The Sindh government has reservations about Ms Hina Rabbani Khar's nomination to the recently constituted National Finance Commission.

Hina is special assistant to the prime minister on economic affairs and her inclusion on the NFC is considered “superfluous” as the commission is headed by the federal finance minister.

“Her inclusion in the NFC strengthens representation from Punjab,'' argued a well-placed source in the Sindh government. The matter will be raised in the light of the principle of equal representation of the provinces in the NFC by the Sindh chief minister with the prime minister before the NFC proceedings begin.

In the notice issued by the federal finance ministry on August 20, the government has replaced the names of three members of the NFC 2005 with new ones. The terms of reference remain unchanged. Technically, the NFC was formed under a notification issued in 2005 and any consensus award, if it comes, should remain in force till 2010. Under the constitution, an NFC award is valid for five years. The Sindh chief minister, who holds the finance portfolio, has been asked to get the issue clarified.

Besides, the two items on the NFC agenda have also been questioned by the Sindh government; these seek (a) rationalisation of payment of federally collected royalties on crude oil and surcharge on natural gas to the provincial governments and (b) to enforce a mechanism for setting parameters to achieve fiscal discipline at the federal and provincial levels “These are exclusively provincial issues to be discussed only in provincial legislatures,'' asserted a source in Sindh government who said a proposal has been made for deletion of these two points from the NFC terms of reference.

These issues, asserted the source, are being created deliberately by the officials in Islamabad who want to retain the existing formula for distribution of national resources. “The PPP won 2008 elections on a manifesto that spells out principles on which NFC consensus award has to be sought,'' Mr Taj Haider, a former PPP Senator said. He represented Sindh on NFC in 1995 and is one of the eight-member committee formed by Sindh government to draw up a strategy for the current NFC.

The first and foremost principle of the new NFC award has to be a multi-criteria for resource distribution in which revenue generation, backwardness and geographical size have to be given weight along with population ratios of the provinces. Other political parties MQM, ANP, PML(F), BNP have endorsed the PPP stand on the issue.

In 2008 election manifesto, the PPP committed to retore octroi and zila tax as the party was committed to make local governments financially self-sustainable and effective within the provincial jurisdictions. The octroi and zila tax were abolished by the PML(N) government of Mian Nawaz Sharif in 1998 through a resolution of Inter-Provincial Coordination Committee (IPCC). Following abolition of octroi, the PML(N) government increased rate of general sales tax from 12.5 to 15 per cent. The proceeds of 2.5 per cent sales tax was given to the provinces as compensation for the loss of octroi revenue.

Sindh's stand on distribution of 2.5 per cent sales tax proceeds among the provinces since 1999-- irrespective of which party headed the government-- has been consistent. “We lost about Rs45 billion because of the mode of distribution adopted for the sales tax proceeds in the last nine years'', Nawaz Leghari, a member of Sindh NFC committee said.

Leghari quotes official audit figures which show share of octroi collection in 1999 of Sindh at 46 per cent against 42.63 per cent of Punjab, 6.4 per cent of NWFP and 5.33 per cent of Balochistan.

Sindh government wants restoration of octroi for which MQM will support the PPP because it can be the biggest source of income for Karachi and other city district governments. “Revival of octroi will mean 2.5 per cent relief in sales tax in all parts of the country'', Senator Taj Haider argued. The government is committed to withdraw 2.5 per cent sales tax immediately. In case the octroi is not restored and the federal government collects 2.5 per cent sales tax in compensation, Sindh wants distribution of proceeds on the basis of actual collection.

“There is a possibility that PML(N) government in the Punjab and PPP in Sindh may come into direct clash on this issue'', said a political activist of PML(N) in Karachi. But there are hopes that political leadership from both the parties may be able to find an amicable solution.

Sales tax on few services is being collected by the federal government through provincial ordinances enforced in 1999. But there is a growing consensus among the provinces to ask federal government to stop collection of sales tax on services as it is a provincial subject under 1973 Constitution.

“The federal finance ministry and the Federal Board of Revenue never provide regular and accurate data on collection of sales tax on services,'' reveals a Sindh government document circulated among eight members of the provincial NFC committee. “Bulk of sales tax on services was collected in Sindh but hardly 23 per cent was given to us in the last nine years,'' said an official. “The federal government should reimburse the differential amount (received less by Sindh because of NFC formula) of 2.5 sales tax proceeds and sales tax on services'', demanded an official document while suggesting that the issue be raised in the federal cabinet.

Like Balochistan, Sindh too disputes the federal figures about the collection of revenue from oil, gas and gas development surcharge and royalty. In its official document, Sindh complains that for last several years, neither the federal finance ministry nor the federal petroleum and natural resources ministry provided details of oil and gas related revenue.

A reference has been made to reduction in gas development surcharge (GDS) for Sindh during 2007-08 when it came down to Rs14.3 billion from Rs22.39 billion in 2006-07. In the current fiscal year, the federal budget indicates Rs11.32 billion GDS for Sindh.

An effort is being made for a joint representation with Balochistan to the federal government for resolving the GDS issue. The Sindh government has been advised to appoint a consultant on gas and oil who should negotiate with Balochistan's nominee on the NFC, Dr Gulfaraz.