May 28, 2020

Understanding the National Finance Commission Award NFC

Distribution of tax revenue between the federal government and the provinces is based on a simple formula under the 1973 constitution. It has deliberately been problematized by the centre to serve its own interests. 

Even under British colonial rule, the sharing of tax revenue was kept simple: one major tax each – income tax to the centre and sales tax to the provinces. 

Given that customs and excise duties were retained by the centre, to compensate provinces it relinquished 50 percent of income tax to each province. It was also liable to fund tax-deficient provinces through grants-in-aid. It was all clear and simple. 

In 1948, the government of Pakistan appropriated initially 50 percent and subsequently 100 percent sales tax, leaving the provinces with no major tax revenue. 

In response to protests from the provinces, the centre appointed a Finance Commission in 1951, headed by British Finance expert Jeremy Raisman. The Raisman Award recommended 100 percent of sales tax, 50 percent of income tax to be given to the provinces. Bengalis protested as export duty was not shared, income from jute being their mainstay. 

Unfortunately, in flagrant violation of the Raisman Award, the centre grabbed all the taxes. The Bengalis were in overwhelming majority; their voices could not be ignored.

Suddenly, ‘One Unit’ was imposed (1955) thereafter erasing all provincial boundaries in Western Pakistan, and reducing the original federation into two ‘wings’, a smokescreen of parity, created to satisfy the Bengali nation. 

In July 1970, after sustained demand by the people, the four provinces were restored. However, instead of devolving sales tax (major source of revenue) to the provinces and sharing the other three taxes (income, customs and excise) with each province, the centre aggregated tax collection into one ‘pool’. 

The provinces were restored administratively but a fiscal ‘One Unit’ remained. Islamabad continued the status quo by cunningly retaining first the lion’s share then cleverly pooling the balance. 

After the adoption of the 1973 constitution, collection of all four major taxes was retained by the centre but the distribution would take place with each province separately (as was under the Government of India Act of 1935). This could also be evinced from parliamentary debates on Article 160. 

However, 47 years later, Article 160 remains un-implemented. By sleight of words/numbers and creation of divisible pools, Islamabad illegally perpetuates the status quo ante. 

The constitution mandates that Islamabad take its agreed NFC share from the revenue collected from each province and return the rest to each concerned province. Currently, the provinces are not being returned their tax revenue. Instead the balance is returned to the (so-called) ‘pool’ and distributed primarily on the basis of population. 

This is an absurd and blatant denial of the principles of the federation and brazenly contravenes the 1973 constitution. Would any province voluntarily relinquish taxes collected within its territory or accept the right of any other province over its tax revenue? 

It was precisely to start a process of ‘course-correction’ within this fraudulent framework propped up by an Islamabad-centric bureaucracy that the PPP proposed and passed the 18th Amendment. 

After the 7th NFC Award (announced in 2009 before the 18th amendment), provincial shares were set to increase in the 8th and the 9th NFC Awards, as the 18th Amendment protected against decreases. The Centre avoided the announcement of both Awards. 

Currently the intention is to slash the share of the provinces under the 10th Award. Therefore, the NFC has been composed with a bizarre choice of members and strange Terms of Reference. 

During Musharaf’s tenure, the NFC Award, 2006 gave initially 41.50 percent to provinces with progressive increase to 46.25 percent in 2010-11. However, Islamabad also undertook to surrender 2.5 percent of GST (in lieu of the Octroi Tax abolished by the provinces) and gave grants-in-aid to provinces thus creating a 52:48 share ratio between the centre and the provinces. 

However under the 7th NFC Award (after the deduction of one percent respectively for the FBR and Anti-Terrorism charges for Khyber Pakhtunkhwa), the ratio actually stands at 44.5 to 55.5 between the centre and provinces. But Islamabad no longer reimburses the provinces (for Octroi and grants-in-aid) so the distribution settles at a ratio of 47:53 between the centre and the provinces. 

If Islamabad deducts its agreed percentage of share of tax revenue collected from each province and surrenders the rest to each concerned province, it could still be in concord with the constitution (Article 160). Instead, it forces all provinces to pool their share and then distributes this on the basis of population. Punjab gains, others lose. 

This formula deprives Sindh as it generates most of Pakistan’s revenue but receives a fraction back. Islamabad is responsible for returning the income from natural resources to tax-deficient provinces. However, it has been depriving KP of royalty on hydro-electric power and Sindh and Balochistan their control on natural resources. It forces Sindh to share its tax revenue with other provinces to compensate the losses generated in Islamabad. 

Strangely, any reference to a ‘Divisible Pool’ is missing from Article 160. The phrase was ‘coined’ by Islamabad to aggregate/club taxes from the provinces instead of retaining four separate accounts as mandated in the constitution. 

Extortion by obscurantism is clearly at play, cleverly manipulated by the federal government bureaucracy. 

Two illegal ‘Divisible Pools’ in contravention of the constitution deliberately obfuscate the matter and sow permanent seeds of discord among the provinces. 

If Islamabad continues to violate Article 160 with such distribution (between itself and each province), contravening the mandate of the constitution whereby only minimum federal share is to be retained and the rest returned to each province, relations among the federating units will further deteriorate – weakening the state even further . 

The writer is a barrister-at-law and former advocate general of Sindh.