Can PTI solve the NFC awards conundrum?

The National Finance Commission (NFC) has been the centre of attention in Pakistani politics of late. Under article 160 of Pakistan’s constitution, the president has to constitute the NFC after every five years for a term of five years. The 7^th NFC award – after a thirteen year gap – became effective under the rule of Pakistan Peoples Party (PPP) in 2010-11. The NFCs that followed remained indecisive. The 7^th NFC holds towering significance in the political economy of Pakistan. The award’s noticeable features include the vertical increase in provincial share to 56% in the first year and 57.5% thereafter.

The fiscal mechanism in the 7^th NFC award has not been thought through. The federation withholds too little – compared to its colossal needs and financial commitments – forcing it to run a deficit. The federation has to service unilateral and bilateral debt after distributing the due share to the provinces. The debt servicing only leaves behind a sum that finances a part of the military budget. Non-tax revenue and additional loans fund the remaining expenditures.

Thus there is a case for mulling upon the NFC awards again. But the biggest hindrance to the federation is the stipulation of the 18^th Amendment that bars the stakeholders from reducing the provincial share of the revenue. So the provincial share cannot be curtailed without another amendment to the constitution.

The 7^th NFC gave the provinces exclusive tax jurisdiction over agriculture and services. This roughly accounts for 80% of Pakistan’s gross domestic product (GDP). It is why we witness regular fiscal imbalances despite an increase in the tax collection over the years. However, the award remained silent on sharing financial burdens like debt servicing of public loans for national projects.

The reduction of the share of revenue may impede the federation against unexpected needs of national importance. It has resulted in a persistent fiscal deficit, forcing Pakistan into the vicious cycle of the debt trap.

There were some underlined assumptions in the 18^th Amendment and the 7^th NFC award regarding the growth rate of federal tax collection. The lawmakers assumed improvement in the tax-to-GDP ratio based on which they augmented the provincial share. However, the previous governments failed to implement it. This is the foremost reason for a noteworthy fiscal pressure on the incumbent federal government.

After the 7^th NFC, the performances of federal and provincial governments on the fiscal front have been lamentable. There has not been any budgetary discipline. The governments spent recklessly on current expenditure (salaries and pension) and untargeted development projects. The meaningless large-sized governmental departments did nothing except heavily denting national resources.

Pakistani governments have failed to tax the affluent. They have burdened the poor under the regressive indirect taxes. On the contrary, the elite class has remained exempted from income taxes despite their large incomes and flamboyant lifestyles. They find themselves in a win-win position by successfully evading taxes while enjoying premium quality private education and medical services. The poor neither keeps the cake nor eats it.

After the 18^th Amendment, the provinces are mandated to levy inheritance and agricultural income tax. But the provinces have displayed an abysmal performance due to the lack of political will to tax the powerful. It has resulted in an appalling collection of agricultural income tax.

The stakeholders have a responsibility to revisit the NFC awards and the 18^th Amendment. The parliamentarians have to set aside political differences to engage in a constructive debate on the Centre and the provinces’ financial asymmetry. Likewise, the 10^th NFC nominees have to reflect upon the merits of the stupendous provincial share in the federal revenue collection. To see a financially blossoming Pakistan, the politicians have to step out of their parochial mindset and contemplate the issue from a Pakistani lens.