The lack of consensus at the National Finance Commission (NFC) in evolving a new award every five years since the 7th award was announced 11 years ago is creating a problem in updating the horizontal distribution of resources required to reduce uneven regional development within and among federating units.

One such glaring issue is of Khyber Pakhtunkhwa’s share in the NFC Divisible Pool after the merger of Federally Administered Tribal Areas (Fata) with the province. Under the current horizontal distribution formula, KP qualifies for more resources owing to the increase in population, level of backwardness and also probably due to the sparsely populated vast territory earlier administered by Islamabad.

But the PTI is adopting a different and difficult approach. In the first meeting of the reconstituted commission held on February 18, KP Finance Minister Taimur Saleem Jhagra urged all the provinces to share the cost of the erstwhile Fata development package evolved by the centre prior to the merger but linked to it. The proposal is being opposed by other federating units.

The NFC meeting chaired by Federal Finance Minister Dr Abdul Hafeez Sheikh decided to set up a sub-group headed by Mr Jhagra to evolve a consensus on the KP’s proposal.

If a federal project is designed to benefit only one province, the beneficiary could share its cost — the financing of other federal projects should be the headache of the centre

Better ways need to be found to resolve such problems. For example, as PTI rules the most developed and populous sub-federation of Punjab, it may not be impossible for the ruling party and its coalition partners to agree voluntarily to a cut in the allocation of funds on a population basis as the province earlier did in the case of 7th award, and increase the share for the removal of countrywide poverty and backwardness. The problem has acquired some urgency following a surge in unemployment and the plunge in wages because of the economic crisis triggered by Covid-19.

PTI has been unable so far to create a separate autonomous South Punjab province. Alternately, the under-developed region needs a stronger national will and commitment for its socioeconomic development.

The NFC’s horizontal distribution formula establishes inalienable rights of federating units and their linked responsibility to help uplift the country’s less developed areas. The resources are shared on the basis of multiple indicators with their respective weights as follows: population 82 per cent, poverty and backwardness 10.3pc, revenue collection and generation 5pc and inverse population density 2.7pc.

The 7th NFC award has expired six years ago and is being extended on an ad-hoc basis.

The NFC has decided to set up a sub-group on horizontal distribution of resources headed by Baluchistan Finance Minister Zahor Baludi. He wants an increase in the existing share of his province now a little over 9pc of the horizontal distribution pie.

The Baluchistan government has also objected to the demand of sharing the expenditure burden of the federal government, says the province’s NFC technical member Dr Kaiser Bengali.

Sindh Chief Minister Syed Murad Ali Shah believes the only solution to the present fiscal situation is that the size of the pie should be increased.’

And Dr Sheikh does not seem to disagree. He says “all provinces agreed that the size of the pie should be increased to address the precarious fiscal situation at the centre and the provinces.” This observation indicates the capability of federating units to spare money for sharing the cost of the federal expenditure.

Apparently, there is now a hint of review in the centre’s approach regarding the vertical distribution of resources, going by the assurance extended by Finance Minister Dr Abdul Hafeez Shaikh to the sub-federations. He is reported to have said: “we have given comfort to the provinces we will strictly adhere to the constitutional requirements.” Dr Sheikh was responding to the concerns about the NFC’s terms of reference raised in the meeting.

For the past several years the centre has tried unsuccessfully to convince the sub-federations to share the centre’s spending on a need basis. The Constitution bars any reduction in the combined fiscal share of the federating units below 57.5pc as incorporated in the 7th NFC award.

The provinces attribute the fiscal problems of both the federation and the sub-federations to the failure of the Federal Board of Revenue being unable to raise the GDP-to-tax ratio to 15pc as understood in the NFC arrangements. The ratio is stuck in the range of 10-11pc since then.

The participants in the NFC meeting also discussed the need for harmonisation of revenue collection operations at the levels of federation and provinces to broaden fiscal space and streamline the revenue collection.

A sub-group proposed to be set up for this purpose will be headed by Punjab’s finance minister.

The issues in tax harmonisation related to the inter-provincial collection of sales tax on services (STS) is now being addressed by Punjab and Sindh revenue authorities. There are also problems in the general sales tax (GST) being collected by the federation and STS by the provinces. Tax experts agree that ideally the two taxes should be collected by the same tax authority to maximise revenue.

Going by the stellar performance of Punjab and Sindh in the STS collection since the subject was devolved, the solution lies in transferring the GST collection to the provinces as provided in the constitution.

Syed Murad Ali Shah points out the federal tax collection rose by 6pc this year, which was far less than the 15pc growth recorded by the Sind Revenue Board which collects STS.

The NFC has decided to set up two groups — one on the vertical distribution of resources and another on national economic development, headed by Federal Finance Secretary Kamran Ali Afzal.

The sub-group on national development needs to be guided by the fundamental principle of federalism: the right and responsibilities of all the three tiers of government should be so distributed that what can be managed at the district level should not be in the jurisdiction of the provinces. Similarly, the constitutionally mandated responsibility of the federating units should not be duplicated by the centre.

No doubt the national economic development needs to be coordinated with the participation of all relevant stakeholders. If a federal project is designed to benefit only one province, the beneficiary could share its cost. The financing of other federal projects should be the headache of the centre. The unrestrained appetite for centralisation is not helping resolve problems.

Published in Dawn, The Business and Finance Weekly, , March 1st, 2021