Evidently, the Eighteenth Amendment and the Seventh National Finance Commission (NFC) Award have considerably assuaged anti-centre and anti-Punjab sentiments, at least in the financial context. It is, therefore, imperative to further entrench the democratic process of decentralisation and redistribution of resources. Sadly, efforts are afoot to roll back the benefits of the Seventh Award. Instead of expanding its revenue base, the federal government is impoverishing the provinces for its own inefficiencies and failures evident in its misplaced fiscal and foreign policies - It’s Not the NFC Award, Shahab Usto, Dawn, April 6, 2024.
It is heartening to know that in the wake of the notification of the Eleventh National Finance Commission (NFC) and its inaugural meeting on December 4, 2024, a separate group, chaired by the Finance Minister of Khyber Pakhtunkhwa, has been tasked with improving the tax-to-GDP ratio. This group, for its report, must seek input from experts who have been pointing out impediments entrenched in our target-oriented, rotten, outdated, oppressive, anti-people, and anti-growth tax system, both at the federal and provincial levels.
There is an urgent need to deconstruct the existing tax systems and, at the same time, reconstruct a fair, equitable, and pro-growth federalised tax system conforming to Pakistan’s specific needs and future challenges. The prescriptions of the International Monetary Fund, World Bank, and other donors and lenders have miserably failed to reform our tax system; they have now openly admitted this fact in their recent reports, which are not only shallow but also fall short of accepting the blame for their faulty policies.
Unfortunately, the debate about the NFC vis-à-vis Article 160 of the Constitution of Pakistan, both at official and public platforms, misses the point that this provision does not prescribe any particular formula for the distribution of net tax proceeds among provinces. It, in fact, requires equitable sharing and/or distribution of resources between the federation and the provinces. The issue is not one of vertical or horizontal distribution of taxes, but of giving the provinces full autonomy, including the exclusive right to levy and collect taxes on goods and services generated in their respective geographical areas.
The provinces, in all previous NFCs, have failed to highlight that the federal government, in utter violation of the Constitution, was collecting taxes that fall exclusively within their domain. To this day, the provinces have not worked out their actual share in the divisible pool. Nearly 70 per cent of federal tax collection is on account of indirect taxes (including petroleum and gas levies), even under the garb of the Income Tax Ordinance, 2001. The provinces are not even aware of how the Centre has been cheating them since 1973.
It is a matter of record that successive governments in Pakistan—civil and military alike—have never bothered to restore a judicious distribution of taxation rights between the federation and the federating units. The lack of such a distribution and the perpetual abuse of constitutional provisions by Islamabad have created disharmony and animosity between the Centre and the provinces.
Even after a lapse of more than fifteen years, the provinces have failed to introduce progressive taxes transferred to them through the Eighteenth Amendment
The federal government has been collecting huge amounts of taxes that constitutionally belong to the provinces and then “distributing” them under the NFC Award. This adds insult to injury. Many nationalist leaders of smaller provinces have rightly rejected this as ‘charity’. Unfortunately, the ruling elites (installed) in some provinces are accepting it with praise, a disrespect to the rights of their people.
Federal high-handedness, even in the wake of the Constitution (Eighteenth Amendment) Act, 2010, in tax matters, has not only negated the true concept of provincial autonomy but has also crippled the provinces financially. In this way, the Centre seeks to perpetuate its hegemony over the provinces.
The federal government has been blatantly encroaching upon the undisputed right of provinces to levy taxes on goods and services within their geographical areas. Such taxes levied under the garb of presumptive or minimum taxes are not “taxes on income” (which the federal government is empowered to levy under Item 47 of the Federal Legislative List). This core issue has never been touched by any province.
With the principal objective of granting greater autonomy to provinces by devolving critical functions, the Eighteenth Amendment substantially transformed federal–provincial relations. However, even after a lapse of more than fifteen years, the provinces have failed to introduce progressive taxes transferred to them through the Eighteenth Amendment. They have also miserably failed to implement Article 140A(1) of the Constitution, which requires the devolution of “political, administrative, and financial responsibility and authority to the elected representatives of the local governments”.
In view of the above, both the federation and its units have denied citizens their fundamental rights through open and blatant defiance of the Eighteenth Amendment. This proves that since 2010, none of the political parties in power has shown any interest in empowering the masses. Their primary interest has been obedience to a centrist mindset, praising it and even celebrating their subjugation in the name of hybrid and hybrid-plus arrangements.
