Given that the NFC distribution formula is stated in the Constitution, two amendments would be necessary, one to Article 160 and the other to Item 47 of Fourth Schedule of Federal Legislative List Part I, as reproduced in Tables 5 and 6, respectively.
With regard to Article 160 (3) (i),
"taxes on income, including corporation tax, but not including taxes on income consisting of remuneration paid out of the Federal Consolidated Fund;" will need to be amended to read:
"taxes on income, including corporation tax, collected under Withholding mode but not including taxes collected directly and not including taxes on income consisting of remuneration paid out of the Federal Consolidated Fund;"(underlined to be added)
With regard to Item 47 of Fourth Schedule of Federal Legislative List Part I,
"Taxes on income other than agricultural income"
will need to read
"Taxes on income." and the words "other than agricultural income" will need to be deleted.
Table 5: Article 160
160. National Finance Commission.- (1) Within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces.
(2) It shall be the duty of the National Finance Commission to make recommendations to the President as to-
(a) the distribution between the Federation and the Provinces of the net proceeds of the taxes mentioned in clause (3);
(b) the making of grants-in-aid by the Federal Government to the Provincial Governments;
(c) the exercise by the Federal Government and the Provincial Governments of the borrowing powers conferred by the Constitution; and
(d) any other matter relating to finance referred to the Commission by the President.
(3) The taxes referred to in paragraph (a) of clause (2) are the following taxes raised under the authority of [Majlis-e-Shoora (Parliament)], namely:-
(i) taxes on income, including corporation tax, but not including taxes on income consisting of remuneration paid out of the Federal Consolidated Fund;
(ii) taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed;
(iii) export duties on cotton, and such other export duties as may be specified by the President;
(iv) such duties of excise as may be specified by the President; and
(v) such other taxes as may be specified by the President.
Table 6: Fourth Schedule of Federal Legislative List Part I
43. Duties of customs, including export duties
44. Duties of excise, including duties on salt, but not including duties on alcoholic liquors, opium and other narcotics.
45. deleted
46. deleted
47. Taxes on income other than agricultural income.
48. Taxes on corporations.
49. Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed [except sales tax on services].
50. Taxes on the capital value of the assets, not including taxes on immovable property.
51. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.
52. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes and duties specified in entries 44, 47, 48, and 49 or in lieu of any one or more of them.
53. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freight.
54. Fees in respect of any of the matter in this Part, but not including fees taken in any court.
6. Enhancing horizontal equity:
The 7th NFC accorded greater fiscal autonomy to the provinces. However, fiscal autonomy is meaningful only if a province possesses the economic base to raise revenues from. Punjab and Sindh have benefited significantly from the fiscal devolution, given their relatively strong economic base. Khyber-Pakhtunkhwa and Balochistan do not possess that economic base. There is, as such, an imperative to account for the lack of economic base of the two provinces in the forthcoming NFC horizontal revenue sharing formulation.
Two proposals are forwarded herewith.
- One, include a fifth criteria: inverse of share of cultivated area (ICA).
- Two, raise the weight of inverse of population density (IPD) to 5%.
Inverse cultivated area (ICA):
Punjab and Sindh provinces are located astride the river Indus, with the extensive irrigation network located largely therein, and which supports a robust agricultural economy. Khyber-Pakhtunkhwa and Balochistan are located on the periphery of the Indus network and large parts are mountainous or arid; and, as such, uncultivable.
Share of cultivated area, thus, emerges as a potential candidate for inclusion as the fifth criteria in the NFC formulation. The arithmetic of the inverse of the share of cultivated area is provided in Table 7. Column 2 shows the total reported area of the province, column 3 shows the total cultivated area of the province and column 4 shows the share of cultivated area in reported area in each province. Accordingly, 71% of the reported area in Punjab, 35% in Sindh, 22% in Khyber-Pakhtunkhwa and 12% in Balochistan are cultivable areas. Thus, Punjab has the maximum cultivated area and Balochistan the least.
Working out the share of each province in inverse of cultivated area (ICA), the shares emerge as follows: Punjab 8.2%, Sindh 16.8%, Khyber-Pakhtunkhwa 26.4% and Balochistan 48.6%. Applying a weight of 5% to the ICA criteria, the shares in the NFC formulation emerge as follows: Punjab 0.41, Sindh 0.84, Khyber-Pakhtunkhwa 1.32 and Balochistan 2.43. Thus Balochistan accrues the maximum benefit, followed by Khyber-Pakhtunkhwa.
