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Jun 06, 2020 PRINT EDITION

NFC award

The heated controversy between the federal government and opposition leaders on the seventh National Finance Commission (NFC) award raising the share of the provinces from the divisible pool of taxes to 57.5 percent (with a concomitant reduction of the fe

Updated May 21, 2020

The heated controversy between the federal government and opposition leaders on the seventh National Finance Commission (NFC) award raising the share of the provinces from the divisible pool of taxes to 57.5 percent (with a concomitant reduction of the federal share that, so it is argued, has disabled the centre from meeting its two major expenditure items - defence and debt servicing) coupled with the 18th Constitutional Amendment that disallows any reduction in the share of provinces in the last NFC award has exacerbated the political climate in the country. But as Aldous Huxley said facts do not cease to exist because they are ignored while Mark Twain stated that facts are stubborn things but statistics are pliable. This newspaper, however, advises the protagonists in this debate to let three facts speak for themselves.
First and foremost, the share of the provinces pre-seventh NFC award was 46.5 percent, however, that did not imply that the residual was the Centre's share. The reason: the Centre agreed to the demand of industrialists/wholesalers/retailers to do away with Octroi and Zila Tax levied by provincial governments and collected by the local authorities because while these levies were applicable on goods upon arrival at their final destination yet there were inordinate delays en route as each jurisdiction through which the goods passed would examine the paper work and, on several occasions, bribes were given to speed up the process or so it was alleged. In return for foregoing these levies, the federal government agreed to give 3.75 percent additional share to the provinces which accounted for the provinces having a total share of 50.25 percent and left the Centre's share at 49.75 percent.
Secondly, the NFC award raised the provincial share to 57.5 percent or in actual terms the provincial share rose by 7.25 percent. In this context, the Centre cites Article 160 (c) of the 18th Constitutional Amendment barring any reversal in the share of the provinces as a serious impediment to raising its share to enable it to meet its expenses. However ignored is the fact that this amendment, passed through a rare parliamentary consensus, reflected a 1973 constitutional requirement notably that the concurrent list would be effective for 30 years, implying thereby that an entire range of subjects including education, health, social development, would revert to the provinces by 2003. It is unfortunate that this requirement was extended by docile parliaments till 2010 when the 18th Amendment fulfilled this constitutional obligation.
Thirdly, and very pertinently, the seventh NFC award envisaged a one percent tax to GDP raise every year in the size of the divisible pool that would enable the centre and the provinces to have the resources they required to meet their rising expenses. Unfortunately, however, tax to GDP ratio that was around 9 percent in 2010 still remains the same today, generating a resource shortfall for both the centre and the provinces. Had subsequent governments succeeded in raising the tax to GDP ratio by one percent every year the ratio would have been around 19 percent today which would imply an addition 4.4 trillion rupees with the federal government's share of 1.9 trillion rupees.
For the tenth NFC award to add terms of reference that envisage a contribution by the provinces to state-owned entities' losses and debt servicing/principal on loans incurred by the federal government is inexplicable because it is tantamount to insisting that the provinces pay for the inefficiencies, corruption and poor governance of the centre and to pay debts that have been incurred by the centre.
While the International Monetary Fund documents on the ongoing Extended Fund Facility programme (currently suspended due to Covid-19) do indicate that Pakistan's economic team leaders agreed in the context of the NFC to "make progress on measures aimed at better rebalancing inter-governmental relationships to improve inter-provincial horizontal equity," the federal government must instead focus on meeting the seventh NFC award's quantitative objectives notably raising the tax to GDP ratio and till such a time as the ratio rises to levels that would make the budget deficit sustainable. It must also reduce its expenditure by doing away with the ministries or subjects that have been under the 18th Amendment instead of changing their names and retaining these with it. Renaming ministry of food and agriculture as ministry for food security is something that attracts legitimate criticism to Centre's approach to 18th Constitutional Amendment.

Copyright Business Recorder, 2020