National Finance Commission Award, an economic program in Pakistan, has its roots date back to 1951. After independence “Raisman Award Program” was enacted by Prime Minister Liaquat Ali khan which aimed at distributing 50% share of collected taxes to the provinces. Since its inception only three awards have been granted, mainly in 1961, 1964 and 1970. In the Raisman award, tax, collected on the basis of income and sales tax, was distributed among the provinces.
With the passage of time, components of vertical distribution of divisible pool extended to income tax, sales tax, export duty excise duty, wealth tax, capital value tax and customs duty. Later, the said program was renamed as National Finance Commission Award. Article 160 of the Constitution empowers President of Pakistan to constitute National Finance Commission for transfer of revenue between Federal and Provincial governments. Constitutionally, it is to be held every 5 years by the President of Pakistan to review the resource sharing mechanism for the equitable fiscal transfers between Central and Provincial governments. Certain taxes collected from provinces are added in the distribution pool and then re-distributed to provinces according to the revenue sharing formula. NFC decides what percentage of the total revenues will be retained by the Federal government and what share will go to the provinces.
Currently, four parameters are being used for horizontal distribution that includes population 82%, poverty 10.3%, revenue collection 5% and inverse population density 2.7%. As of now 51% of divisible pool goes to Punjab, 25 % to Sindh, 9% to Balochistan and 15 % to Khyber Pakhtunkhwa. Up till now only 7 NFC awards have been granted to provinces out of which 3 remained inconclusive as consensus could not be built up on distribution criteria among federal and provincial governments. The 10th NFC has been constituted by President of Pakistan and it remains to be seen whether the federal and provincial government reach on consensus or not.
There is no doubt about the fact that NFC awards have enabled provincial governments to spend more on development, health, education and social protection but still there are no rigorous improvements in the provinces. One can see that inter district disparity is prevalent across the Pakistan as some districts are more developed than the others. This inter district disparity is mainly because of inequitable and inefficient budgetary allocation and huge chunk of fund is used in non-development expenditure. If the provinces wish to maximize benefits of NFC, they need to spend more on development and poverty alleviation.
In addition to this, that after 18th Amendment, revenue collection has not improved so far. Provinces are making fewer efforts in generating revenues at local or district level. Pakistan needs to adopt the formula of generating local revenues and local expenditures like other countries. United States, Australia and Germany have localized revenue collection and allowed local spending resultantly revenue collection at local level is higher. Pakistan needs to adopt similar path in order to increase revenue generation.
After 18th Amendment and 7th NFC award, government had decided to increase tax to GDP ratio to 15%, which it failed to do so. Efforts should be made to streamline tax collection by taking various initiatives. Currently, Pakistan’s tax to GDP ratio stands at 11% which is lowest in the region and needs to be increased to 17%. Reforms in tax policy, implementation and monitoring mechanism needs to be introduced at the earliest to support the fragile economy.
Another debate is on the limelight since the federal government has asked provinces to contribute in federal expenditures including security. Provinces are reluctant to contribute and argue that federal government should decrease its expenditures and cabinet size since all federal lists subjects have been devolved to provinces. In order to end this stalemate there are two viable options, either the government to reduce its expenditure or increase tax to GDP ratio. When PTI government came to power, FBR announced that they will register tax payers by using technology and trace people through digital database but it still remains a dream. Flaws exist within institutions, where no one is pushing forward for increasing tax ratio in Pakistan.
Pakistan’s economy is under stress and tough decisions are needed to be taken to avoid economic crisis. If Pakistan wishes to improve lives of citizens, here are few steps that government must take to boost its economy and provide relief to the poor. MNA, MPA schemes and grants should be abolished as it wastes revenue and does not produce any positive outcomes. Public Sector Entities including DISCOS, SNGPL etc. be transferred to provinces to reduce burden of federal government. Urban property tax should be implemented vigorously across Pakistan to increase revenue. NFC award should be spent more on development and poverty alleviation.
In addition to this, Benazir Income Support Programme, Planning Commission, HEC and all other subjects, except security and diplomacy, should be transferred to provinces for smooth functioning of state and economy. For political reasons, federal government has not devolved these subjects to the provinces. As our economy is shrinking, we have to keep aside political agenda for larger benefits of people of Pakistan.