============================================================================================
Table 7: Arithmetic of Proposed Criteria # 5 in NFC Formula Inverse of Cultivated Area (ICA)
============================================================================================
Province Reported Cultivated Share Share of Inverse Share of ICA
Area Area (CA) of CA Province of Province Weight
(mill. (mill. ha) (%) in CA Share in ICA @ 5%
ha) (%) in CA (%)
(ICA)
============================================================================================
Punjab 17.53 12.45 71.1 50.8 0.0197 8.2 0.41
Sindh 14.10 4.90 34.8 24.8 0.0403 16.8 0.84
KP 8.34 1.84 22.1 15.8 0.0635 26.4 1.32
Balochistan 17.18 2.06 12.0 8.6 0.2402 48.6 2.43
============================================================================================
Inverse Population Density (IPD):
Introducing inverse population density was included in the 7th NFC formula to account for Balochistan's small population at about 5% and vast area at about 44% and served to raise the province's share in the horizontal distribution. While welcome, the criteria is inherently self-eroding in its efficacy in the long run. This occurs because while the area remains constant, population continues to rise - resulting in higher population density and, consequently, lower inverse population density. As such, the effective weight of inverse population density as a criteria will continue to dilute as population increases over time.
=================================================================
Table 8: Notional depiction of efficacy of IPD over time
=================================================================
Year Area Population Population Inverse of Share in
(sq. km.) (million) Density Population IPD
(Growth @ (Population Density (%)
3%) per sq.km.) (IPD)
=================================================================
1972 347,190 2,491,000 7.2 0.1393 46.6
1981 347,190 4,332,000 12.5 0.0801 26.8
1998 347,190 6,566,000 18.9 0.0528 17.7
2017 347,190 13,200,000 38.0 0.0263 8.8
=================================================================
The above tabulation shows that as population has risen from 6.6 million in 1972 to 13.2 million in 2017, the share of IPD - applying the 7th NFC formula notionally - has declined from 46.6% in 1972 to 8.8% in 2017. There is, thus, a case for raising the weight of IPD from the current 2.7% to 5%.
The impact of raising the IPD weight to 5% is shown in Table xx. Currently, as per 7th NFC, Balochistan's the share in terms of IPD is 2.16%. Raising the overall weight of IPD to 5% will enhance the respective shares of all the provinces, but significantly so for Balochistan from 2.16% to 4.01%.
================================================================================
Table 9: Impact of raising IPD weight to 5%
================================================================================
Province Area 1998 Population Inverse Share Share Share
(sq. Population Density Population of IPD of IPD of IPD
km.) (million) Density @ 2.7% @ 5%
(IPD)
================================================================================
Punjab 20.63 73.6 3,569 0.03 4.2 0.11 0.21
Sindh 14.09 30.4 2,160 0.05 7.0 0.19 0.35
KP 10.17 17.7 1,745 0.06 8.7 0.23 0.43
Balochistan 34.72 6.6 189 0.53 80.1 2.16 4.01
================================================================================
Overall impact:
The overall impact of introducing a fifth criteria - Inverse Cultivated Area - with a weight 5% and raising the weight of Inverse Population Density to 5% is shown in Table 10. Accordingly, the weight of population will decline from 82% currently to 74.7%, while the weights for Poverty/Backwardness and Revenue Collection/Generation will remain the same. Inverse Population Density and Inverse Cultivated Area are proposed to command a weight of 5% each.
=======================================================
Table 10: Overall impact of proposed changes on weights
=======================================================
Criteria Pre-7th 7th Proposed
NFC NFC
=======================================================
1. Population 100 82.0 74.7
2. Poverty/Backwardness 0 10.3 10.3
3. Revenue 0 5.0 5.0
Collection/Generation 0 2.7 5.0
4. Inverse Population Density 0 0 5.0
5. Inverse Cultivated Area Total 100 100 100
=======================================================
Appendix
Addressing federal fiscal constraints:
There is a view that the 7th NFC Award transferred excessive resources to the provinces, creating a fiscal imbalance and shrinking federal fiscal space. Concern arises also from the fact that the road to reducing the 7th NFC specified provincial (vertical) share has been blocked by a constitutional provision.
In this context, a demand has been placed for the NFC to pre-allocate 7% of the Federal Divisible Pool for the federal government - 3% for meeting security needs and 4% for meeting development needs of federal territories: Azad Kashmir, Gilgit-Baltistan and FATA. The demand is based on a precedent created by the 7th NFC in pre-allocating one percent of the Divisible Pool for Khyber-Pakhtunkhwa (then NWFP).
