The International Monetary Fund (IMF) on Thursday called upon Pakistan to reopen discussions on the National Finance Commission (NFC) award, seeking to address the ongoing imbalance in the distribution of fiscal resources between federal and provincial governments. During the opening round of discussions for a $1.1 billion loan tranche, Nathan Porter, the IMF Mission Chief to Pakistan, raised concerns over the distribution of resources and responsibilities, underscoring the need for a more equitable arrangement. Representing Pakistan in these talks was Finance Minister Muhammad Aurangzeb. — IMF asks Pakistan to revisit NFC award, Express Tribune, March 14, 2024
The continuous pressure of the IMF for reconsidering the 7th NFC Award, aimed at reducing the share of provinces, confirms that our state sovereignty is at risk. The reduction in the provinces’ shares is not possible unless we amend the supreme law of the land—the Constitution of Islamic Republic of Pakistan. Obviously, there will be resistance from all provinces. The issue of fiscal consolidation is not because of assumed inequitable distribution between the centre and the provinces, but the size of the cake — the divisible pool. Over the period, both the federation and federating units have failed to harness the real tax potential by not taxing the rich and mighty. The IMF has also failed to issue any report after 2016 to indicate the true tax potential of Pakistan.
The crux of the IMF’s objection on the 7th NFC Award in 2016 was “poor performance of provinces” in tax collection, especially in respect of the agricultural income tax.
A 2016 report by IMF, titled, Unlocking Pakistan’s Revenue Potential, while estimating Pakistan’s actual tax potential at Rs. 8 trillion, mentions: “The latest National Finance Commission (NFC) award, signed in 2010, advanced fiscal decentralization and increased the provincial share in federal tax revenues from 45 percent to 57.5 percent, even though provinces have exclusive power to tax agricultural income, property and services and account for only about 35 percent of total general government expenditures. Consequently, while provincial tax revenues increased by about 0.3 percentage points over the past three years to 1 percent of GDP in 2016, provincial governments have limited incentive to boost own source revenues and instead rely on transfers from the federal government. The agriculture sector, for example, generates less than 0.1 percent of total tax revenues under the purview of provincial governments, although it accounts for about 20 percent of GDP and employs 45 percent of the workforce at the national level.”
The crux of the IMF’s objection on the 7th NFC Award in 2016 was “poor performance of provinces” in tax collection, especially in respect of the agricultural income tax. The anti-agritax-lobby says that the overwhelming majority of farmers live on subsistence level and are not liable to this provincial tax. According to Dr. Hafiz A Pasha, a renowned economist, in 2022, the net income of the richest one percent of landowners, possessing 22 percent of all cultivable land in Pakistan, was Rs. 2,800 billion, but they paid only Rs. 2 billion tax. The issue, is, thus of non-taxation of the rich and mighty in Pakistan.
In 2024, our economic managers are still relying on the 7th NFC Award, signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010, commonly called 18th Amendment, came into force. Article 160(3A) of the Constitution, added by the 18th Amendment, categorically says: “The share of the Provinces, in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award.” However, outside the ambit of Article 160 of the Constitution, the Centre can impose taxes to meet budgetary gaps, as it did in 2013 by enacting the Income Support levy Act, 2013, but repealed it the very next year.
When the federal government can impose any tax, levy or cess to meet its needs without sharing proceeds with the provinces, as is the case with petroleum levy, then what is the IMF’s and others’ motive behind starting a controversial debate over the 7th NFC Award, which is in fact a move to unsettle the 18th Amendment.
As the 8th and 9th NFC remained inconclusive, the 10th NFC was constituted on May 12, 2020. Nobody’s knows its current status. The inaugural meeting of 10th NFC was held on February 18, 2021, after many months of its constitution.
The issue is not that of the 7th NFC Award or 18th Amendment, but poor collection of taxes by the federal government and the provinces. Governments are guilty of not collecting taxes from the rich and mighty. This real dilemma of Pakistan is discussed in detail here.
The history of negotiating NFC awards after the 7th NFC Award is intriguing. As the 8th and 9th NFC remained inconclusive, the 10th NFC was constituted on May 12, 2020. Nobody’s knows its current status. The inaugural meeting of 10th NFC was held on February 18, 2021, after many months of its constitution. Presided over by the then Finance Minister, Dr. Abdul Hafeez Shaikh, it constituted six sub-groups to prepare sectoral recommendations. In the inaugural meeting, Khyber Pakhtunkhwa and Balochistan demanded higher resources “to address their peculiar deprivations.”
