PUNJAB has begun firming up its strategy for retaining the existing population-based formula for inter-provincial distribution of resources from the federal divisible pool of taxes under the National Finance Commi-ssion (NFC) award.

The provincial government expects the first meeting of the recently constituted commission to be held this month. It will determine the NFC’s terms of reference and formal discussions will be initiated for the next award.

While pressing for retaining population as the sole criterion for distribution of financial resources amongst the federating units, Punjab will also try to seek greater fiscal autonomy for the provinces.

“We will actually be beginning from where we left the discussions for the inconclusive sixth award in 2006,” a senior Punjab finance department official told Dawn following a briefing last week for provincial minister Tanvir Ashraf Kaira on the province’s stand.

Beginning with the demand for an increase in the provincial share in the divisible pool and cut in the federal government’s allocation, Punjab is also looking forward to greater autonomy for the provinces to raise cheaper debt from the domestic market and expansion of their tax-base.

“We want the central government to allow the federating units to impose and collect sales tax on services, and any other federal tax — for example, capital value tax on immovable property. Also, we want permission to raise debt from the domestic market,” the official said.

He said these issues are of immense importance for Punjab.

“Therefore, we want the terms of reference of the new NFC wide enough to include these issues.”

Punjab is hopeful that the other three provinces would support its demand for fiscal independence as agreed during an informal meeting of the four provincial finance ministers in June in Lahore.

The federal government has consistently rejected the demand for transferring to the provinces the right to tax major revenue generating services like telecommunication and financial sectors — which cut across provincial boundaries — to the federating units because it thinks it could cause a new dispute on “territorial” jurisdiction between provinces, particularly Punjab and Sindh.

Also, the centre feels that the proposal would deprive Balochistan and the NWFP of chunk of their share in tax revenue as the services sector there remain underdeveloped. But it is not averse to the provinces taxing services like retail and wholesale markets within their respective territories to increase their tax revenues.

Punjab will also oppose the federal government’s decision to benchmark the resource allocation under the NFC on the basis of the current expenditure and own resource generation of the provinces.

“The method adopted by the centre is to give a uniform growth rate on the actual current expenditure made by respective provinces in the financial year 2008, and project it over the NFC period. There is an element of discretion in this exercise, which is exploited by the centre,” said the official.

“This proposal is to the disadvantage of Punjab because of its conscious policy to reduce the level of the current expenditure — it amounts to penalising the prudent province and rewarding the undeserved ones.”

The officials are also hopeful that the provinces would unanimously demand an increase in provincial share in the divisible pool.

The provincial share, including subvention grants, is set to rise to 50 per cent of the total divisible pool funds in the last year, 2010-11, of the current interim arrangement.

The interim award was announced by the president in 2006 when the provinces had failed to evolve a consensus on the criteria for inter-provincial distribution of the funds.

Punjab stuck to retaining population as the sole basis for the distribution of funds and the rest of the provinces called for a formula based on multiple indicators.

Punjab feels that the demand for multiple indicators is being advocated “on the basis of political necessity rather than economic rationality”.

“Sindh’s argument that the NFC resources be allocated on the basis of revenue collection only takes the point of collection as the basis and not the point of incidence or the real taxpayer. We insist that the NFC should also take into consideration the contribution of taxpayers from Punjab towards federal taxes,” said the official.

Balochistan and the NWFP have always argued for inclusion of backwardness, poverty and area in the horizontal distribution formula. But Punjab says that it has the highest number of poor in absolute numbers and the provinces can be compensated for poverty and underdevelopment through the system of subventions.

Punjab’s insistence to stick to population as the only criterion for inter-provincial sharing of the NFC resources stems from its heavy dependence on transfers from divisible pool due to lack of natural resources.

“While other provinces have guaranteed royalties, excise duty and hydro-electricity profits under the Constitution that make them less dependent on their share from the divisible pool, we are heavily dependent on federal divisible pool share,” the official said. “Besides, if we closely examine the entire system of federal transfers, we are receiving far less funds than our share in population.”

“Punjab’s total share in the federal transfers and provincial own receipts is calculated at just less than 50 per cent against its share of 57.36 per cent in the country’s population,” the official said.

On the other hand, Sindh’s share of 30 per cent in the federal transfers and provincial own receipts far exceeds its contribution of 23.71 per cent to the population. The NWFP is also getting 14 per cent or slightly more than its population of 13.82 per cent and Balochistan seven per cent against 5.11 per cent.

An analysis of the federal and provincial budgets for 2007, for example, shows that Punjab’s share in the straight transfers (on account of natural resources) is only 11 per cent against Sindh’s 61 per cent, NWFP’s 16 per cent and Balochistan’s 13 per cent. Similarly, Punjab’s share in subventions — distributed on the basis of backwardness — is 11 per cent against Sindh’s 21 per cent, NWFP’s 35 per cent and Balochistan’s 33 per cent.

Punjab is getting lesser share — six per cent — from the divisible pool than its share of 57.36 per cent in the nation’s population because of distribution of 2.5 per cent GST under different proportions among the provinces.

Punjab is also ahead of the rest of the country in generating its provincial own receipts as was reflected by its share of 63 per cent in the total provincial own receipts of the four units together. Sindh’s share is 27 per cent and NWFP’s and Balochistan’s is negligibly low to just seven and three per cent.

“The per capita resource of Rs3,221 available to Punjab is also the lowest. Sindh gets Rs4,741, NWFP Rs3,722 and Balochistan Rs5338. Punjab must be compensated for this. Potential own source revenues plus straight transfers need to be realistically assessed and fiscal needs of the provinces taken into account. We will highlight absence of benchmarking and idea of cost of service provisioning and needs,” the official insisted.