The other view is that federal interpretation of the fiscal impact of the 7th NFC is flawed and its demands untenable. It is held that federal fiscal gap has been created on account of its failure to (1) raise the Tax-GDP ratio, as stipulated in the 7th NFC Award and (2) to follow up on the 18th Constitutional Amendment, which divested the federation of a wide range of functions and which, had it been carried out accordingly, would have served to reduce federal expenditures. Instead, federal current expenditure growth over 2010-2017 has averaged 9.8% - nearly two percentage points above the average rate of inflation (see Table 11).
=======================================================
Table 11: Profile of federal current expenditure growth
=======================================================
Expenditure categories Average growth rate
(2010-2017)
=======================================================
Current 9.8
Debt 12.8
Defence 12.2
Civil Administration 5.9
Rate of inflation 8.0
=======================================================
Decomposition of current expenditure shows that civil administration expenditures have been contained with average growth restricted to 5.9% - two percentage points below the average rate of inflation. The responsibility for fiscal profligacy lies with debt service and defence, which has averaged growth at above 12% each - four percentage points above the average rate of inflation. Herein lies the onus for fiscal imbalance. Table 12 confirms the above finding, showing that the share of debt servicing in total current expenditure has risen from 38% in 2010 to 46% in 2017 and the share of defence expenditure has increased from 18% to 21% over the same period, while the share of civil administration has declined from 44% to 33%.
=====================================================
Table 12: Federal current expenditure category shares
=====================================================
Fiscal Year Debt Defence Civil
Administration
=====================================================
2010 38.2 17.7 44.1
2011 36.3 18.9 44.8
2012 36.9 19.2 43.9
2013 36.9 17.3 45.8
2014 42.6 18.5 38.9
2015 44.0 20.2 35.8
2016 44.0 20.9 35.1
2017 46.1 20.8 33.1
=====================================================
While commendable relative to debt servicing and defence, the growth in civil administration expenditures is as yet questionable. The abolition of the Concurrent List by virtue of the 18th Amendment required abolition or curtailment of the relevant Ministries and Administrative Divisions, which would have seen actual reductions in expenditure. This does not appear to have happened.
There are about 16 federal Administrative Divisions that are clearly questionable in the light of the 18th Amendment and in the context of economizing on non-development expenditure. Five of these Divisions deal with exclusive provincial subjects and need to be abolished. They are:
Education and Training
Housing and Works
Human Resource Development
Industries and Production
National Food Security and Research
Another seven Divisions have been carved out of 'parent' Divisions and need to be reverted or merged. They are:
- Defence Production back to Defence Division
- Information Technology & Telecommunications back to Communications
- Postal Services back to Communications
- Revenue back to Finance
- Statistics back to Finance
- Textile back to Commerce
- States & Frontier regions back with Kashmir & Gilgit Baltistan Affairs
And yet another four Divisions are clearly spurious and need to be abolished altogether. They are:
- Climate Change
- National Harmony
- National Heritage & Integration
- National Regulation & Services
There are also a host of federal agencies - corporations, authorities, etc. - whose rationale for existence or size needs a serious review. An example is Pakistan Post that was run by one Director-General and one Additional Director-General and which has now ballooned to nine Additional Director-Generals. The top-heavy expansion of the Pakistan Post officer corps is all the more questionable in the light of the erosion of the task of delivering mail.
The above list of Divisions are what appears to be the obvious. Essentially, the number of Ministries and Divisions need to be brought down to the level that existed in 1971. There can be little justification of the size of the country reduced and the governing apparatus expanded out of proportion. Herein lies the source of addressing federal fiscal constraints.
Dangers of any roll back:
The Sindh case offers an insight in the potential dangers of any attempt to dilute or roll back the 7th NFC Award or the 18th Amendment enacted in 2010. Post-independence and post-One Unit, demographic and political events gave birth to a nationalist movement that carried elements of secessionism and was largely rooted in anti-Punjab sentiment.
The 2010 devolution has served to demolish this aspect of Sindh's politics. Evidence for this change emerges from the fact that post-2010, almost all nationalist parties and groups in Sindh aligned themselves with the Punjab-based PML-N and one of them even merged with it. Clearly, the 18th Amendment and the 7th NFC Award, both achieved with rare unanimity across all political parties and across all provinces, has served to bond the federating units and strengthen national unity.
The implications of any roll back are clear. Any undermining of the 18th Amendment or the 7th NFC Award is almost certainly likely to provide oxygen to the separatist agenda and revive the revisionist nationalist politics of yore.
(Concluded)