NFC — too many roadblocks to go around (24-09-2009)

So even this time drawing a consensus for the 8th National Finance Commission Award is still far from reach. In the first part of the article, we discussed that how difficult it is to resolve the conflicting interests of the four provinces and that of the provinces with the center. The present commission has also come to the same road blocks. It has formed a number of committees to find a way to go around these blocks by persuading all the conflicting parties to leave their maximalist positions.

The first major issue before the NFC is that that the provinces are asking the Federal government to take a sharp cut on its share from the present 55% of the revenue collected to 40%. Federal Finance Secretary Salman Siddiqui has reportedly opposed this idea. His contention is based on the given situation that the center has to foot the massive debt servicing bill, it cannot touch the sacred fat defense expenditure and it needs a large amount for infrastructure development. As a bureaucrat he is not expected to touch the political aspect of this conundrum: that the issue of provincial autonomy has to be sorted out first before suggesting any major change in the division of fiscal resources between Islamabad and the province.

Federal government budget can only be slashed by cutting down its bloated size. First, it has to be cut to the size that was envisaged in the Constitution for example by abolishing the ministries which are provincial subjects – education, health, agriculture and local bodies to name a few. No doubt there has to be coordination between the provinces on these important subjects. This job can be done by just a few officials in the Council of Common Interest secretariat by organising coordination meetings of all the provinces.

Second, the present constitution has to expand the quantum of autonomy to provide more space to the provinces; otherwise disenchanted provinces may adopt the path Balochistan nationalists have picked up. What our parliamentarians have to understand is that we are living in the era where a strong center cannot hold the federating units. The federating units have become mature and independent in the post-second war period in all the countries of the world. Belgium is holding its Flemish and Wallons parts together with great difficulty; Switzerland, one of the most ideal participative democracy is looking for more devolution; UK the mother of all democracies is faced with the independence referendum demand from Scotland nationalists; our next door neighbour India has been struggling to keep it’s seams from splitting. The regional parties of India which form the coalition exert their pressure in the ruling coalition to get their pound of autonomy, notwithstanding the constitutional barriers. Islamabad should learn from what is happening globally and cut its size. India was partitioned because Congress wanted a strong center and Pakistan lost East Pakistan for the same reasons. Now is the time to act before some foreign powers decide to help the independence movements in Sindh and Balochistan. By giving in to the provinces’ demand Islamabad would reduce its expenditure substantially and help in meeting their demands.

Smaller provinces have been demanding that the Federal government should only retain Defense, Communications, Foreign Affairs and currency as envisaged in the 1940 Pakistan Resolution. The fact that Mr. Jinnah accepted to the Cabinet Mission’s Plan much later with the same division of power between the center and the provinces also shows that he was for more autonomy. Initially East Pakistan leaders also demanded the same, but the obstinate establishment preferred to give away half the country in their lust of concentrating power.

Now let’s examine the position of the four provinces on the distribution of resources among the provinces. Most ticklish issue is that all the smaller provinces have been saying that a vertical division of fiscal resources on just population basis is not acceptable to them. They want a horizontal criteria giving due weightage to multiple criteria: collection of taxes, poverty and backwardness, inverse population growth, area and fiscal efforts, etc.

The first major roadblock is that Sindh demands a larger share on the basis of its claim that almost 60-70% taxes are collected from the province; hence collection of taxes should be given heavy weightage in the new distribution formula. Unfortunately, I was unable to find any proper study to support this argument. The ten percent difference in economic figures in the statements of many Sindh’s political leaders and bureaucrats shows that much of the demand is based on rhetoric.

In the 6th NFC Punjab’s position was that population basis formula under which its gets 57.88% from the total divisible pool should not be changed. The position paper presented at the 6th NFC clearly stated: “In summary, if the proposal of resource allocation on the basis of tax collection is accepted, it may invite retaliation from provinces that are negatively affected by it. This retaliation may inter-alia take the following forms:-

1. Imposition of taxes on inter-provincial movement of goods

2. Imposition of taxes on wholly-owned subsidiaries of companies with head offices registered in other provinces

3. Imposition of taxes on inter-provincial movement of capital

4. Establishment of separate tax collection infrastructure”

“This tax warfare between the provinces will have disastrous consequences for not only the federation but also for the provinces. The four economic freedoms enshrined in the Constitution will be undermined and the economic system based on a single common market will collapse. Sindh will lose the investment flows and access to markets while other provinces will lose markets for their goods and services. It is

therefore recommended that the proposal of Sindh may be shelved for the time-being and further research be conducted to evaluate its potential impact.

Punjab’s contention is right to the extent of corporate tax, customs duty and sales tax collected at import or at production level. As most of the large corporations and banks have their head offices in Karachi it cannot be said that the taxes paid by them are based on their income accrued from Sindh alone. Similarly, as major ports are in Karachi all the goods arriving are not for Sindh alone and same is the case with the sales tax on goods at the factory level.

However, of late Punjab has shown some signs of flexibility by agreeing that a multiple formula for the distribution of resources can be considered by the present commission. This flexibility is based on their claim that in absolute terms Punjab has a greater number of people who are below the povertyline; hence the benefit of the admissibility of the poverty criterion would be acceptable to them. At the same time in the last two decades Punjab’s industrial and commercial scene has also changed and a number of big businesses are situated in the province. Most recent being the shifting of the head offices of two major commercial banks to Lahore.

