.The federal government had agreed to an unprecedented 46.4 per cent share to the provinces



Feb 24 - Mar 02, 2003 




Following the unanimous resolution of Sindh Provincial Assembly, signed by both leader of the house and the leader of opposition, rejecting the formula of distribution of Federation and the Provinces outlined in the 6th NFC Award, the Federal Ministry of Finance has shelve the proposed award.

In a rare unanimity shown, the Sindh Assembly rejected with one voice the "erratic distribution of federal revenues" between the Federation and the Provinces. Demanding a new National Finance Commission the assembly resolution suggested a new formula for sharing the divisible pool.

The National Finance Commission in its fourth meeting in September 2002, had finalised its recommendations for the NFC award providing a big jump in the provincial shares in the divisible pools. The NFC 4th meeting held in Peshawar was presided over by the then Minister for Finance Shaukat Aziz and was attended by the Finance Ministers and Finance Secretaries of all the federating units. The outlines of the 6th award were finalised. Describing it as revolutionary, Mr. Shaukat Aziz had informed newsmen that the federal government had agreed to an unprecedented 46.4 per cent share to the provinces from the federal divisible pool. Making this announcement at a press conference in Islamabad, Mr. Shaukat Aziz said, "for the first time, we will be extending roughly 44.6 per cent share from the federal divisible pool to the provinces in the new NFC award, and this is something unprecedented". He said an initial agreement had been reached in the meeting in Peshawar that the federal government will retain 60 per cent share while 40 per cent will be offered to the provinces. "But if you calculate the new amount of Rs.20 billion subventions and another Rs.30 billion to be paid from 2.5 per cent General Sales Tax (GST) income to the provinces, the total share of the provinces would reach a substantial 46.4 per cent". The next NFC meeting, to be held in the first week of October in Islamabad would finalize the new award, he added.

The Chief Executive Gen. Pervez Musharraf, however, withheld the announcement of the 6th award till the elected government come to power.



The new formula of distribution of divisible pool suggested in the unanimous resolution of the Sindh Assembly stipulates that the provinces and not the federation would determine the share of the latter in accordance with their respective populations. Under the current formula the federation retains 62.5 per cent of the resources from the divisible pool and allocates the rest among the provinces in accordance with their populations.

It was also suggested during debate that the share of the provinces he raised to 55 per cent while the remaining 45 per cent should go to the federation totally ignoring the fact that in view of defence and debt burden on the federation this would not be enough to meet the requirement.

Sindh has long been unhappy with the NFC award and wants the next NFC to develop its Award for the next five years starting July 2003, which would require the federal government to credit the net proceeds of taxes collected from various provinces into their accounts after deducting five per cent collection charges and payment of three and two per cent respectively to Balochistan and the NWFP as subvention. Each province would then contribute to the federation in accordance with its population, which would in effect be 45 per cent of the total net taxes collected by all the four provinces put together.

This formula would immediately bring Punjab under pressure because population-wise it is bigger than all the three provinces put together. Of the total 145.44 million population nearly 81 million live in Punjab. So, its contribution to the centre's share of the net taxes collected would have to be about 55.34 per cent of its collection. What it would be left with would certainly not be enough for taking care of the needs of its large population. On the other hand, Sindh with a population of 33.55 million would be required to contribute only 23.06 per cent of its total collection, which in the year 1999-2000 was Rs.189.46 billion. This means that if the 1997 NFC had developed its Award according to the newly recommended formula, Sindh would have kept for itself 76.94 per cent of this amount or Rs.145.77 billion, whereas that year Sindh actually received only Rs.24.80 billion as its share. Since the NWFP has only 13.42 per cent of the total population and Balochistan 5.35 per cent, their contributions to the federal revenues would not be so high as to make them destitute and perhaps the two would no more need the subvention they receive from the divisible pool. Still, their overall backwardness is such that the two provinces would be needing extra help for many years to come.

The provinces have also been aggrieved of not receiving even their allocated share in full. For example, the Sindh Assembly was informed that the province had been short-changed by 68 to 80 billion during the last four years. Likewise, NWFP has constantly complained of not receiving its due share of the hydel profits while Balochistan is rueful of inadequately computed gas royalty and, of course, delayed payments.



All these and other related issues have strained the federation since the expiry of the last NFC award in 1997. The military government did move towards a new award but decided to leave it for the elected government. This was perhaps wise as the issue is more political than fiscal or technical and is best settled by elected governments through a political discourse particularly so because while the provinces are united and keen to receive a bigger chunk of the pie from Islamabad, they disagree strongly on the criteria for determining their respective shares. Population, thus far the sole basis is no longer acceptable to the smaller provinces. Other determinants like resource-generation, geographical sprawl, backwardness and fiscal discipline will have to be factored in. All this boils down to very tough negotiations on a very sensitive issue and hence, Islamabad's tendency to temporise. But the issue being too self-evidently important to be ignored, the Jamali government needs to fulfill it constitutional obligation by immediately constituting the National Finance Commission so that the orduous negotiation can be completed and the new award should be crafted before the next budget.