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Revisiting NFC Award

Dr. Ikramul Haq

The 9th National Finance Commission (NFC), in its maiden meeting, chaired by Finance Minister Asad Umar, held in Islamabad on February 6, 2019, discussed besides other issues recommendations for improving the distribution of resources among provinces and smooth communication between the centre and provincial administrations. The last NFC Award of December 2009 is often described as “historic” as it was agreed upon after a lapse of 20 years and substantially increased the overall share of provinces under Article 160 of the Constitution.

Prior to the meeting, Asad Umar in response to a question whether the Federal Government planned to ask the provinces to give up 7% of their share responded: “We are not starting discussions from a fixed position”. “We will explain to the provinces the economic and financial issues confronting the country and try to reach a consensus on the points that need to be addressed,” he added.

Under the previous government of Pakistan Muslim League (Nawaz), the 9th NFC was constituted on April 24, 2015. In its first meeting of April 28, 2015, four working groups were constituted to undertake thematic studies and put forth their recommendations. What happened thereafter is history—a sad reflection on fulfilling the constitutional obligations by entire political leadership. It went largely unnoticed as the so-called vibrant media (sic) remained busy in Baghdadi-like manazaras (debates) to ignite conflicts among the already highly divided and disturbed nation.     

The star Finance Minister of PMLN informed the nation in budget 2016-17, “the shares of the provinces in the divisible pool have been worked out in accordance with the 7th NFC Award, 2009”. In 2016, he was shamelessly following the Award of 2009 and that too without fresh census required under the supreme law of the land! Yet, he claimed “ours is the best government Pakistan has ever had!” The provinces were also guilty of not agitating the matter—happy to get more money!!

It is an undeniable fact that the federal and provincial governments have not been concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights amongst Centre and federating units that can help empowerment of masses and ensure prosperity for all. In 2009, the representatives of provinces and federal government showed “satisfaction” over the 7th NFC Award. In fact, there was a mood of jubilation that a consensus had been reached. This validated the hollowness of our ruling classes as they failed to comprehend the real issue faced by the federation that was how to empower the provinces to enjoy full autonomy in fiscal and administrative matters.

The issue was and still is not only devising a just and fair formula for distribution of the net proceeds of the taxes—commonly known as Divisible Pool—but the revisiting of Article 142, 160 of the Constitution vis-à-vis bringing the less privileged and under developed areas at par with big sprawling cities where mass influx of people is playing havoc with law and order situation besides creating pressure on available civic amenities. Article 160 of the Constitution, dealing with the NFC Award, does not prescribe any particular formula for distributing the net tax proceeds among provinces. It, in fact, requires equitable sharing and distribution of resources among federation and provinces. The matter is, thus, not that of vertical or horizontal distributions of taxes and resources, for which six new working groups have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying harmonised sales tax on goods and services emanating in their respective areas.

Depriving provinces of the right to levy sales tax on goods is the fundamental flaw of our constitution. It was available to them before independence. The Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948 with the promise to give it back as soon as financial position of Centre improved—a promise that remains unfulfilled with none of the provinces ever raising its voice to seek fulfilment.

Balochistan should have exclusive right to levy indirect taxes on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This can make them rich. Their present share in sales tax from Divisible Pool is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh.

The Centre has been brazenly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and Federal Excise Duty (FED) on a number of services. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to overcome the burgeoning fiscal deficit. Had provinces been allowed to generate their own resources by levying sales tax etc on goods produced by them, the present chaotic situation on fiscal front could have been averted.

It is regrettable that the provinces have been denied even pre-partition available right of levying sales tax on goods. They have been purposefully made dependent on the federal government—this is a considered policy of control for maintaining hegemony over federating units. On the one hand, the provinces have not been allowed to levy taxes on goods generated within their boundaries and on the other the federal government has utterly failed to tap the real revenue potential, which is not less than Rs. 8 trillion—the roadmap to realise it is available in ‘Towards Flat, Low-rate, Broad & Predictable Taxes’ (PRIME, 2016). Collection to this extent will make the entire Pakistan prosper and not only a few urban areas.

The Federal Board of Revenue (FBR) has reportedly informed Asad Umar that it would be able to collect only Rs. 4.1 trillion this year. It means less than promised share for the provinces. In the Budget 2019, the revenue target of FBR was fixed at Rs. 4435, which was reduced to Rs. 4398 billion by the PTI Government and now FBR wants further reduction of 335 billion vis-à-vis original target slashing substantially the share of provinces promised for 2018-19! 

The pathetic performance of FBR affects the provinces as they are heavily dependent on share/transfers from the Divisible Pool. Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and has at its own collects too little to meet the national overall demand. Since the size of cake (Divisible Pool) is small, the provinces lack sufficient resources for the welfare of their people. In this scenario, the real sufferers are the masses. The taxation rights under the prevalent constitutional scheme needs reconsideration to empower provinces to raise adequate resources which will also help in overcoming overall fiscal deficit faced by the country.


The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq.

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