By tooba imtiaz

Roll # 35

Admin# 596

Table of contents

1. History of NFC awards

2. NFC Award

3. Member of NFC

4. Type of taxes in pool

5. Mechanism of NFC awards in Pakistan

6. Purpose of NFC awards

7. Factors to be improved

8. Recommendations

9. conclusion

HISTORY OF NFC AWARDS-:

In 1971, Pakistan was cut into two by our enemies with the indirect support of our fellow Pakistani’s and hence we lost East Pakistan to Bangladesh. There are many reasons that can be attributed to the incident but one of the major one is the “Distribution of Resources” among the provinces i.e. East Pakistan and West Pakistan

At that time, the distribution of resources based on population was never raised by anyone since it would have resulted in greater share of West Pakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan.

YearSpending on West Pakistan (in crore Rupees)

Spending on East Pakistan (in crore Rupees)

1950–551,129524

1955–601,6555241960–653,3551,4041965–705,1952,141Total11,3344,593

The NFC award, National Finance Commission award, is the distribution of financial resources among the provinces of Pakistan by the federal government on annual basis. Certain types of taxes collected in each province are pooled, then redistributed according to the NFC formula. What taxes to include in the distribution pool and the distribution formula is a subject of debate.

Resource royalty is collected by the federal government and distributed to the provinces based on independent agreements.

Pakistan has had five NFC awards formulas. The Fifth NFC Award, adopted in 1997, was supposed to be valid for five years but failure to reach agreement on a sixth has meant that the fifth is still in operation.

MEMBERS OF NATIONAL FINANCE COMMISSION-:

Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President

(1) The distribution of specified taxes, duties between federation and provinces.(2) The disbursement of grants to provincial governments.(3) The borrowing powers exercised by federal and provincial governments.(4) Any other financial matter referred to commission.

TYPES OF TAXES-:

Taxes included in the pool are

(1) Income taxes

(2) General sales tax,

(3) Wealth taxes,

(4) Capital gains taxes, and

(5) Custom duties

MEMBERS OF NATIONAL FINANCE COMMISSION-:

Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President

(1) The distribution of specified taxes, duties between federation and provinces.(2) The disbursement of grants to provincial governments.(3) The borrowing powers exercised by federal and provincial governments.(4) Any other financial matter referred to commission.

Mechanics of National Finance Commission Award in Pakistan:

The purpose of NFC award is the re-distribution of resources among the provinces. According to PIDE Working Paper 2007:33,

National Finance Commission (NFC) has undergone many changes and has dynamically grown to its present shape. NFC is established by law for the smooth and judicious re-distribution of resources collected by centre according to the need and goals for development of federation and federating units. NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be held at the intervals of five years.

PURPOSE OF NFC-:

As per law NFC is intended to have an amicable mechanism for resource sharing formula between the federation and provinces and amongst the provinces. On ground it faced difficulties from time to time which barred its development.

FACTORS-:

Although, federally constituted, but with its ad hoc nature, NFC has failed to provide ideal resource distribution criteria. There are no penalties, as such and certain provinces have benefited by having no consensus for redistribution. Furthermore, the parameter choice is very narrow and sub-optimal, especially the population. This is based on census, which is carried out after every 10 years and has issues such as demographic dividend, migration, etc. in recent years. Therefore, international experiences must be incorporated in the resource distribution

formula. While announcing NFC award the government should give proper importance to following factors which are exercised in the rest of the world. The factors that can be incorporated are:

(1) Backwardness and development gap.

(2) Inverse income distribution (rural urban income disparity).

(3) Natural resource endowment.

(4) Revenue generation/revenue collection.

(5) Population density.

(6) Poverty.

(7) Area.

(8) Non-formula transfers.

(9) Environmental consideration.

There should be a permanent body of NFC, with professionals of the subject as consultants to regularly monitor and evaluate the equitable utilization of the award. Visits should be made to different areas and stakeholder consultation should be made to have a real look at the situation prevailing there so that the resource allocation can be made more appropriate. Like PFC it should have a dynamic interface with other stakeholders in improving the flow of funds. The federal assignments should be gradually reduced, both from the financing side as well as the service delivery side. Finally, the key to successful public service delivery is adequacy, sufficiency, transparent and regular flow of funds to the stake holders in doing the business of government.

Recommendations-:There are only three awards (recommendations) as such, in the last 34 years by National Finance Commission. The most recent NFC award is of year 2006 which was announced by the President, after a deadlock between provinces and federal government on conforming to one

distribution formula. During the delay period interim NFC award were used in order to make transfers.

Since 1960’s, Punjab is getting around 60%, Sindh is getting around 24%, NWFP is getting around 12% while Baluchistan is getting around 4% from the Federal Divisible pool. Beside this, there is also another mechanism termed Straight Transfer.

The purpose of theses NFC awards should be to bring justice in the distribution of resources so that we have a more prosperous Pakistan rather then any one province. A new NFC Award can not be announced because the four provinces have failed to develop consensus. Consensus has not been reached because Punjab province insists resource distribution on the basis of population alone whereas the other three province, namely North-West Frontier Province, Sindh and Baluchistan demand giving importance to the revenue generation by each province, level of poverty in smaller provinces and other related factors as well, while distributing the national resources among provinces through National Finance Commission. And the distribution of recourses should not be based on population .Equal rights should be given to every province and from this our all provincial problems can be solved easily if we keep in mind all the factors of these awards while distributing the resources.

Conclusion

There is a need for inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, environment, etc. to be taken into account for justifiable of resource distribution. Even if we look at our neighboring country India, various criteria are used for resource distribution from central to provincial governments. So, in order to achieve equity,

such policies should be devised which take different aspects of development into its account while distributing the resources. The issue of resource distribution among federal and provincial governments never proved to be simple and is a much complex issue. But when we go through the history of NFC, it becomes obvious that the problem of resource distribution is never taken seriously. If we act on all this then our all problems can be solved very very easily.