The National Finance Commission Award or NFC constituted under the Article 160 of the Constitution emerged to take control of financial imbalances and manage the financial resources of four provinces to meet their expenditure liabilities while alleviating the horizontal fiscal imbalances. As per the Constitution, the program awards the designs of financial formulas of economic distribution to the provincial and federal government for five consecutive years.
The Award plays a key role in enhancing the financial status and working ability of the state machinery at provincial as well as the federal level. However, due to inter-provincial disparities in income distribution, capabilities in tax collection and expenditure disbursement, there was a strong need for the financial arrangement between the federal and the provincial governments.
The allocation of means and responsibilities among different tiers of government is a critical issue as its misappropriation may lead to political, economic and social unrest. There are two broad sets of reasons behind the deadlock or the delay in NFC award: (a) distributive and (b) technical.
The former revolves around taxation, where vertical distribution is the bone of contention in terms of should provinces share the expenditure on war-on-terror related security; on federal territories; and on social spending such as BISP. The latter revolves around differences in constitutional interpretation about the mechanism and duration of the award. These topics don’t usually appear in mainstream discourse. But stakeholders relevant to the NFC have been musing about it for some time, albeit mostly behind closed doors.
As far as the issue of distributive reasons is concerned, the provincial governments have made it clear that they do not want to share the expenditure on security and federal territories. This clarity stems from the constitution, according to which the responsibility of both these subjects lies squarely with the centre. This message was made clear even by Punjab in the last regime when PML-N was in power in the centre, and in Punjab. Unless provincial politicians want to shoot themselves in the foot, this message would likely be clear when the next NFC is constituted.
In the outside chance, there may be a technocratic solution where the federal government comes up with a plan to beef up security across the provinces at a cost of say 1 per cent of the divisible pool (paid by provinces) against pre-defined security-related deliverables by the centre, and a sunset clause.
But a political consensus to that effect seems quite unlikely, given the hostile political environment, and a gradual lowering of war-on-terror related security risks in recent years. There is a lot of naming and shaming between the centralists and the federalists, especially about how Islamabad is in a perpetual fiscal constraint due to the insertion of clause 3A of Article 160 in the 18th Amendment.
That clause reads: the share of the provinces in each Award of NFC shall not be less than the share given to the provinces in the previous award. While this clause is religiously repeated by the centralists (and the IMF), they don’t appreciate that taxation which lies at the heart of the matter.
The 2010 NFC award was based on an agreement that tax collection would be increased every year through well-coordinated efforts where it was the centre’s responsibility to lead that coordination. Yet the centre has been consistent in its failure to roll out tax reforms to expand the size of the cake. To that end, PTI’s performance in taxes has not been different than PML-N in the last regime, or PPP before that.
Meanwhile, provinces have been criticised for failing to grow their own revenues. This criticism comes despite the fact that provinces have sharply increased collection on GST on services by expanding the base outside the golden ducks of banks and telecom. Provinces, of course, could have, and ought, to work towards agriculture income tax (AIT) and property taxes. But these taxes have no bearing on the NFC since these taxes lie in the provincial domain and are not included in clause 2 of Article 160 that defines the scope of the NFC.
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The revenue potential of AIT is little and that of property taxes are little researched. In any case, since the major tax bases are with the centre, it is the centre that eventually has to pull up its socks.
On the other hand, technical concerns about the mechanism and duration of the award are another cane of worms that hardly anyone wants to open. There are also concerns over what to do if the federal government dilly-dallies in its perceived duty to call NFC meetings. Some, such as Senator Raza Rabbani had once proposed that there should be 1 per cent penalty on the federal government for every year in case an NFC is unable to finalise an award after the expiry of the last award. Another proposal so goes that the NFC decisions should be based on the majority rather than unanimity.
But these solutions have been found to be untenable for a variety of reasons. Be that as it may, these fundamental structural issues remain little researched with no consensus on the solution except that neither the centralists or the federalists want to rock the boat by going to the apex court for the interpretation of NFC clauses.