THE first meeting of the newly constituted National Finance Commission (NFC) held on Feb 6 initiated conciliatory moves, required to steer the course of tough negotiations ahead for finalising the long-awaited eighth award.

Finance Minister Asad Umar assured the NFC partners that the government will fully implement the 18th amendment, addressing the provinces’ concerns about tinkering with their vertical share in the Divisible Pool. At the same time, all stakeholders agreed that there was a need for additional resource mobilisation as both the federation and provinces were ‘under-resourced.’

This was followed by the decision to base the next NFC award on the 2017 population census which, when implemented, will benefit the minority provinces.

Involving the provinces in the dialogue with the International Monetary Fund (IMF) to set fiscal targets for the medium-term is likely to enable the federating units to acquire more weight in fiscal policymaking.

Involving the provinces in the dialogue with the IMF to set fiscal targets for the medium-term is likely to enable the federating units to acquire more weight in fiscal policymaking

It may be pertinent to point out that in FY2018 the tax revenue mobilised by the provinces went up by 24.7 per cent to Rs400.1 billion as against 13pc increase in federally collected taxes amounting to Rs4467.2bn.

All stakeholders, particularly Mr Umar, adopted a conciliatory approach to reach an agreement on the above stated points. They now need to sustain this spirit.

The NFC partners are well aware that additional resource mobilisation is urgently required for sustainable fiscal structure, equitable social development and poverty alleviation. It is also imperative to reduce prohibitive growth in non-development expenditure, which is easier said than done.

The challenges in resource mobilisation are also as enormous owing to the tax revenue that remains untapped. The World Bank estimates potential tax capacity of Pakistan at 23pc of the GDP against the actual collection of 12.6pc.

Most recent empirical estimates put the size of the informal economy between 71-90pc, says the first quarterly report of the State Bank of Pakistan for FY2018-19. The expectation that the informal enterprises over time will graduate, with growing business volumes, into the formal sector is not happening in a noticeable way.

While the provinces can be blamed for failing to realise the full revenue potential of agricultural income tax, the Federal Board of Revenue (FBR) cannot remain immune from criticism for its inability to arrest at least the growth of the tax-evading informal sector.

Segregation of sales tax on goods and services, say fiscal experts, inhabits their combined revenue potential. Both constitutionally and on the basis of performance (collection of sales tax), the provinces have the legitimate claim to sales tax on goods.

Despite reforms, the system of tax collection and distribution has proved to be an inadequate response to the challenges in resource mobilisation. Instead of expanding its reach to bring the informal sector into the tax net, the FBR duplicates provincial functions to show improved performance.

Similarly, in violation of the constitutional provisions, the provinces have not empowered the district governments to raise taxes for their needs, barring for some poor, low-yielding municipal taxes.

Now, the finance minister has assured all NFC partners that the 18th amendment is part of the constitution, cannot be rolled back and the current government will fully implement it. This translates into further fiscal devolution, held up because the FBR insists on retaining subjects transferred to the provinces under the amendment.

In the NFC meeting, the provinces reportedly proposed a new taxation model but the specifics are not known. Expressing concern over the FBR’s performance, Sindh Member Asad Sayeed said that federating units had demanded a role in revenue policymaking.

Involving the provinces in the dialogue with the IMF on fiscal matters may promote a more harmonised fiscal relationship among NFC partners. Quite often some changes made in the federally collected taxes suit the Centre but hurt one or the other province.

Yet another important NFC decision was to base the NFC distribution formula on the 2017 population census which will have an impact on three of the four criteria for horizontal distribution of resources among the provinces.

Under the seventh NFC award the greatest weight (82pc) in horizontal distribution is given to population followed by poverty and backwardness (10.3pc), revenue generation (5pc) and Inverse Population Density (1.7pc). Under the latest census Punjab’s share will go down primarily because of the province’s population decline.

On the basis of the new population census, Dr Hafiz A. Pasha estimates that Punjab’s share in the Divisible Pool will fall by 4.5 percentage points while the share of other provinces will increase as follows: Sindh (0.17 percentage points) KP (2.61 percentage points) and Balochistan (1.72 percentage points).

The Senate Committee on Less Developed Areas earlier this month had also urged the federal and provincial governments to end the distribution of resources on population basis as. It called for giving more importance to less developed areas.

However, the 2017 population census requires approval by the Council of Common Interests, which may not be difficult because the stakeholders are the same as in the NFC award.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, February 18th, 2019