The 7th NFC Award – a step towards attaining fiscal federalism in Pakistan – Guest post by Qudrat Ullah

Amid the daily reports of truculent Taliban’s interminable terrorism, explosions and deaths, coupled with a gasping economy with little respite for the indigent hoi polloi of the society, the unanimous approval of 7th National Finance Commission Award in Lahore the other day with Chief Minister Punjab Muhammad Shahbaz Sharif as the benign host, by all the four provinces and federal government, is indeed a big step forward, showing solicitous maturity and political wisdom of the leadership.

The issue of NFC Award, which was lingering on for the last 19 years, has now been resolved with unanimity and accommodating approach of the provinces. All the more, four chief ministers and federal representative- minister for finance Shaukat Tarin, have shown much needed understanding and accrued statesmanship to arrive at an acceptable resource sharing formula between federating units and the federal government & amongst the four provinces. On the occasion, Punjab Chief Minister Shahbaz Sharif has termed the award as the second gift of democracy to the nation after restoration of democracy.

Country’s media and financial experts have welcomed the unanimous approval of the NFC Award and hoped that it would pave the way for composite growth and strengthening of democracy. According to the media reports highlighting various features of the new NFC Award, federal government has agreed to increase share of provinces up to 57.5% as compared to 47.5% which was given to them from the federal divisible pool before this Award.
In the new criteria, population, revenue, backwardness and “inverse density population” (the less the population, the greater the allocation) have been finalized for the Award. The Population would be given 82% weight, Poverty 10.3%, Revenue Collection 5% (2.5% revenue generation, 2.5% revenue collection) and Area 2.7%. Thus the Award would enable Punjab to secure 51.74% of resources, Sindh 24.55%, NWFP 14.62% and Balochistan 9.09%.The new Award has also removed disparities regarding revenue collection and generation from Sindh and Punjab, hydel royalties from NWFP and gas development surcharge (GDS) from Baluchistan. What is good that NWFP province has been given 1% of divisible pool for recognizing its role as a front line province in war against terror.

The state of Islamic Republic of Pakistan is a parliamentary federation comprising of four provinces, recently created Gilgit- Baltistan, federally administered areas, and the Islamabad Capital Territory. Being a central type of government, most of the revenues are collected by the Centre and then these revenues are re-distributed vertically between federal and provincial governments, and horizontally amongst the provinces. Through the Article 160 of the Constitution of Islamic Republic of Pakistan, 1973 it has been made mandatory for the government to compose NFC Award at an interval extending not more than 5 years for the amicable resource distribution among the federation and its respective units. Provinces then also re-distribute revenues among lower tiers of the government, through a revenue-sharing formula. And this way, the state functions.

Historically speaking, fiscal federalism has remained a rough road to ride in Pakistan. Out of a total of seven Commissions constituted after the 1973 Constitution, only four have come up with additional parameters to distribute the resources among the federating units. The resource transfer paradigm has always been a major bone of contention among the federation and the federating units as financial resources are a key for development. Its judicial and equitable distribution is necessary to build up any under developed or under privileged area and to win confidence of federating units. And, this is what 7th NFC Award has achieved.

The National Finance Commission Award has undergone different make over growing to its current form. Prior to independence, the pioneering Niemeyer Award under the Government of India Act, 1935 was followed to settle on the distribution of resources between federal and provincial governments in the British India. After the independence in 1947, Sir Jeremy Raisman was assigned by the newly created independent state of Pakistan to help formulate a feasible revenue sharing formula between federation and the federating units divided by one thousand miles. This Raisman formula was presented in December, 1947 and subsequently adopted on April 1, 1952.

It may be added here that taxes included in the federal divisible pool are income tax, general sales tax, wealth tax, capital gains tax, and custom duties.

In the first Award presented by ZA Bhutto government in 1974, fewer taxes were included in the divisible pool which consisted of income tax, sales tax and export duty while the criterion used for resource redistribution was recommended to be population. Resources were vertically distributed among federal and provincial governments at a fixed ratio of 20:80. As population being the sole criterion for distribution, Punjab’s share increased from 56.50 percent (1970 Award) to 60.25 percent while the three other provinces suffered, with Sindh suffering the most.

Afterwards, credit goes to the Pakistan Muslim League leadership for the fourth NFC Award in 1990, after almost 16 years of break in declaring a consensus NFC Award; the 1990 NFC award came up with some positive recommendations in April 1991 under the then government of Prime Minister Nawaz Sharif. The 1990 Award significantly increased the volume of provincial shares in the revenue collected by federal government by around 18 percent as compared to 1974 Award. This Award was a significant move forward towards fiscal decentralization by extending more financial autonomy to the provinces. In addition to this, for the first time the provinces’ right on net hydel profit, development surcharge on gas and excise duty on crude oil was admitted and amounts were relocated in the shape of straight transfers to the provinces.

Since then, no other government could bring out harmony on national financial matters and the eight years despotism further ruined the future of the country which antagonized the centrifugal forces in Balochistan and the cold blooded murder of Nawab Akbar Bugti added fuel to it.

The democracy which dawned on February 18, 2008 has bore many fruits; it has restored independent judiciary, helped to strengthen federation and a new journey of hope has begun. Acceptance of NFC Award has been hailed by the whole country. National leadership including President Zardari and P.M Yousaf Raza Gillani, besides various political leaders and finance experts have widely hailed consensus over 7th NFC award as a remarkable achievement of the government.

What is more commendable that Punjab province has shown much needed flexibility in approving the Award as its approval was not possible without such a positive approach of Shahbaz Sharif. Punjab leadership have shown flexibility and benign attitude towards other provinces and this gesture of sacrifice will help to strengthen federation and realizing the people of other provinces that Punjab is a caring partner in their development.

Indeed, democracy is the best hope for the people in our country.

Lahore Cantt., Pakistan



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