Dr. Ikramul Haq
The People’s Republic of China’s (PRC) fiscal system is characterized by very high expenditure decentralization and heavy reliance on transfers to finance public services. The government’s embrace of inclusiveness and equalization as national goals has raised questions about whether transfers can deliver equalization—Equalization through the People’s Republic of China’s Intergovernmental Fiscal System: The Effectiveness of Central and Provincial Transfers by XIAO TAN & YING TAN
Fiscal equalization is not charity. It is a constitutional obligation aimed at correcting disparities in fiscal capacity and service-delivery costs arising from geography, poverty, population dispersion, and historical neglect. Mature federations recognize that population alone cannot determine fairness. Our successive governments, civil and military alike, however, have confused revenue sharing with equalization. Our fiscal arrangements distribute funds but do not correct inequality. The result is redistribution without justice.
Centralized Tax Power, Perpetual Dependency
One of the gravest distortions in Pakistan’s federal design is the refusal to allow provinces meaningful tax autonomy. Despite the Constitution (18th Amendment) Act, 2010 [18th Amendment], provinces remain constrained by a federal monopoly over major tax bases and by the absence of a truly harmonized, constitutionally grounded national tax framework.
In earlier articles on fiscal decentralization, the consistent argument has been that without a National Tax Agency, jointly represented and governed by the federation and provinces, Pakistan cannot escape deadly debt trap. Centralized collection coupled with low transfers entrenches dependency and weakens accountability. Provinces are blamed for poor service delivery but denied the revenue tools to improve it. Balochistan’s predicament is especially acute: limited own-source revenues, weak administrative capacity (itself a consequence of underdevelopment), and near-total reliance on federal transfers that are politically negotiable rather than constitutionally assured.
From Transfers to Justice
If Pakistan is to thrive as a genuine federation, it must move beyond symbolic National Finance Commission (NFC) awards and confront the structural roots of inequality. This requires:
- A shift from population-weighted sharing to needs-based equalization; and
- Full constitutional compliance in resource taxes, royalties and surcharges
A jointly governed national tax system ensuring transparency and equity alone can strengthening provincial and local fiscal autonomy, especially in smaller provinces. The need of the hour is treating Balochistan not as a security problem but as a constitutional stakeholder. Until this transformation occurs, Pakistan will remain a textbook example of fiscal injustice in the garb of constitutional federalism—a federation in form, but not in substance; united in rhetoric, but divided in economic reality.
Article 172(3): Joint Ownership Without Joint Control
Article 172(3) of the Constitution of Islamic Republic of Pakistan [“the Constitution”] envisages shared ownership and shared decision-making over mineral oil and natural gas within the province or the territorial waters adjacent thereto. In practice, control remains overwhelmingly federal. Licensing, pricing, and exploration decisions are centralised, while provinces are reduced to passive recipients. Resource-rich provinces thus remain development-poor. Joint ownership exists on paper; federal unchallenged dominance prevails in reality.
Article 140A: The Missing Equalizer
Local governments are the final conduit of fiscal justice. Article 140A mandates elected local governments with political, administrative, and financial authority. The constitutional courts have repeatedly held that such governments should be elected as per the Constitution, cannot be dissolved prematurely and must exercise bona fide powers as envisaged in the supreme law of the land. Yet provincial political elites in power routinely avoid or dismantle local governments, retain fiscal authority within bureaucracies, and centralize development spending. Without local governments, fiscal transfers remain accounting entries rather than improvements in living conditions of the citizens at grass root level.
Punjab’s Structural Dominance
Punjab’s dominance is often defended on demographic grounds. This argument misunderstands federalism. Federations exist to prevent majoritarian capture, not entrench it. Punjab’s structural advantage is maintained through population-weighted NFC formulas, centralised tax collection, disproportionate influence in federal institutions, and weak enforcement of equalization provisions. This is majoritarian federalism, incompatible with constitutional balance, must end. The innovations by other federations (see below) and even unitary states must be debated and viable solution suiting our peculiar historic situation must be searched and implemented.
Comparative Perspective: Lessons Ignored
In Canada, equalization is constitutionally entrenched, formula-driven, and non-negotiable. In Germany, fiscal solidarity is court-enforced to ensure equivalent living standards. In Australia, an independent grants commission accounts for geography and service-delivery costs. Our successive governments have been ignoring these lessons and treating equalization as political generosity rather than constitutional duty. Our failure in fiscal equalization is neither accidental nor inevitable. It is the outcome of deliberate fiscal engineering, persistent constitutional non-observance, and an institutional mindset that treats federalism as administrative convenience rather than a binding constitutional compact.
