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The seventh National Finance Commission (NFC) award was announced in 2010 amidst much fanfare with Shaukat Tarin, the then Finance Minister, widely praised for successfully convincing Punjab to allow multiple criteria for the award instead of population alone, though reportedly the then President Zardari used the passage of a constitutional amendment (under the umbrella of the then ongoing negotiations on the eighteenth constitutional amendment) to enable Nawaz Sharif to become prime minister for the third time as leverage.

NFC 2010 was hailed as a giant step towards granting financial autonomy to the provinces, their long-standing demand (with provincial share from the divisible pool raised from 46.5 to 57.5 from 2011-12 onwards). This was only the fourth conclusive award – the previous three were in 1974, 1991 and 1997.

To ensure no roll back of the award the eighteenth constitutional amendment stipulated that the share of the provinces agreed in a previous NFC award provided a finality that could not be challenged by any government with less than two-thirds majority in parliament (the number required to amend the constitution).

Two envisaged targets of the seventh NFC award/eighteenth amendment remain unmet to this day: (i) the one percent annual increase in the tax to Gross Domestic Product (GDP) ratio that would have automatically increased the pie thereby tempering the federal government’s hankering after its lost share.

The tax to GDP ratio today is less than 10 percent; and (ii) devolution of several subjects to provinces including agriculture, education and health remains a pipedream as provinces have neither strengthened their capacity to deliver on these devolved subjects nor has the federal government closed these ministries/departments in spite of the formation of an inter-provincial federal ministry. To put it in historical perspective no government since 2010, including the PPP-led government (2008-13) and its successor the PML-N government, implemented policies that would have met these two targets.

Post-June 2013 Ishaq Dar, appointed as the finance minister subsequent to the electoral victory of PML-N - a man known to have been working on Punjab’s behalf during negotiations on the seventh NFC award - began to severely criticize the seventh award as the reason for the Centre’s inability to meet its expenditure.

And with PML-N well short of two-thirds majority required to amend the constitution Dar, during his tenure as finance minister, ensured that the NFC award, due every five years as per the constitution, remained inconclusive.

Dr Hafeez Sheikh as the Khan administration’s second finance minister followed Dar’s trail. As per the IMF’s less than one-page long press release dated 12 May 2019, announcing that the staff level agreement on the 6 billion dollars Extended Fund Facility programme was reached: “to improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission.”

Publicly, including in parliament, Dr Hafeez Sheikh denied any knowledge of an agreement with the Fund on revisiting the NFC award however it is known that multilaterals, including the IMF, provide copies of all their documents, including press releases, to the concerned government prior to uploading them on their website. Thus Dr Sheikh either never bothered to read the press release, and he should have to ensure that the agreement reached was reflected in their press release, or simply lied.

Notwithstanding the two unmet targets it is relevant to note that the federating units began to collect taxes on services, a provincial subject, which till then were being collected by the Federal Board of Revenue (FBR) for a 2 percent fee with the amount collected put in the divisible pool to be distributed according to the pre-seventh award formula (with Punjab a clear winner as population was the major criteria). It is therefore little wonder that Sindh took the lead with its chief negotiator at the time insisting on Sindh collecting its own sales tax on services, in spite of reportedly the then President Zardari’s direction to continue to let FBR collect this tax.

Since then all the federating units have set up their own revenue collecting boards/authorities and collections under this head have assumed greater relevance as they have not only widened its ambit but also strengthened their capacity.

What is disturbing however is the fact that while all provinces have shown an ability to impose and collect taxes on services, yet all provinces have failed to impose a tax on farm income (a provincial subject as per the constitution) commensurate with the income tax payable by other groups, including the salaried, to FBR.

The reason is well-known: the rich absentee landlords continue to be overly represented in our provincial and federal assemblies and continue to successfully resist all attempts to impose a tax on their incomes irrespective of whether the country was ruled by a military dictator or a civilian government was in place.

Ignored in criticisms hurled by subsequent finance ministers against the seventh NFC 2010 is one obvious element: provincial surplus began to be cited in federal budgets as a revenue source no doubt to offset the rise in the provincial share of the divisible pool. The budgeted surplus (in brackets) as opposed to the actual surplus is as follows:

=======================================================================
Year               Provincial     Divisible pool      Actual provincial
                     surplus                            surplus as % of
                                                         divisible pool
=======================================================================
2021-22 budgeted      (570)           3310                           17
2020-21 
(actual data
not available)      (313.6)           2817                          8.5
2019-20               (423)           3154                          2.4
                      77.6
2018-19             (285.6)           2508                          5.5
                   138.875
2017-18            (285.6)
                     22.370        2268.99                Election year
                (negative)
2016-17              (339)
                    163.246       2044.143                             
                (negative)
2014-15              (297)        1580.787                         0.25
                      3.97
2011-12              (125)
                    22.125        1203.321                Election year
                 (negative
=======================================================================

Two observations are relevant. First, to ensure provincial surplus a working relationship was required between the Centre and the federating units - a relationship that has been lacking when the Centre and a federating unit are governed by different political parties; additionally, support by a province to meet its share of the budgeted surplus is simply ignored during an election year.

And secondly while the budgeted amount reflected in percentage terms is invariably more than the amount that was foregone as a consequence of the seventh award yet the actual data presents a picture that continues to contribute to a widening federal budget deficit which has a direct bearing on the rate of inflation.

To conclude, as the architect of the seventh NFC award is back in the driving seat (finance minister Shaukat Tarin) it is hoped that he gives due attention to these persisting mitigating factors that are thwarting the NFC gains he had envisaged back in 2010.

There is a need to begin to initiate discussions with the federating units to iron out all issues while launching discussions on the next NFC award. Sadly, this appears unlikely not only because of the current state of the economy but also because of the visibly tense political climate that has persisted since the 2018 elections.

Copyright Business Recorder, 2022

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