Sindh’s demand for giving weightage to the collection of taxes is justified when it comes to collection of individual income tax. Its demand that the collection of sales tax on services should be directly transferred to the provinces has strong constitutional basis. Clause 49 of the 4th Schedule of the Constitution says: “Taxes on the sales and purchases of goods imported exported, produced, manufactured or consumed.” Thus while sales on goods is part of the Federal Legislative list, sales tax on the services is not mentioned in this list. Sindh and Punjab would be major beneficiaries of sales tax on goods if it is directly transferred to the provinces from where it is collected. They are thus pushing that sales tax on services should be on the basis of collection. But NWFP and Balochistan would be major losers if tax collection is given higher weightage in the new formula, as very little taxes are collected from these two provinces.

The NFC members have to first agree to the multiple criteria formula, then there would be struggle on what is to be included and how much weightage should be given to each criterion. All the provinces agree on poverty to be included as one criterion, but not on the weightage given to it in the total pool.

Though the NFC has a defined role of dividing the revenue collected by the federation to the provinces, its scope has been expanded and issues like distribution of royalties and taxes on gas & oil; profits on hydel electricity; cost of being a frontline province in war against terrorism are also under its consideration.

Here again Balochistan and Sindh have differences on the issue of division of gas development surcharge. Balochistan has a strong case as the gas produced by them is cheaper therefore its share in profits and taxes should be higher. The crude methodology at present is based on working out the profit (GDS) shares after working out the average well-head price. Under this formula Balochistan feels short-changed.

Another issue is of royalties from oil & gas. It is calculated on the basis of 12.5% and is transferred to the provinces since 1997. Balochistan wants that arrears should be paid to it as its gas has been used since 1953. As the benefit of this royalty does not reach the highly under-developed areas from where the oil and gas resource is drawn, I had proposed it to Prime Minister Shaukat Aziz that the provinces should give at least 20% to the district or Tehsil councils of the areas which produce oil & gas. This would not only reduce the influence of feudals and sardars of the hostile areas, but will also make them hospitable for exploration and production companies. This inequitable distribution among various districts is related to the wider issue of provincial finance commission awards. Provinces have been making a hue and cry about unjust division of resources by the center, and rightly so. But they have also been usurpers of the local government’s financial rights. An issue we should discuss some other time.

Balochistan also wants that all the revenue from the Gwadar port, Saindak and other mines should go to the province. This demand should be supported by Sindh also. As the port income should be shared with the respective provinces where they are located by the federal government.

Pakhtunkhwa’s demand that it should be paid arrears of electricity royalty is genuine and it seems that the Finance Minister has managed to satisfy them to a certain extent. Their other demand that the Pakhtunkhwa should be provided additional help for being the frontline province is just, but assistance in this regard has to come from grants and special subvention funds. Much of this is dependent on the promised foreign funding.

Coming back to what should be the formula for the distribution of resources, we should first look at the neighbour next door (if that can be of help for our commission members) which has now some 30 provinces compared to 23 carved out in the Nehru era. (Some day Pakistan will also have to carve out new provinces). In India income tax and excise duty is divided on the following criteria: population 10%; poverty 62%; and then area, index of infrastructure, tax efforts and fiscal discipline are given equal weightage of 7.5% each.

In Pakistan, 2002 NFC did an exercise by drawing different scenarios in which population weightage in the divisible pool ranged from 55 to 65%. (It may be noted that majority of the countries in the world have multiple formulas, and not just the population based criterion as it prevails in Pakistan). Other factors weightage taken by 2002 papers were revenue collection 15%; area 15%, fiscal effort 15%. When the share of provinces was worked out on this basis, 55% of the total pool to be divided on population basis, it was found out that Punjab would have to take a cut of about 10% (its share under this formula would come down from the present 57% to 47%). Other loser would be Pakhtunkhwa (note hydel profits are not included here). And the gainers would be Sindh and Balochistan by about 5 and 2 percent respectively.

Now the questions which are still before the 8th NFC are: Will the federal government cut its share drastically from the present 55% to 40%? And will Islamabad give away sales tax on services to the provinces? In both cases it seems unlikely. Will Punjab agree to a multiple factors formula which will reduce its share by 10%? With Shahbaz Sharif there it is not probable, in spite PML (N) talk about giving due rights to the provinces. Will Sindh give in to the just demand of Balochistan and settle the GDS issue? And will Sindh accept its oft repeated claim that 70% taxes which are collected from the province is unsubstantiated? Hype built by nationalists in Sindh will make it difficult for the pliable Sindh government to give in a lot.

Thus the task before Finance Minister Shaukat Tarin is much more complex and difficult. And he has no magic wand to say hereafter all will live happily together! All the parties have to rise above their respective maximalist positions and try to move towards an equitable formula in the interest of the provinces of the federation. No single party would be able to get the maximum in one go. So move ahead here please and then try to amend the Constitution for greater autonomy – that’s the only way forward. (

  1. Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s