NFC: issues in equitable revenue distribution

By Manzoor Chandio
April 27, 2009

The PPP government, which had rejected the Musharraf interim award as unconstitutional, is sticking to an old unworkable formula instead of evolving a multiple criterion for a more equitable distribution of resources among the provinces and the federation.
The constitution of the National Finance Commission and the formulation of the NFC award has been put on the backburner while the government is busy in restoring macro-economic stability. without the much needed fiscal autonomy for the federating units, required for it.
All major taxes are levied and collected by the federal government and distributed on the basis of a single criteria of population among the provinces. The three minority provinces reject this formula and many ideas are being thrown up to improve the system.
According to Barrister Zamir Ghumro the country’s economy faced an uncertain future because of over-centralisation of governance and economic and taxation systems.
He calls for creating self-reliant province-based economic units and taxation system. He said the provinces need fiscal autonomy to stand on their feet.
The sales tax must be devolved and an independent NFC set up to give an award on the basis of multiple criterion. Currently, the NFC is a government body, in which all stakeholders are represented.
Barrister Ghumro said population criteria is ultra vires as there is no mention of population or consensus in the Constitution, adding that the GST should be transferred to the provinces.
Former MNA Mujeeb Pirzado believes that there is need for a constitutional amendments to get a fair share resources for the provinces.
He suggests amendments to the Article 160 of the Constitution to make the National Finance Commission redundant. He said each federating unit should be allowed to collect and pool taxes in the Provincial Consolidated Fund.
Article 119 of the Constitution empowered provinces to regulate all matters connected with or ancillary to the provincial fund.
Mr Pirzado proposed that the federal duty of excise on natural gas levied at well-head and collected by the centre, and royalty collected by the federal government, should not form a part of the Federal Consolidated Fund. These taxes should be deposited directly to the Provincial Consolidated Fund.
Such taxes as GST, excise, property, corporation, sales and purchase, capital value tax, mineral, oil, production and fees should directly go the Provincial Consolidated Fund.
He said that 50 per cent of the taxes collected by the provinces should be deposited in the Federal Consolidated Fund and 50 per cent in the Provincial Consolidated Fund.
When Mr Pirzado was asked about Punjab’s insistence on maintaining the status quo on the population-based NFC award, he said Punjab should agree to the promulgation of a new law to convert this “cosmetic federation” into a “genuine federation.”
Rejecting the present interim NFC, Sindh Democratic Forum secretary Zulfiqar Halepoto proposed an award based on multiple criterion. He said the Charter of Democracy has also given a clear mandate for distribution of resources on multiple criterion. In the first budget, he said, PPP got little time to review the NFC. Now they have ample time to honour their commitments.
However, some experts are of the view that with the interim NFC award given by the former President Perveiz Mushrraf, no new award can be given before 2010.
Halepoto said that Sindh had also conveyed its objections over the terms of references of NFC as a lot of things have been included in them which do not come under the mandate of National Finance Commission.
He said Sindh’s provincial committee on NFC will draw clear-cut terms of reference on NFC and will persuade the federal government to include the issue of royalty on crude oil and gas development surcharge. The provincial government will also demand that GST on services must be transferred back to provinces as this tax was the sole right of provinces.
In 2003, the Sindh Assembly in a resolution said that after deduction of five per cent collection charges and payment of three per cent and two per cent respectively to Balochistan and the NWFP as subvention, the federal government would credit the net proceeds of the taxes collected from each province into the provincial exchequer.
The resolution said the federation distributed resources on the basis of population and proposed that it should instead collect taxes on the same basis from the provinces i.e. Punjab should contribute to the federation 55 per cent of its revenue, Sindh 23 per cent, the NWFP 13 per cent and Balochistan five per cent.

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