Sindh Chief Minister, Murad Ali Shah, after the meeting, told newsmen that “the story of insufficient capacity for utilization of additional resources under the 7th NFC award was no more relevant, but disbursement of funds under the provincial shares by the federal government was such that his province had to invariably face a situation on 30th of each month as to how much overdraft was required to pay salaries.” He also pointed out that “the actual problem was that FBR’s collections in last two three years had been lower than fiscal year 2017 at around Rs. 3.9 trillion while the requirements of all provinces and even the centre had gone up.”
On July 22, 2020, Hafeez Shaikh was removed from the chairmanship of the 10th NFC, after opposition from provinces and Balochistan High Court’s verdict against the composition of the NFC. It was reconstituted on July 21, 2020. Though a few meetings were held during the tenure of Pakistan Tehreek-e-Insaf (PTI), no award was announced till the end of its rule in April 2022. During the 16-month period of Pakistan Democratic Alliance, two budgets were presented, but not a single meeting of NFC was held. It shows the apathy of our politicians and legislators towards their constitutional obligation, discussed in detail in a recent op-ed by this scribe.
According to a press report, the 9th NFC “died its natural death… after the Centre and the four provinces could not reach consensus on a new award for distribution of fiscal resources during the five-year constitutional term.” It was the fifth NFC since 1973 that unsuccessfully ended without consensus on the new award. So far only four NFCs have given awards. In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the Centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government, and contribution of provinces in total tax revenues is hardly 6%—in overall national revenue base - tax and non-tax revenue - it is around 8%.
A special feature of the 7th NFC Award was recognition that for Balochistan, the share from the divisible pool was guaranteed at Rs.83 billion in financial year 2010-11, which was more than double from the actual divisible pool share from financial year 2009-10.
According to official documents, such as the Budget in Brief from the 2016-17 budget: “The 8th NFC was constituted on July 21, 2010, but it did not give any Award.” Subsequently, the 9th NFC was constituted on April 24, 2015 followed by its demise on April 24, 2020. This is a sad reflection on meeting the constitutional obligations on the part of the federal and provincial governments.
A special feature of the 7th NFC Award was recognition that for Balochistan, the share from the divisible pool was guaranteed at Rs.83 billion in financial year 2010-11, which was more than double from the actual divisible pool share from financial year 2009-10. It was also ensured that Balochistan would receive provincial share in the divisible pool based on the budgetary projections instead of actual collection by Federal Board of Revenue (FBR). Shortfall, if any, based on the actual collection reported by FBR would be made up by the Federal Government itself.
Initially, this arrangement was for five years of the 7th NFC Award, but later, to cater for the financial needs of Balochistan, an amendment was introduced in the Presidential Order No.5 of 2010, containing the text of the 7th NFC Award, providing that this arrangement “shall remain protected throughout the Award period based on annual budgetary projections.”
During the Decade of Democracy from 2008 to 2018, neither the Pakistan Peoples’ Party nor the Pakistan Muslim League (Nawaz) made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds—commonly known as divisible pool—could bring fiscal consolidation for the federation. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per commands of Article 140A of the Constitution.
The Centre is unwilling to grant the provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet the overall needs of the federation and the federating units.
On assumption of power in August 2018, the coalition governments of PTI in the centre, Punjab and Balochistan and having a two-thirds majority in Khyber Pakhtunkhwa also miserably failed in improving tax collection and devolution under Article 140A of the Constitution. It exposes the political elite—their utter disrespect for Constitution and complete apathy towards the well-being of people and transferring powers at grass root level to empower them. The culprit is not the 18th Amendment, but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008.
The Centre is unwilling to grant the provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet the overall needs of the federation and the federating units. The size of the cake is so small that it cannot aid the country in freeing itself out of the debt trap it finds itself in, and spend adequately for the welfare of the masses, no matter which part of the country they belong to. The way forward is that the provinces should have the exclusive right to levy sales tax not just on services, but also on goods, as was the situation in 1947.
It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign the right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilisation in Pakistan.