Dr. Ikramul Haq
Fiscal equalisation is a transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue raising capacity or public service cost. Its principal objective is to allow sub-central governments to provide their citizens with similar sets of public services at a similar tax burden. Fiscal equalisation can be seen as the natural companion to fiscal decentralisation as it aims at correcting potential imbalances resulting from sub-central autonomy—Fiscal Equalisation in OECD Countries
Pakistan, unfortunately, presents one of the starkest examples of how a formally federal Constitution can be hollowed out by a profoundly centralized fiscal order. Despite repeated National Finance Commission (NFC) Awards, lofty constitutional promises, and rhetorical commitments to provincial autonomy, the lived fiscal reality—especially for smaller and resource-rich provinces—betrays a system structurally tilted against economic justice. No province illustrates this failure more strikingly and unambiguously than Balochistan.
Federalism is not merely a question of political representation or administrative devolution. At its core, it is a fiscal compact—a constitutional guarantee that resources will follow responsibilities and that disparities among constituent units will be consciously reduced through fiscal equalization. In Pakistan, this compact has never truly existed. Instead, Pakistan’s fiscal architecture has evolved into a unitary revenue state with decentralized expenditure obligations.
The federation monopolizes the most buoyant and broad-based taxes—income tax, sales tax on goods, customs duties, petroleum levies—while provinces are assigned responsibilities for education, health, policing, local infrastructure, and social protection. This asymmetry is not accidental; it is the defining feature of Pakistan’s political economy. The result is predictable: provinces remain fiscally dependent, politically constrained, and economically unequal.
Fiscal equalization is the invisible architecture of every successful federation. It ensures that constituent units with unequal fiscal capacities are nevertheless able to provide comparable levels of public services. Where it is absent, regional disparities harden into structural injustice.
Pakistan, despite having an elaborate constitutional framework, stands among the weakest examples of fiscal equalization in practice. The failure is not technical or accidental; it is constitutional, deliberate, and persistent.
This article in two parts highlights that Pakistan’s fiscal crisis cannot be understood merely through deficits, debt, or morbid taxation. The deeper problem lies in the systematic non-observance of constitutional provisions designed to secure economic justice among federating units—most notably Articles 140A, 160, 161, 162 and 172(3) of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. These provisions, in fact, were conceived/enacted by framers tenaciously to act as pillars of economic justice and participatory federalism.
The persistent violation of above constitutional provisions has converted Pakistan into a federation dominated by one province based on population alone, with others—most notably Balochistan—reduced to fiscal dependents. This unconstitutional fiscal engineering that has entrenched into dominance one province, rather than correcting inequality.
NFC Awards: Redistribution Without Equalization
The NFC framework is often portrayed as Pakistan’s principal equalization instrument. In reality, it is little more than a revenue-sharing mechanism, not a system of fiscal justice. Population remains the dominant criterion, inevitably favouring Punjab. Indicators meant to correct historical deprivation—poverty, backwardness, inverse population density—are marginal and cosmetic. For Balochistan, this is devastating.
A province spanning nearly half of Pakistan’s landmass, hosting immense mineral, gas, and strategic resources, receives transfers that are insufficient even to sustain basic governance, let alone close development gaps created over decades of neglect.
Article 161 of the Constitution is unambiguous. It mandates that net proceeds from natural resources—particularly gas—belong to the province of origin. This provision was never symbolic; it was intended as a corrective mechanism for resource-rich but underdeveloped regions.
In practice, however, Article 161 has been rendered almost meaningless. Royalties are under-assessed, development surcharges are manipulated, arrears accumulate for years, and payments are routinely delayed or adjusted through opaque federal accounting.
The result is that provinces producing strategic resources subsidize consumption and industrial growth elsewhere while remaining developmentally deprived. This is not administrative inefficiency. It is a constitutional breach with economic consequences, converting ownership rights into negotiated concessions.
Hard Numbers: Inequality Quantified
Under the prevailing NFC framework, provincial shares of the divisible pool are:
- Punjab:74%
- Sindh:55%
- Khyber Pakhtunkhwa:62%
- Balochistan:09%
In fiscal year (FY) 2024–25, this translated roughly into:
- Punjab: Rs 3.32 trillion
- Sindh: Rs 1.70 trillion
- Khyber Pakhtunkhwa: Rs 1.10 trillion
- Balochistan: Rs 0.71 trillion
Punjab received more than five times what Balochistan receives, despite higher poverty incidence, higher service-delivery costs, and resource extraction burdens in smaller provinces.
Petroleum Levy Dismantling NFC Award
Pakistan’s most serious assault on fiscal equalization has occurred through petroleum taxation.
Under Article 160, taxes forming part of the divisible pool must be shared with provinces (currently 57.5%). Sales tax on petroleum products historically formed a major part of this pool. The federal government adopted a two-step manoeuvre:
- Sales tax on petroleum was zero-rated, removing it from the divisible pool
- Petroleum levy was sharply increased, with 100% retained by the federation
Consumers continued to pay at the pump, but provinces lost their constitutional share. While the 2011 amendment to the Petroleum Products (Petroleum Levy) Ordinance, 1961 was duly passed by both houses of Parliament, the substitution of the Fifth Schedule through Finance Acts in 2018 and 2022, passed only by the National Assembly z Money Bill, bypassed the Senate, which represents the provinces. This legislative shortcut amounted to a flagrant violation of the federal compact, allowing the federation to defeat the NFC Award without amending it.
For provinces such as Balochistan, the result was a sustained loss of shared revenue, fewer development resources, and deeper fiscal dependence—despite rising fuel prices borne equally by their populations. What cannot be done directly cannot be done indirectly. The petroleum levy remains the worst example of fiscal equalization denial in Pakistan.
True fiscal equalization would mean compensating provinces for:
- structural disadvantages,
- sparse populations and high service-delivery costs,
- historical underinvestment, and
- resource extraction without commensurate local benefit.
Pakistan’s NFC awards do none of this in any meaningful sense. Nowhere is Pakistan’s failure more glaring than in the treatment of natural resources. Gas extracted from Balochistan or Sindh, and electricity generated in Khyber Pakhtunkhwa have powered industries and households elsewhere for decades, while communities at the source remain without clean water, electricity, gas, education, or healthcare.
Royalties and development surcharges—constitutionally mandated—are either underpaid, delayed, or absorbed through opaque federal accounting practices.
The result is that provinces producing strategic resources subsidize consumption and industrial growth elsewhere while remaining developmentally deprived. This is not administrative inefficiency. It is a constitutional breach with economic consequences, converting ownership rights into negotiated concessions. This is not merely poor policy; it is a breach of the federal trust. A federation that consumes provinces’ natural wealth/resources without ensuring their development ceases to be a partnership and begins to resemble internal colonialism.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.