The 7th NFC Award came with a gap of thirteen years after the promulgation of the NFC Award in 1997. In the intervening period various Commissions were constituted but could not arrive at a consensus. Eventually, as an interim provision, the Presidential Order No 1 of 2006 was issued.
The 7th NFC Award represents a major step forward in a number of important ways. First, it makes a big move in the process of fiscal decentralisation. The vertical share of the four Provinces combined has been raised to 56% in the first year to 57.5% thereafter. This represents a big increase in transfers in comparison with the maximum share of 50% in the Presidential Order of 2006.
Second, a fundamental transition has been made in the horizontal sharing formula between Provinces. Historically, the distribution was based solely on the basis of population. The 7th NFC Award was able to move toward multiple criteria for sharing, with the prime objective of achieving a degree of fiscal equalisation, leading to higher per capita transfers to the more backward provinces.
Special features: The special features of the 7th NFC Award are summarised below:
(i) The divisible pool of taxes consists of all FBR taxes, excluding tax revenue from remuneration paid out of the Federal Consolidated Fund and the excise duty on natural gas. Prior to the distribution to the four Provinces, one percent of the pool has been assigned to the government of Khyber Pakhtunkhwa to meet the expenses on the war of terror.
(ii) The indicators and weights for horizontal distribution from the divisible pool of taxes are as follows: population, 82.0%; poverty or backwardness, 10.3%; revenue collection or generation, 5.0% and inverse population density, 2.7%. This formula implies a share of 51.74% to Punjab, 24.55% to Sindh; 14.62% to Khyber-Pakhtunkhwa and 9.09% to Balochistan from the divisible pool.
(iii) In addition to divisible pool transfers there are straight transfers, distributed solely on the basis of collection. These straight transfers include the net revenue from the royalty on oil and natural gas, excise duty and development surcharge on natural gas.
(iv) A relatively small special grant-in-aid, equivalent to 0.66% of the revenues in the net proceeds of the divisible pool has been made to Sindh as a compensation for the losses on account of abolition of octroi and zila tax.
(v) The federal government has guaranteed revenues each year to the Government of Balochistan, based on annual budgetary projections.
(vi) The 7th NFC recognizes that the sales tax on services is a Provincial subject under the Constitution and may be collected by respective Provinces.
(vii) The federal and provincial governments have jointly committed to the development and enforcement of mechanisms for maintaining fiscal discipline.
(viii) The federal government may assist the provinces through specific grants in time of unforeseen calamities.
Level of transfers: Given the abovementioned features of the 7th NFC Award, the first question is the magnitude of transfers. These include the share in the divisible pool and straight transfers to the four Provinces combined.
The total transfers are estimated at Rs 999 billion in 2010-11, equivalent to 5.5% of the GDP. This represents a jump of Rs 336 billion or 34% over the transfers in 2009-10, the last year prior to the 7th NFC Award. Thereafter, the transfers have reached Rs 1862 billion by 2015-16, with a growth rate annually of 12.5%. Currently, the total transfers represent 6.3% of the GDP. In the absence of the Award, the overall growth in transfers in 2010-11 would have been below 16%. It needs to be recognised, however, that the level of grants has fallen in relation to those provided for in the Presidential Order 2006.
What is the gain in transfers for individual provinces? Given the emphasis on fiscal equalisation, it is not surprising that the biggest jump in revenue transfers in 2010-11 was 152% in the case of Balochistan, followed by Khyber Pakhtunkhwa with a rise of 97%. The increases for Sindh and Punjab were 53% and 42% respectively. Clearly, the 7th NFC Award has succeeded in raising substantially the shares in transfers particularly of the two relatively backward provinces.
The comparison between share in population and share in transfers reveals that in the 7th NFC Award the only Province that has lost out is the largest Province, Punjab. While its share in population according to the 1998 Census was 57.4%; the share in revenue transfers was 48.4% in 2015-16. However, the big increase in the vertical share has compensated Punjab for the reduction in its horizontal share. The positive difference between share in transfers and in population is 4% in the case of Balochistan, 2.4% in Khyber-Pakhtunkhwa and 2.5% in Sindh.
Sindh has done well because of the high share in FBR revenue collection and larger straight transfers. The big jump of Balochistan is due to lower population density, higher incidence of poverty and a relatively high share of straight transfers. Khyber-Pakhtunkhwa has got a bigger share because of relative backwardness.
The next set of issues relates to the impact of the 7th NFC Award on the overall extent of fiscal decentralisation to the Provinces, the impact of enhanced fiscal powers on resource mobilisation at the sub-national level, the behavioural response by Provincial Governments to larger transfers, allocation of the extra resources to the social sectors and so on. These issues will be taken up in Part II of this article.
(The writer is Professor Emeritus and a former Federal Minister)
Copyright Business Recorder, 2017