The evidence is now overwhelming. Provinces have been deprived of their constitutional entitlements under Articles 160 and 161 through delayed payments, distorted tax design, and unilateral federal levies. Article 172(3) has been reduced to nominal joint ownership without real control. Article 140A—intended as the final equalizer—has been systematically undermined, ensuring that even transferred resources fail to reach communities.
As discussed and elaborated in Part I, the unconstitutional imposition of petroleum levy stands as the most egregious example of this distortion: a parallel revenue regime deliberately constructed outside the divisible pool to deny provinces their guaranteed 57.5 percent share. What emerges is not cooperative federalism, but fiscal centralism disguised as constitutional compliance. Yet Pakistan’s predicament is not without remedy. Importantly, no constitutional amendment is required. The solutions already exist within the constitutional framework—what is missing is institutional fidelity.
Restore Integrity of Divisible Pool
The federation must reverse the practice of tax relabelling designed to defeat provincial shares. Petroleum taxation, in substance a consumption tax, must either be brought back within the divisible pool or subjected to NFC sharing principles. Any levy that has the economic character of a tax cannot be allowed to remain an exclusive federal preserve merely by legislative nomenclature. This single reform would restore trillions of rupees to provincial finances and re-establish the credibility of Article 160.
Rebalance NFC from Population to Needs
Population cannot remain the dominant determinant of fiscal shares in a deeply unequal federation. Future NFC awards must assign decisive weight to poverty, backwardness, cost disabilities, geographic dispersion, and infrastructure gaps. Equalization is meant to close gaps, not perpetuate them. Without this shift, NFC awards will continue to redistribute revenue without correcting inequality.
Articles 161 and 172(3) must be operationalized through transparent accounting, timely payments, and joint governance mechanisms. Provinces must participate meaningfully in decisions relating to exploration, pricing, and development of natural resources. Resource-producing regions cannot remain development-poor without eroding the moral foundation of the federation.
Implement Article 140A
No equalization system can succeed without empowered local governments. Provinces must cease treating local governments as administrative extensions and recognize them as constitutional institutions. Fiscal decentralization must reach the third tier so that transfers translate into schools, clinics, and housing, transport, water supply, and local infrastructure— particularly in peripheral and underdeveloped regions.
Institutionalize Shared Fiscal Sovereignty
Pakistan’s extreme vertical imbalance—where the federation controls the most buoyant taxes while provinces shoulder service delivery—must be corrected. A jointly governed national tax framework, transparent revenue assignment, and a strengthened Council of Common Interests are essential to ending adhocism and restoring trust. A durable correction of Pakistan’s federal imbalance also requires institutional reform beyond fiscal transfers.
The Senate—constitutionally conceived as the House of the Federation—cannot continue to be indirectly elected while being denied an effective role in financial legislation that directly affects provincial rights. Direct election of the Senate, combined with a constitutionally guaranteed right to vote on Money Bills, would restore its role as a genuine protector of provincial interests rather than a ceremonial chamber.
Equally, federal cohesion demands that state institutions reflect the country’s diversity. In the Pakistan Armed Forces, recruitment, command structures, and career progression must ensure fair and visible representation of all four provinces, not as a quota-driven concession but as a principle of federal ownership. Federations endure not merely through shared revenues, but through shared power, shared institutions, and shared stakeholding. Without representative political and state institutions, fiscal equalization alone cannot heal structural alienation.
Conclusion
Pakistan today faces a clear choice. It can continue down the path of fiscal centralization masked as federalism, where constitutional guarantees exist on paper but are neutralized in practice. This path leads inevitably to deepening provincial alienation, service delivery failure, and political instability. Alternatively, it can return to the true spirit of Constitution—not as mutilated by dictators and their cronies. Unfortunately, their legacy persists in letter and spirit, even in further mutilating the supreme law of the land through handpicked cronies.
All pro-people minds and parties need to unite and rebuild democratic institutions and culture that are prerequisite for fiscal equalization as a system of rights, not discretion. Fiscal equalization is not a concession to smaller provinces. It is the price of unity in a diverse federation. The Constitution already provides the map. What remains is the political will to follow it and wage struggle against those who want status quo for self-aggrandizement.
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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.