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NFC: Maneuverings and Equity

  • Kaiser Bengali
  • June, 2020
  • 159
  • ROYAL BATTLE

The other side of the argument is that the resources allocated from the Federal Divisible Pool are not sufficient.

The 10th NFC has been constituted - and the Terms of Reference (ToRs) of the commission have set off a roaring controversy. There are controversies aplenty; however, this one could be highly costly for the country’s political health and may threaten to undermine the foundations of the federation.

One issue with the 10th NFC ToRs is the commission’s composition. The NFC is a constitutional body, with the composition of its membership specified in the constitution. Membership includes federal and provincial ministers of finance and “such other persons as may be appointed by the president after consultation with the governors of the provinces”.

Currently, the prime minister holds the finance portfolio. As such, he is a member and chair of the NFC. There is no provision authorizing him to delegate his powers and functions in this respect to anybody else. Precedence-wise, the Sindh chief minister was also the provincial finance minister during the life of the 7th NFC and duly attended all the commission’s meetings. The chief minister of Sindh has sent a communication to the prime minister in this regard.

From 1974 to date, ‘appointment of such other persons’ has meant one non-statutory member from each province. The words ‘consultation with governors’ would also entail appointment of provincial representatives, not a federal one. However, a battle royal is in the offing over the interpretation of the constitutional clause. One more controversy to the many that are already swirling around. If the current federal argument carries the day, the NFC’s composition would become a tool of political expediency. Its institutional integrity and legitimacy would be lost. One more national institution will bite the dust.

The other issue is the nine-item agenda as part of the ToRs. The first three items are as per the constitution. However, the other six are additions and include federal expenditures related to Gilgit-Baltistan, Kashmir, erstwhile Fata, security, natural disasters, repayment of debt, subsidies, and losses of state-owned enterprises.

One side of the argument would be that the NFC has already allocated a share - 42.5 percent - out of the Federal Consolidated Fund to the federal government. Accordingly, the federal share out of the budgeted Rs5.5 trillion tax revenue in the 2019-20 budget works out to Rs2.4 trillion.

The other side of the argument is that the resources allocated from the Federal Divisible Pool are not sufficient. That, of course, is a very weak argument. After all, what is sufficient and when will sufficiency be achieved? If a precedent is established today for the provinces to bail out the federal government, the half dozen items today can expand to a dozen tomorrow and more thereafter.

Other more serious questions are also thrown up. If the principle of the provinces picking up the tab for the federal government’s expenditures is established, then will they be entitled to ask for expenditure details for scrutiny? There are more serious implications, though. If the provinces begin to pay for more and more of federal government expenses, there may be a demand for the provinces to collect all the taxes themselves and reimburse the federal government’s expenditures. In the event, the federal structure will roll on its head. The federal government’s moves may be undermining the very theoretical basis of a federation and setting the stage for creating a de facto confederation.

The 7th NFC Award is of great significance as it broke the stalemate in the inter-provincial distribution formula and strengthened provincial fiscal autonomy. However, the award is static and the tax revenue debate has been restricted to ‘who can get how much’. The current debate is also about how the centre can extract more out of the provinces.

This is a futile and self-defeating debate. A more productive discussion can be about how the NFC formulation can achieve certain desired socio-economic goals - and one such undisputed objective is to render the tax regime more progressive. As such, the debate needs to move forward towards making the NFC distribution formula advance equity goals.

The basis for resource distribution between the federation and provinces and between provinces is the Federal Divisible Pool, which by virtue of Article 160(3) of the constitution included income and corporate tax, sales tax, export duties on cotton, and excise duties as specified by the president. Jurisdiction over income tax on agriculture was allocated to the provinces.

In 1991 and 1997, the 4th and 6th NFC decided to add central excise duties and import duties, respectively, to the divisible pool. In ot...

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