Federal government wants to exclude customs from the divisible pool, sources say
The 7th award in 2010 attempted to correct irregularities by increasing the total allocation to provinces to 57.5% and reducing the population weight to 82%. Photo: file
ISLAMABAD:
The Center has notified eight committees of the National Finance Commission (NFC), including one on debt utilization and transfer of expenditure to provinces, following the attorney general’s support to the federal government against Sindh’s objections.
The development happened when Pakistan’s top tax expert, Dr. Hafiz Pasha, noted that despite the constitutional requirement to allocate 57.5% of the divisible pool to provinces, they received only 45.8% in the last fiscal year after accounting for oil taxes and cash surpluses. Dr. Pasha made these remarks at a seminar on NFC organized by the Social Policy and Development Center (SPDC).
Finance Minister Muhammad Aurangzeb, who had initially confirmed attendance, did not attend the seminar; instead, he met SPDC representatives in his office. SPDC chief executive Asif Iqbal said the finance minister had initially confirmed his attendance but expressed regret late the night before.
Meanwhile, the finance ministry formed committees on eight critical issues that will shape the 11th NFC award. The last, 7th NFC Award, was unanimously adopted 15 years ago for a five-year term. A working group, headed by the Punjab Finance Minister, was also set up to make recommendations on the sharing of financial expenditure incurred by the federation in areas under provincial jurisdiction. The group’s formation followed a legal opinion from the justice minister after Sindh objected, arguing that cost-sharing falls outside the NFC’s mandate.
Sources indicated that Sindh may seek its own legal opinion as the federal government continues to spend in areas under provincial control. According to Dr. Asad Sayeed, Sindh’s technical member on NFC, the federal government retains ministries linked to decentralized subjects and spent Rs 328 billion on them, as highlighted in a 2023 World Bank report.
Khyber-Pakhtunkhwa Finance Adviser Muzammil Aslam criticized the federal government’s policies, citing energy mismanagement that contributed to over Rs 5 trillion in circular debt in the electricity and gas sector and over Rs 5.1 trillion in payments to Chinese power plants.
Headed by Finance Minister Muhammad Aurangzeb, the Center constituted a working group to make recommendations on the composition of divisible pool taxes, and suggest the inclusion or exclusion of certain taxes in the pool.
The sources said the federal government wants to exclude tariffs from the scope of the divisible pool shared among the five governments.
Another working group has been set up to determine the percentage of resources that will be shared between the Center and the four provinces – the vertical transfers. Currently, the provinces get 57.5% while the rest goes to the Centre.
While speaking at the SPDC seminar, Dr. Hafiz Pasha that in the last financial year the provinces got 45.8% compared to their guaranteed share of 57.5%. He added that nearly 12% share was retained either by levying oil tax on products not part of the divisible pool or by getting remitted money back in the form of cash surplus.
In the last fiscal year, the federal government collected over Rs 1.2 trillion in oil tax and the provinces also saved Rs 921 billion as cash surplus to meet IMF program conditions.
Headed by Balochistan’s finance minister, the federal government constituted a working group to decide the distribution of resources among the four provinces. Currently, over 82% of resources are distributed based on population.
The seeds of East Pakistan’s separation were sown in the 1960s with the decisions to first withdraw the provinces’ right to collect VAT and then deny the distribution of resources based on population, said Dr. Asad Sayeed. Dr. Sayeed said that soon after the separation of East Pakistan, the federal government started distributing resources based on population.
KP’s Muzammil Aslam said there is a need to stop incentivizing the population, and more reliance on other indicators, including revenue generation.
The federal government has also notified a task force to “consider and propose measures to improve the overall tax-to-GDP ratio”. KP’s finance minister will chair the working group.
FBR’s tax to GDP ratio is barely 10.3%, while the provinces also collect taxes equivalent to 0.8% of GDP. The FBR has grossly failed to fulfill its task, and the chairman FBR told the prime minister that the first half-year tax target could be missed by 560 billion. Rs.
The finance ministry also notified a working group on direct transfers of resources to provinces, which will be headed by the Sindh finance minister.
The Seventh Working Group has been set up to make recommendations on the merger of the erstwhile FATA and its share in the NFC. KP’s finance minister would take the lead.
Muzammil Aslam said that over 5 million people have been added in KP and its one-third area has been expanded without an increase in resources. The financial adviser said that KP’s share in NFC should further increase by over 4% based on the new population size.
The federal government has also set up a working group on the composition of the national debt and its utilization. This group will be headed by the Finance Minister of Balochistan.
