National Finance Commission award

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The centre and the four provincial governments have failed to reach a consensus on the new National Finance Commission award and an ad hoc approach continues to rule the roost
By Kaleem Omar

The Constitution stipulates that there should be a National Finance Commission (NFC) award to determine what share of the federal divisible pool of taxes should go to the provinces and what share should go to the centre. The fifth NFC award was announced in 1997. Under Article 160 (1) of the Constitution, the next award should have been announced five years later, that is, in 2002. This did not happen, however, and the 6th award has now been delayed by nearly six years.

In the absence of a new NFC award, the distribution between the centre and the provinces of the net proceeds of taxes mentioned in Article 160 (3) has continued to be done since 2002 on the basis of an ad hoc directive issued by the President. This ad hoc approach to what is, after all, a key issue cannot be allowed to continue, and it will now be up to the new government that will take office after the February 18 elections to ensure that the constitutional stipulation in this regard is strictly followed.

A series of meetings held in the various provincial capitals in early 2004 had failed to evolve a consensus on the new NFC award, with the provinces arguing that their collective share of the federal divisible pool be raised to 50 per cent and the centre offering them a 46 per cent share, up from 37.5 per cent in the 5th NFC award announced in 1997.

After a meeting in Quetta in the last week of March 2004, then-Finance Minister Shaukat Aziz, who chaired the closing session of the two-day meeting, had told journalists that he was hopeful that a consensus on the award would be evolved before the finalisation of the iscal 2004-05 federal budget. He had added that he hoped that the 2004-05 budget, due to be announced in mid-June 2004, would be based on the new award.

That, however, would only have been possible if the differences between the centre and the provinces over their respective shares in the federal divisible pool had been resolved by the third week of April 2004 at the latest. Any delays beyond that date would not have left the budget-makers with enough time to prepare a budget based on the new award.

Aziz had added that work on the 2004-05 budget had started and that the NFC would hold further talks on finalising the award after the federal and provincial members of the commission had had a chance to discuss the deliberations of the Quetta meeting with their respective governments.

Putting an optimistic spin on the progress made at the Quetta meeting, Aziz had said that the March 31, 2004 meeting had been “more successful” than the NFC’s previous five meetings in the 2004 series.

Warming to his theme, he had added, “All the stakeholders showed a professional approach towards the issues and discussed different matters in an atmosphere of complete understanding. The representatives of the federation and the provinces explained their positions for the first time since the start of the deliberations three months ago.”

According to Aziz, the issues discussed at the Quetta meeting had included general sales tax, payment of royalty to the provinces on electricity produced by hydropower plants located in the various provinces, the gas development surcharge imbroglio and other issues.

Even today, however, these are still some of the very issues over which differences exist between the centre and the provinces.

NWFP, for example, has long argued that it is entitled to a greater share of the revenue earned from the sale of electricity generated by the Tarbela hydropower plant, which is located in that province. Similarly, Balochistan wants a greater share of revenue from the gas development surcharge on supplies from the Sui gas field.

To compound the problem, there are also serious differences among the provinces over the formula to be used to calculate each province’s share of the federal divisible pool.

Punjab is pushing for each province’s share to be based on the population of each province. This was the formula used in the 5th NFC award, with Punjab getting the lion’s share of the divisible pool as the most populous province, with 57 per cent of the country’s population.

Balochistan, the least populous province, as well as the least developed by far, says that under the population formula, it has only been getting 5 per cent of the divisible pool, and that the new formula should also take into account other key factors such as the respective levels of economic development of each province.

This argument is supported by NWFP, which says many parts of the province are chronically backward areas with very low levels of development.

But Balochistan, which constitutes 40 per cent of the country’s total area, further argues that the award should be based on the area of each province. An award based on this formula would give Balochistan 40 per cent of the provincial share in the divisible pool – a formula opposed by the other three provinces and the centre.

Sindh, which generates about 60 per cent of federal revenue, wants revenue-generation to be made the basis of the award. But the other three provinces and the centre oppose this formula.

The four provinces are demanding a collective 50 per cent share of total resources. They say that the centre now has $ 15 billion in foreign exchange reserves. They say that the centre is “rich,” while the provinces are becoming “even poorer.”

Meanwhile, the NWFP is pressing the centre to increase net hydel power profits for the provinces.

Balochistan, for its part, says that in order to increase the share of the four provinces in the federal divisible pool, revenue generation (in Balochistan’s case, revenues from Sui gas sales) and the relative levels of economic backwardness of each province should form the basis of the new formula.

Balochistan would get Rs 35 billion a year from the divisible pool if this new formula is accepted; otherwise it would get only Rs 9 billion.

Article 160 (1) of the Constitution says: “Within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces.”

Article 160 (2) says: “It shall be the duty of the National Finance Commission to make recommendations to the President as to: (a) the distribution between the Federation and the Provinces of the net proceeds of the taxes mentioned in clause (3); (b) the making of grants-in-aid by the Federal Government to the Provincial Governments; (c) the exercise by the Federal Government and the Provincial Governments of the borrowing powers conferred by the Constitution; and (d) any other matter relating to finance referred to the Commission by the President.”

Article 160 (3) says: “The taxes referred to in paragraph (a) of clause (2) are the following taxes raised under the authority of Parliament, namely: (i) taxes on income, including corporation tax, but not including taxes on income consisting of remuneration paid out of the Federal Consolidated Fund; (ii) taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed; (iii) export duties on cotton, and such other export duties as may be specified by the President; (iv) such duties of excise as may be specified by the President; and (v) such other taxes as may be specified by the President.”

So what happens after the NFC award is announced? Does it then automatically become applicable or are further steps involved? The answer is spelled out in Articles 160 (4) and 160 (5) of the Constitution.

Article 160 (4) says: “As soon as may be after receiving the recommendations of the National Finance Commission, the President shall, by Order, specify in accordance with the recommendations of the Commission under paragraph (a) of clause (2), the share of the net proceeds of the taxes mentioned in clause (3) which is to be allocated to each province, and that share shall be paid to the Government of the Province concerned, and notwithstanding the provision of Article 78 shall not form part of the Federal Consolidated Fund.”

Article 160 (5) says: “The recommendations of the National Finance Commission, together with an explanatory memorandum as to the action taken thereon, shall be laid before both Houses (the Senate and the National Assembly) and the Provincial Assemblies.”

Nawaz Sharif government was ousted and General Pervez Musharraf took over the reins of government) until general elections were held in October 2002, no NFC award could have been laid before the Senate, National Assembly and Provincial Assemblies, as stipulated in Article 160 (5). But this problem no longer existed after the October 2002 elections were held and the new National Assembly and four Provincial Assemblies came into being. So the 6th NFC award should have been finalised and announced immediately thereafter. The President can, by executive order, alter, amend or modify the NFC award. Article 160 (6) of the Constitution empowers him to do so.

Article 160 (6) says: “At any time before an order under clause (4) is made, the President may, by Order, make such amendments or modifications in the law relating to the distribution of revenues between the Federal Government and the Provincial Governments as he may deem necessary or expedient.”Under Article 160 (7) of the Constitution, the President is also empowered, by order, to make grants-in-aid of the revenues of the provinces in need of assistance. The Article stipulates that such grants shall be charged upon the Federal Consolidated Fund. Given the fact that several constitutional steps are required to be taken before an NFC award becomes applicable, it is an open question whether the already much-delayed 6th award can be made applicable in time for the budget-makers to incorporate its recommendations into the budget for fiscal 2008-09.