The size of the provincial pool is estimated to increase to Rs910 billion in the first year (2010/11) of the award and to Rs1.813 trillion in the last year (2014/15) of its life.

The current year's size of provincial pool is estimated in the budget at Rs787 billion.

Punjab's share from the provincial pool is estimated to spike to Rs938 billion during the life of the next award from the current fiscal year's Rs419 billion. Sindh's share will go up to Rs445 billion from the existing Rs197 billion, Pakhtoonkhawa's to Rs265 billion from Rs133 billion and Balochistan's to Rs165 billion from Rs53 billion.

“Until now the federal units had an incentive to raise their own tax receipts, though incrementally, for development requirements due to low, inadequate resource transfer from the divisible pool,” a leading economic analyst, who refused to give his name, tells Dawn. “This incentive will no longer be there once the new award comes into effect; they will have plenty of money pouring in without doing anything at all.”

Provinces are often criticisd for their lack of interest to build their capacity for levying and collecting taxes to raise their own revenues and reduce dependence on the federal funds. The provincial tax receipts constitute only a fraction of the nation's total tax revenues, which remain below nine per cent of gross domestic production GDP).

The major provincial taxes include agriculture tax, stamp duty, motor vehicle tax and property tax (collected on behalf of local governments). In spite of their potential to generate huge revenues, none of the four federating units has ever made any serious effort to overhaul its tax regime and administration.

Agriculture, which contributes about 23 per cent of the GDP, has huge potential of generating revenues , according to federal finance minister Shaukat Tareen, who played a crucial role in the early conclusion of an agreement on the next NFC award as chairman of the commission.

The provinces, on the other hand, blame a narrow tax base and “encroachments” by the federal government for their abysmally low tax receipts. The example of provincial sales tax on services, which the federation has now agreed to transfer to the provinces, is pointed out by the provinces, especially Punjab and Sindh, to defend their case.

“The provinces try to cover up their shortcomings and lack of political will to improve tax administration and governance,” says the analyst. “The argument of narrow tax base is true for Pakhtoonkhawa and Balochistan, but not for Punjab and Sindh. What stops them from collecting agriculture tax? Or tax capital gains on real estate? Or increase the size of the revenues collected under the property tax and stamp duty?,” he asks.

He says the provincial bureaucracy was a major obstacle in the way of reforms in tax administration and governance because that would plug leakages and corruption. “But politicians too are not much interested in taxing the richer segments of population and eliminating tax exemptions to certain lobbies.”

The provincial share from the divisible pool is projected to rise because the federation's decision to agree to a substantial cut in its own share in the pie to create room for the transfer of greater financial resources to the federal units.

As a result, the provincial share will swell to 56 per cent of the divisible pool in the first year (2010/11) of the award from the current 47.5 per cent, and 57.5 per cent during the remaining four years of the NFC award's its life.

The federation's decision to increase the size of provincial pool of funds reflects realisation on its part of the fact that the provinces need more funds for providing quality public services like health, education, drinking water, sanitation, etc to their people.

“The federal government recognises the fact that stronger provinces will strengthen the federation,” federal finance minister Shaukat Tareen, who chaired the commission, observed as he announced the new formula for vertical and horizontal sharing of the funds from the divisible pool. At the same time, however, the minister has urged the provinces to build their capacity to raise tax revenues.

Apart from the increase in the provincial share in the divisible pool, the other landmark achievement of the next NFC award pertains to the agreement between the federal units on a four-point multi-criteria formula - population, backwardness/poverty, revenue (combination of generation/collection), and inverse population density, for horizontal distribution of funds.

It replaces the existing population based formula. Population, nevertheless, remains the main denominator for distribution of the funds among the federating units as it has been allocated 82 per cent weightage in the formula. Backwardness/ poverty has been given 10.3 per cent weightage, revenue 5.0 per cent and inverse population density 2.7 per cent.

Though the federation and the provinces have already crossed major hurdles in the way of a more equitable sharing of the resources, some issues still remain to be sorted out in the coming months.
“The government, for example, is yet to credibly define poverty and determine a method to measure it,” says the analyst. The issue was a major source of difference between the provinces during NFC negotiations until they agreed to “use the average of the 1999 poverty survey and the last Household Integrated Economic Survey (HIES)”, says a participant from Balochistan.

Moreover, the government is also to develop an institutional framework to collect credible data on revenue generation and collection. The issue of lack of comprehensive and credible data on revenue collection and generation was a major factor that held up an early outcome in the Lahore meeting of the commission.

While Punjab insisted on including revenue generation for making part of the multiple criteria for horizontal distribution, Sindh argued in favour of revenue collection. At the end of the day both the provinces agreed to use a hybrid of generation and collection.

“The issue of lack of data on revenue generation and collection was discussed at the NFC meeting and it was decided to evolve a legal and institutional framework for developing data on revenue generation for future,” says another participant from Sindh. He says the commission formed under former military dictator General Pervez Musharraf had also taken a similar decision but nothing was done to implement it.

Another issue pertains to federal excise on high revenue generating services like telecommunication, banking services, etc. If the provinces are to levy sales tax on services and collect it, the federal government will be required to remove excise duty on these services.

Will this government be able to settle these issues? Most believe it will. “The task is not easy. But this government's intentions are honest. I hope it will sort out these matters before very long,” the analyst says.