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Provinces seek review of NFC award

In the past Sindh and Balochistan have been agitating over the inequitable distribution of shares of provinces in divisible taxes

Dec 04 - 10, 2000

The provinces have once again demanded a fundamental change in the distribution of National Finance Commission (NFC) award. This time the provinces raised this demand in a high level meeting on the fiscal decentralisation held at the National Reconstruction Bureau (NRB).

NRB Chairman Lt. General (Retd) Syed Tanvir Naqvi chaired the meeting that reviewed provincial views, and progress on the issue of fiscal decentralization which would be incorporated in the power devolution plan. A formula was proposed in the meeting that for the Provincial Financial Award there should be four bases for transfer of funds from provinces to local government i.e. population, needs of districts, backwardness and share of each district in taxes. The provinces demanded that the NFC award should also be finalised by transfer of funds from centre to the provinces on these four bases rather than the population alone.

The meeting discussed progress in establishment and composition of the Provincial Finance Commission for developing a Provincial Finance Award so that the provincial budget for 2001-2002 can be based on its list of taxes levyable by local councils; and mechanism for transfer of assets to local bodies i.e. from a province to district.

The meeting was attended by the provincial ministers for finance and local government, provincial chief secretaries and secretaries of the finance and local government departments.

Earlier a high level meeting of Inter-provincial Coordinate Committee (IPCC) called by the Interior Minister and attended by Provincial government, federal & Provincial Minister and senior officials had recommended to the government to review the NFC Award over which the small provinces have been agitating for long. The Chief Executive has already hinted at removing provincial disharmony through equitable distribution of federal and provincial resources. In the past Sindh and Balochistan have been agitating over the inequitable distribution of shares of provinces in divisible taxes.

The meeting was told that the provincial government could not complete the ongoing development projects because of financial restraints due to abolishment of the octroi system and amendments in the taxation procedure. All the provinces submitted their recommendations in seeking fresh allocation of financial resources under the NFC award. Finance Minister Shaukat Aziz assured the federating units that serious consideration would be given to the recommendations. If the recommendations found justified, measures will be taken to provide additional allocation in the next federal budget, Shaukat added.

Accepting the recommendation of IPCC, the Chief Executive announced reconstitution of National Finance Commission to review the award two years ahead of schedule. A few days later President Rafiq Tarar, constituted an 11-member National Finance Commission with the finance minister as its head to make recommendations, among other things, regarding distribution of taxes between the federal government and the provinces.

Besides recommending the distribution of net proceeds of various government taxes, the commission will determine the ratio in which the distribution is to be made. According to sources, the new taxes to be included for distribution are GST and sales tax on services. The commission, which was set up during Farooq Leghari's caretaker regime, stands dissolved with the setting up of the new commission.

In the previous commission, the share of the provinces was considerably reduced and the federal government's share was enhanced to 72.5 per cent, while 37.5 per cent was distributed among the provinces on population basis. The new commission will consider the distribution of sales tax and tax on services as part of the federal pool. Besides the commission would also consider the inclusion of other federal taxes including customs duties and federal excises and deliberate on the issue of grants in-aid to the provincial governments.

The terms of reference (TRO) for the commission are:

The distribution between the Federation and the provinces of the net proceeds of the following taxes:

i) Taxes on incomes including corporation tax but not including taxes on income consisting of remuneration paid out of the Federal consolidated Funds.

ii) Taxes on the sales and purchases of goods, imported, exported, produced, manufactured or consumed.

iii) GST on services;

iv) Consider the inclusion of other Federal taxes including customs duties and federal excises, but including taxes on income paid of Federal Consolidated Funds.

v) The making of grant-in-aid bar the Federal government to the provincial government.

The exercise by the Federal government and the Provincial government of the borrowing powers conferred by the constitution.

vi) Examine the question of rationalization of payment of royalties on crude oil, one of surcharge of natural gas collected by the Federal government to the Provincial government. To consider review of the distribution of share of taxes between fiscal discipline at the federal and Provincial levels and for ensuring consistency in maintaining an appropriate fiscal balance at the consolidated level.

Any other matter relating to finance referred to the commission by the President.

The commission has not yet completed its review and forwarded its final recommendation. The Chief of National Reconstruction Bureau Lt. Gen. (Rtd) Naqvi, while pleading for provincial finance commission proposed four bases for transfer of funds from provinces to local governments. Population, needs of the district, backwardness and share of each districts in taxes. While agreeing with the formula the provincial representative demanded that same should apply to the National Finance Commission while determining the shares of respective provinces.