NationalVOLUME 15 ISSUE # 20

TORs make the 10th NFC impossible to finalise

The constitution of the 10th National Finance Commission (NFC) by President Arif Alvi was needed to distribute financial resources between the central and provincial governments; however, the manner in which it has been formed would make the finalization of the award quite unlikely.

The Ministry of Finance formally notified the constitution of the 11-member commission after approval by federal and provincial members and its terms of reference by President Arif Alvi as required under the Article 160 (1) of the Constitution. Although there is no constitutional provision that an adviser to the prime minister could become a member of the NFC, yet President Alvi has nominated Adviser to PM Imran Khan on Finance, Hafeez Sheikh, its member. It would precipitate legal action and two lawyers have already challenged it in the Balochistan High Court.

Regarding the constitutional position, the NFC will have four provincial finance ministers and four non-statutory members representing the provinces and the federal finance secretary as official expert. It may be mentioned that the ToRs set under the Clause 2 of Article 160 require the 10th NFC to distribute between the Centre and the provinces, the net proceeds of five major tax categories, besides looking into expenditure requirements for special areas and special needs of the country. These include taxes on income, including corporation tax but not taxes on income consisting of remuneration paid out of the Federal Consolidated Fund. Included in the list are taxes on the sale and purchase of goods imported, exported, produced, manufactured or consumed and export duties on cotton, and other export duties as may be specified by the President. It also includes excise duties and any other taxes as may be specified by the President.

The constitution of the 10th NFC is quite unconventional as for the first time a new subject has been added to the list of discussions, suggesting that the Centre wants the provinces to bear some additional fiscal responsibilities. They pertain to “exploring ways to reduce losses of state-owned enterprises and agreeing to a mechanism for sharing the losses between the federal government and the provincial governments”. The NFC will also be required to make grants-in-aid by the federal government to the provincial governments and set powers and conditions for the federal and provincial governments for borrowing, besides assessing and allocating resources to meet expenditures relating to Azad Jammu and Kashmir, Gilgit-Baltistan and newly merged districts of Khyber Pakhtunkhwa (erstwhile FATA).

The notification also requires the NFC to assess and allocate resources to meet expenditures made on security and natural disasters, calamities and it will be responsible for the assessment of total public debt and allocation of resources for its repayment. It is the most contentious aspect of the newly formed NFC as the provinces could, in no way, be convinced to reduce their total share of 57.5 of the financial resources in order to help out federal government enterprises and institutions. In other words, 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 the critical areas. Constitutionally, it is not possible as under the provision of the 18th Constitutional Amendment the share of the provinces cannot be reduced from what was agreed upon in the last NFC (which in this case is the 7th NFC). This is the reason that the federal government has been looking for ways and means to revisit the provisions of the 18th Constitutional Amendment. But given the strength of the ruling Pakistan Tehreek-e-Insaf (PTI) of PM Khan in the National Assembly and Senate, it is almost impossible unless the opposition Pakistan Muslim League-Nawaz (PML-N) supports it in changing the provisions of the 18th Constitutional Amendment. Realizing the situation, the provinces while maintaining their present shares, will be asked to share the additional expenditures and financial responsibilities that the federation is bearing.

It is important to note that reducing the share of the provinces is going to have negative effects on the state of union or federation of Pakistan. Everybody knows there are several anti-state parties in the garb of ethno-nationalist groups and they are going to exploit the demand from the central government. Already, the groups have become active as this is the agenda of their politics, rather it is the issue of their survivability. So, the central government must desist from reversing the share of the provinces in the 10th NFC. The fact of the matter is that the central government cannot do so as it would be challenged in the Apex Court of the country and ultimately it could overturn it. Therefore, it is good to be cautious beforehand.

Insofar as asking the provinces to share the burden of debt servicing, defence and allocation for federal territories, it is totally unjustified because all of them are federal subjects and the provinces have nothing to do with them. Here, a point arises that if the provinces have to buttress the finances of the federal government, then for what good the federal government has been taking more than 40 percent share in the NFC?

The PML-N government, during its five year tenure (2013-18), did not start the process of giving a new financial award let alone finalizing it due to two main reasons. The PML-N had got almost its entire mandate from the largest province, the Punjab, and as the party also had its government in the province apart from the Centre, it feared that in case it would demand increase in the share of the federation and a cut in the resources of the provinces, it could be politically damaging for it. It must be mentioned that in the last NFC, finalized during the rule of the Pakistan People’s Party (PPP) in 2010, the share of the provinces had substantially been increased while that of the federal government slashed significantly. It was under the 7th NFC that for the first time in the history of Pakistan the share of the provinces was increased vis-à-vis the federal government.

Last year, Sindh had proposed that instead of decreasing the financial share of any federating unit the solution was to increase the tax net. Indeed, it is a sagacious suggestion because any federating unit would not only object to a decrease in its share but feel deprived. However, the solution of increasing the tax collection is not that easy to achieve. It is important to note that since the finalization of the last award, whether it is the federal government or all provinces, they have serious reservations about the failure of the Federal Board of Revenue (FBR) to increase the tax-to-GDP ratio. The 7th award had projected the tax-to-GDP ratio to rise to 15 per cent of the GDP at the expiry of its tenure in 2015, from 9.2 per cent in 2010. At the moment, the existing tax-to-GDP ratio stands at just 11.3 per cent. This poor performance of the FBR has compelled the provinces to demand that they be made part of the revenue generation policymaking process. It is a rational demand as only an inclusive and participatory mechanism from all the federating units could result in improvement in tax collection.