backwardness (10.3 per cent); Revenue Collection and Generation (five per cent); and Inverse Population density (2.7 per cent). Based on these four parameters, during 2009, the share of each province was: Punjab 51.74 per cent, Sindh 24.55 per cent, Khyber Pakhtunkhwa 14.62 per cent, and Baluchistan 9.09 per cent.

(V) To safeguard the share of Baluchistan on budgetary projection in comparison to actual receipts. The federal government paid about Rs 90 billion to fill the protection granted to Baluchistan till 2019.

(VI) The declaration of the GST on services as a provincial matter. Though, the GST on goods is still a federal subject and included in divisible pool taxes.

(VII) A reduction of collection charges of taxes by the Federal Board of Revenue (FBR) from five per cent to one per cent.

The current arrangement under the 7th NFC award, as both the 9th and 8th awards were inconclusive, is such that out of gross divisible income, the first one per cent goes to KP as reconstruction relief due to “War on Terror,” and 0.66 per cent goes to Sindh as compensation for the abolishment of Octroi and Zila Tax in 1997. Afterwards, 57.5 per cent goes to four provinces and the remaining income comes under the domain of the federal government. The federal government pays for its obligations under its domain, including debt servicing, defence, salaries, and pension of federal employees and development and non-development funds to three territories of Azad Jammu Kashmir (AJK), Gilgit-Baltistan (GB), and erstwhile Federally Administrated Tribal Area (FATA). It is important to note that there is a defined formula to distribute the 57.5 per cent revenue only among four provinces, not for the territories of AJK and GB.

The centralists believe that the 7th NFC award and 18th Amendment have created a serious deficit at the federal level

The 18th Amendment provides further protection and autonomy to the provinces while including clauses 3(A) and 3(B) in Article 160. Clause 3(A) states that the share of a province in each NFC award should not be less than the ratio of that province in the preceding award. Similarly, Clause 3(B) assures the proper implementation of the award by federal and provincial finance ministries. Based on the clause, the government published the Biannual Monitoring of Implementation of NFC Award reports. As a result of the Amendment, 17 ministries are devolved to the provinces. However, the devolution did not take place in true spirit at both the federal and provincial levels even after ten years of the amendment.

The federalists support the notion that the 7th NFC award and 18th Amendment provide financial autonomy to the provinces. However, the centralists believe that it has created a serious deficit at the federal level. For example, the federal deficit in the post-7th NFC award period (2010-2018), on average, is 6.8% of GDP in comparison to 5.5 per cent in the pre-7th NFC award period (2005-2010).

According to the Federal Ministry of Finance, the remaining amount after distribution among provinces is not enough to finance two important and obligatory expenditures i.e., debt serving and defence. Dr Salman Shah, a former member of NFC award from Punjab, addresses the challenges to the federal government in financing deficit including low tax-to-GDP ratio, circular debts, high debt servicing, loss-making public sector enterprises, increasing cost of the pension fund, a deficit in the provision of key social services, providing jobs for youth, regional issue of poverty and human development. The 7th NFC award mentioned that there would be a gradual increase in tax-to-GDP ratio having a target of 15% by 2015 but the previous three governments failed to achieve this target and still roaming around 10% of the GDP. The fiscal deficit at the Centre is not the worry of only PTI but equally alluded by PPP and PML-N during their tenures. The centre claims that the provinces became rich and the federal became poor as a result of the 7th NFC award and 18th Amendment and blames the provinces for non-productive projects. The International Monetary Fund (IMF) shows concern regarding the 18th Amendment in the Country Report 2017, as they fear that the debt serving may get affected due to high fiscal deficit. In response to IMF, the finance ministers from federating units argued that the provinces have increased their collection (especially GST on services) many folds and the inefficiency lies at the FBR collection at Centre.

At the time of PML-N, during the second meeting of 9th NFC headed by former Finance Minister Ishaq Dar, a seven per cent deduction was proposed from divisible tax pool for security/defence (three per cent) and four per cent for AJK, GB, and erstwhile FATA. The talk of the town is that the federal government wishes to increase the seven per cent to somewhat 10-12 per cent to cover the federal responsibilities in the 10th NFC award.

Besides increasing the tax-to-GDP ratio by Centre, other alternatives for the federal government is to focus on increasing the non-tax revenue and cut down non-development spending rather tempting to get the share from the divisible pool of tax money. The Pakistan Economic Survey 2019-2020 shows an increase in non-tax revenue from 1100B to 1600B. The spending to GDP ratio of Pakistan (21 per cent) is higher than neighbouring Bangladesh (14 per cent) and India (13 per cent). The federal government can reduce the expenditure to fully devolve the 17 ministries to the provinces as a result of the 18th Amendment and to get rid of loss-making state-owned enterprises. However, the privatisation process should be transparent enough as the majority of previous privatisations did not produce the desired results, both financially and non-financially.

The writer teaches at the University of Peshawar and can be reached at naimat@uop.edu.pk. He tweets @NAIMAT84.