From 2010 to 2025, Pakistan’s rulers have relied on the Seventh NFC Award, signed on December 30, 2009, and notified on May 10, 2010. Article 160(3A) of the Constitution, inserted by the Eighteenth Amendment, categorically states: “The share of the Provinces, in each Award of the 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, the Centre can impose taxes to meet budgetary gaps, as it did in 2013 by enacting the Income Support Levy Act, 2013, which was repealed the following year.
The share of the provinces in national expenditure stood at 5.1 per cent of GDP. All provinces together generated non-tax revenues of only Rs 313.59 billion against a GDP of Rs 114,692 billion
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 the petroleum levy—what then is the need to undo Article 160(3A) through another constitutional amendment? If there is no desire to implement Article 140A, what relevance is there in creating more provinces and district governments controlled and run by bureaucrats?
The real challenges are the devolution of political, administrative, and financial responsibility and authority to elected representatives of local governments under Article 140A, and improving poor tax collection by both the federal government and the provinces. Both are guilty of failing to collect taxes from the rich and powerful. This is Pakistan’s real dilemma.
During the Decade of Democracy (2008–18), neither the Pakistan Peoples Party nor the Pakistan Muslim League (Nawaz) made efforts to ensure adequate revenue collection by the Federal Board of Revenue so that distribution of net proceeds could bring fiscal consolidation for the federation. The provinces, too, failed to devolve powers as mandated under Article 140A of the Constitution.
Upon assuming power in August 2018, the coalition governments of Pakistan Tehreek-e-Insaf at the Centre, in Punjab and Balochistan, and with a two-thirds majority in Khyber Pakhtunkhwa, also miserably failed to improve tax collection and devolution under Article 140A. This demonstrates their utter disrespect for the Constitution and complete apathy towards the well-being of the people and the transfer of power to the grassroots. Had they acted prudently, the less privileged and the have-nots would not have been suffering so immensely since 2008.
Presently, all broad-based and buoyant sources of revenue lie with the federal government. The contribution of Rs 978.6 billion by all provinces to total tax revenues of Rs 12.722 trillion for the fiscal year 2024–25 was pathetically low—0.9 per cent of GDP. This amounted to merely 5.2 per cent of the overall national revenue base (tax and non-tax) of Rs 17,997.45 billion (15.7 per cent of GDP), against total national expenditure of Rs 24,494.3 billion (21.4 per cent of GDP).
The share of the provinces in national expenditure stood at 5.1 per cent of GDP. All provinces together generated non-tax revenues of only Rs 313.59 billion against a GDP of Rs 114,692 billion.
In FY 2024–25, the federal government spent Rs 2,193 billion on defence and Rs 8,887 billion on debt servicing. After transfers to the provinces of Rs 6,854 billion under the Seventh NFC Award, these two heads alone exceeded the net revenue collection of the federal government by Rs 1,134 billion. This is Pakistan’s real and perpetual fiscal dilemma.
The Centre is unwilling to federalise tax policy and tax administration. As a result, the size of the revenue “cake” remains so small that it cannot help the country escape the debt trap or allow adequate spending on the welfare of the masses. The way forward lies in the introduction of a unified sales tax on goods and services and its collection through a National Tax Council. The Eleventh NFC should concentrate on this and devise a mutually beneficial distribution formula—a win-win situation for both the Centre and the provinces—which would substantially improve the tax-to-GDP ratio.
A unified sales tax on goods and services can fetch around Rs 9,000 billion, compared to the collection of sales tax on goods at Rs 3,901 billion by the FBR in FY 2024–25 and Rs 612 billion on services collected cumulatively by all provinces. The additional revenue of over Rs 5,000 billion would not only provide fiscal space to the federal government to narrow the fiscal deficit but would also enhance transfers to the provinces.
It is also imperative that further constitutional amendments, after debate and consensus, assign the right to levy tax on all kinds of income, including agricultural income, to the federal government to improve infrastructure, retire debt, and bridge the fiscal deficit. This alone can achieve the real purpose behind Article 160 of the Constitution: ensuring sustainable fiscal stabilisation and prosperity for all citizens of Pakistan, wherever they may reside.