Economists propound divergent views on change in 10th NFC Award

ISLAMABAD: The Terms of Reference (TOR) of the just-constituted 7th National Finance Award (NFC) marks a radical departure from the past as it contains at least five new subjects and areas that never figured in any of the previous NFCs.

The overall federal allocation from amongst the available resources is sought to be increased and the shares of the provinces to be decreased to meet expenditures on these critical areas.

Or the provinces, while maintaining their present shares, will be asked by the NFC to share the additional expenditures and financial responsibilities that the Federation is bearing.

The new areas and subjects incorporated in the NFC agenda are expenditures made on the governments of Azad Kashmir and Gilgit-Baltistan, the newly merged districts of erstwhile tribal areas into Khyber Pakhtunkhwa (KP); security and natural disasters/calamities; and repayment of public debt.

Two other areas included in the agenda are rationalisation of subsidies given by the federal and provincial governments in their budgets and agreeing on a mechanism to finance them, and exploring ways to reduce losses of state-owned enterprises and agreeing on mechanism for sharing these losses between the federal and provincial governments.

The expanded agenda has caused a controversy with the Sindh government having disapproved the inclusion of the new items and two prominent lawyers having challenged the NFC in the Balochistan High Court.

Two noted economists differ on the expansion of the NFC agenda. Dr Ashfaque Hassan Khan supports it in view of the changed situation when the federal government doesn’t have money to meet the expenditures being incurred on the five crucial areas.

When contacted, he told The News that when the provinces were getting 60pc of the revenue and the federal government is being given just 40pc, they will have to share the rising financial responsibilities. “How can the federal government with meager resources meet the swelling expenditures?”

The economist also alluded to the controversy relating to the composition of the NFC especially the role of the adviser to the prime minister on finance and revenue, but said he did not want to dilate on it for being not a legal mind.

When approached, distinguished economist Dr Kaiser Bengali, who was a member of the 7th NFC, whose award is still in field, told The News that the functions of the NFC for distribution of revenue between the federal government and provinces have been clearly specified in the Constitution.

“Reducing the shares of the provinces or shifting some additional expenditures on them and raising the share of the federal government will affect the health of Federation, which will have serious consequences. The new allocation must not be done because it will be deleterious for the Federation,” he said.

Dr Kaiser Bengali said it was the federal responsibility to substantially reduce expenditures and break the stagnant tax-to-GDP ratio but nothing has been done in this connection. He said that there were 15/20 federal divisions, which have not been abolished/ devolved but have been retained by the central government by changing the names of some of them. “The divisions of national harmony, national heritage and regulations have nothing to do at the federal level. The federal government can save a lot of money by winding up all these divisions, which it can have at its disposal to meet the additional expenditures that it now wants the provinces to share.”

The economist said that the composition of the NFC was spelt out in the Constitution and the president of Pakistan can’t go beyond that and can’t change it. He said that the adviser on finance and revenue can’t be member of the NFC and can’t chair its meetings even in the absence of the finance minister, who in the present case is Prime Minister Imran Khan.

A public finance expert told The News on condition of anonymity that by way of TOR the government cannot extend the mandate of NFC beyond what is provided in the Constitution.

The prime motivation behind the inclusion of a number of new subjects and areas in the NFC agenda is the growing federal financial responsibility in the face of the squeezing resources. The hard-pressed central government is attempting through the NFC to make the provinces accept part of the massive new burden.

The 7th NFC steered by PPP government in 2010 was a watershed event in federal-provincial relationship. The unanimous award increased provincial share in the Federal Divisible Pool to 57.5% from 46%. It reduced federal government’s collection charges to 1% from 5%.

For determination of provincial shares in the 7th NFC award, the principle of apportionment according to population was reviewed, and factors like population, poverty, revenue generation, inverse population density were also agreed to be considered and were given weightage of 82%, 10.3%, 5%.and 2.7% respectively. This brought windfall for smaller federating units particularly Balochistan.

According to the agreed formula in the 7th NFC award, share of Punjab, Sindh and KP decreased from 53.1% to 51.74%, from 24.94% to 24.55%, from 14.88% to 14.62% respectively. The share of Balochistan increased from 7.17% to 9.01%.

A special allocation of 1% for war on terror was given to KP from federal divisible pool.

Many other contentious issues were decided in the 7th NFC, like share of provinces, in gas development surcharge, excise duty on oil, share in net hydel power revenues for provinces particularly KP. These measures greatly benefitted KP, Sindh and Balochistan. The provinces were given the authority to levy and collect sales tax on services, a measure which brought huge revenue to Sindh and Punjab.

Through a special provision in Constitution brought in by 18th Amendment, it was guaranteed that the share of the provinces in each award of NFC shall not be less than the share given to them in the previous award.

The 10th NFC is supposed to review the resource apportionment agreed between the federal government and federating units in 2010 under the 7th NFC.

The NFC is provided for in Article 160 of the Constitution. The central government is mandated by it to establish the NFC every five years. The same article specifies the mandate of the NFC, which is one of the most important forums between federal government and provinces.

The NFC has to unanimously agree on the distribution between the Federation and the provinces of the net proceeds of taxes on income, including corporation tax; on the sales and purchases of goods imported, exported, produced, manufactured or consumed, export duties on cotton, and such other export duties, duties of excise and such other taxes as may be specified by the president. Apart from these taxes, the NFC also decides about the making of grants-in-aid by the federal government to the provincial governments.

The NFC also has a constitutional mandate regarding exercise by the federal government and the provincial governments of the borrowing powers.