Demise of second consecutive NFC

Dr. Ikramul Haq

According to a Press report, the 9th National Finance Commission (NFC) “died its natural death …after the Centre and four provinces could not reach consensus on a new award for distribution of fiscal resources during the five-year constitutional term”. It was the fifth NFC since 1973 that unsuccessfully ended without consensus on the new award. So far only four NFCs have given awards. In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution of Islamic Republic of Pakistan [“the Constitution”] between the Centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is hardly 6%—in overall national revenue base (tax and non-tax revenue) it is around 8%.

In 2020, our economic managers are relying on 7th NFC Award signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010 [commonly called 18th Amendment]. Article 160(3A) of the Constitution, inserted by 18th Amendment, categorically says: “The share of the Provinces, in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award”. However, outside the ambit of Article 160 of the Constitution, the Centre can impose taxes to meet budgetary gap as it did in 2013 by enacting Income Support levy Act, 2013, but repealed it the very next year [A tax for the poor that the rich never paid, Daily Times, October 21, 2018]. When the federal government can impose any tax/levy/cess to meet its needs without sharing proceeds with the provinces then what is the motive behind starting a controversial debate over the 18th Amendment? The issue is not that of 18th Amendment, but poor collection of taxes by the federal government that hurts the provinces as well, which also do not collect taxes from the rich and mighty. This real dilemma of Pakistan is discussed in detail in Revisiting NFC Award, Daily Times, February 10, 2019 and IMF, NFC Award and PTI, Daily Times, October 14, 2018.  

The official document [Budget in Brief] of budget 2016-17 says: “The 8th NFC was constituted on July 21, 2010, but it did not give any Award”. Subsequently, the 9th NFC was constituted on April 24, 2015 followed by its demise on April 24, 2020. This is a sad reflection on meeting the constitutional obligations on the part of the federal and provincial governments.

A special feature of the 7th NFC Award was recognition that for Balochistan, share from the divisible pool was guaranteed at Rs.83 billion in financial year 2010-11 which was more than double from the actual divisible pool share of financial year 2009-10. It was also ensured that Balochistan province would receive provincial share in the divisible pool based on the budgetary projections instead of actual collection by Federal Board of Revenue (FBR). Shortfall, if any, based on the actual collection reported by FBR would be made up by the Federal Government itself. Initially, this arrangement was for five years of the 7th NFC Award but later on in order to cater for the financial needs of Balochistan, an amendment was introduced in the Presidential Order No.5 of 2010 [containing text of 7th NFC Award] providing that this arrangement “shall remain protected throughout the Award period based on annual budgetary projections”.

After 10 years of 18th Amendment and 11 years of 7th NFC Award, during Decade of Democracy [2008-18] neither PPP nor PMLN made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds—commonly known as divisible pool—could bring fiscal consolidation for the federation. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the Constitution.

On assumption of power in August 2018, the coalition governments of Pakistan Tehreek-i-Insaf (PTI) in the centre, Punjab and Balochistan and having two-third majority in Khyber Pakhtunkhwa also miserably failed in improving tax collection and devolution under Article 140A of the Constitution. It exposes the political elite—their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower them. The culprit is not the 18th Amendment but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008, now miserably after the Covid-19 outbreak and lockdown. In the coming week, they will notify 10th NFC Award but nothing will change unless oppressive, exploitative and elitist structures are dismantled! 

The federal government after imposing all kinds of oppressive taxes has miserably failed to reduce the burgeoning fiscal deficit. The reason being that FBR has been persistently failing to achieve the assigned targets, what to speak of tapping the actual tax potential that at federal level is not less than Rs. 8 trillion at federal level and Rs. 2 billion at provincial levels—Raising Rs. 8 trillion, Daily Times, September 20, 2018.

The failure to tap real tax potential is the failure of both the federal and provincial governments. Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on the Divisible Pool. Provinces are not ready to collect taxes wherever due e.g. agricultural income tax from rich absentee landlords and property tax from owners of palatial houses/bungalows/farm houses etc and not giving fiscal powers to local governments as envisaged under Article 140A of the Constitution.

Centre is unwilling to grant the provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet overall needs of the federation and federating units. The size of the cake is so small that it cannot help the country to come out of debt trap and spend adequately for the welfare of the masses, no matter which part of the country they belong to. The relief/stimulus package announced on March 24, 2020 by Prime Minister exposed our economic and fiscal vulnerabilities during testing times. Under the given scenario, Pakistan will remain in debt prison, and more and more people will be pushed below the poverty line, especially after corona crisis. If we want to overcome it, the Parliament will have to reconsider the prevailing social contract between federation and the provinces.

The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilisation in Pakistan.   

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)