Pakistan is a federal democracy. In order to maintain a productive inter-governmental fiscal relationship, Article 160 of the Constitution provides for the setting up of a National Finance Commission (NFC) with intervals not exceeding five years. The NFC is mandated to make recommendations to the President for the distribution of resources between the federal government and the provincial governments.
The recommendations of the NFC, when submitted to the President and approved by him after due consideration, are given legal cover through a Presidential Order which is also commonly known as the NFC Award. It is initially valid for the period of five years. However, it can also be implemented on a year-to-year basis until a new NFC Award is notified.
For the first time in the history of Pakistan, multiple indicators were adopted in the seventh NFC Award for the distribution of provincial shares in the divisible pool of taxes and duties whereas in all the previous NFC Awards, the population was the sole criterion.
A special feature of this NFC Award, which continues to be extended every year after its expiry, was the long overdue recognition of the requirements of the province of Balochistan. Its share out of the divisible pool of taxes and duties was Rs.83 billion during FY2012, which was more than double from the actual divisible pool share of FY2010. Balochistan will also be receiving its share in the divisible pool based on budgetary projections instead of actual collection by the federal government’s main tax generation and collection agency, the Federal Board of Revenue (FBR). A shortfall, if any, based on the actual collection is made up by the federal government out of its own share. This arrangement has been in practice since FY2012 and is continuing now too.
The 7th NFC Award was announced by President Asif Ali Zardari in 2010 and enforced from the first day of July 2010. Since no new NFC Award was notified despite some half-hearted efforts, the 7th NFC Award was extended through the Distribution of Revenues and Grants-in-Aid Order of 2015. It came into force from July 1, 2015, and continues to be in force.
The 8th and 9th NFCs were constituted from time to time to meet the constitutional requirements, but both these NFCs somehow could not make any headway beyond a couple of initial meetings and the formation of some working groups, mainly due to the strong stances adopted by the stakeholders on one or the other points.
According to the provision of Article 160 of the Constitution, a National Finance Commission is to consist of the Federal Finance Minister and Finance Ministers of the provinces and any other persons that may be appointed by the President after consultation with the governors of the provinces. Each province is also represented in the NFC by a non-statutory member while the Federal Finance Secretary acts as the official expert.
The composition of the 10th NFC was challenged in the superior courts as it was headed by the Advisor to the Prime Minister on Finance and Revenue, Dr Abdul Hafeez Shaikh. In the absence of a full-fledged Finance Minister, the Prime Minister is supposed to hold the portfolio of finance also among others. The Advisor status was accordingly upped and made the Federal Minister. Presently, the Federal Minister for Finance and Revenue Shaukat Fayyaz Ahmad Tarin heads the NFC.
The pool of taxes and duties includes taxes on income, wealth tax, capital value tax, taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, export duties on cotton, customs duties, federal excise duties, and any other tax which may be levied by the federal government.
The allocation of shares out of the divisible pool, as per the 7th NFC Award are based on multiple indicators. The indicators and their respective weights are: population at 82 percent, poverty backwardness at 10.3 percent, revenue collection at 5 percent and inverse population density at 2.7 percent. The sum assigned to the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan are distributed amongst the provinces on the basis of the percentage specified against each: Punjab at 51.74 percent, Sindh at 24.55 percent, Khyber Pukhtoonkhwa at 14.62 percent and Balochistan at 9.09 percent.
The federal government also makes straight transfers to the provinces on account of royalties on crude oil, natural gas, gas development surcharge and excise duty on natural gas.
