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The criteria of distribution of funds according to all NFC Awards are given in below.

Formula for Federal Tax Sharing with Provinces


Niemye
r
Award
1937

Raisma
n
Award
1951

196
2

196
4

197
0

197
4

1991

1997

50

50

50

65

80

80

80

37.5

50

50

65

80

80

80

37.5

50

60

65

80

80

37.5

Income Tax
Sales Tax
Central Excise
on Tea,
Tobacco &
Betelnut
Export duty on
jute & cotton

62.5

62.5

NFC Awards

100

65

80

37.5

Wealth Tax
-

41.5 46.25
41.546.25

5657.5
5657.5

41.5 46.25

5657.5
5657.5
5657.5

on
Collectio
n Basis

37.5

Capital Value
Tax

2010

on
Collectio
n Basis

80

37.5

2006

41.5 46.25
41.546.25
41.5 46.25
41.5 46.25
on
Collectio
n Basis

80

Custom Duties

Royalty on
excise duty on
gas
Development
surcharge on
gas
Royalty on
crude oil
Profit from
hydroelectricity

200
2

-do-

-do-

-do-

-do-

-do-

-do-

-do-

-do-

-do-

From 1974 to 1990 few taxes were part of the divisible pool and in 1997 all
FBR taxes were made part of the divisible pool and this practice continued
till date.
Vertical distribution formula changed in every subsequent NFC but the
horizontal formula changed only in 2009 NFC.

3) We need to study 1994 onwards what was done wrong or right and if you
recall your presentation on gas royalties and oil I thought it was CCI issue
but as per NFC it is to be taken up in NFC not CCI .
Since 1991 it is being decided in the NFC. Before that it was not in the
ambit of NFC. Royalty on hydro-electricity was decided in 1973
Constitution. Experts on Constitution may give good opinion royalties of oil
and gas.
4) I think we should read 1990 NFC onwards together to debate and discuss
how and what we can raise in NFC and also ensure it is done in the interest
of Sindh
Historical analysis of National Finance Commission (NFC) Awards shows that
each successive Award was worse than the previous one in terms of improving
fiscal relation and enhancing fiscal autonomy and fiscal capacity of the
provinces.
1974 Award
1974 NFC award had drastically changed the distribution criteria among the
provinces from multiple factors to single factor criteria i.e. population.
Pakistan is only Federation in the world where population is use as a sole
criterion for the distribution of resources among the provinces. This criterion
which was set in 1974 was changed in 2010 after constant demand of three
provinces i.e. Sindh N.W.F.P. and Baluchistan.
1991 Reward
The 1991 award significantly curtailed provincial fiscal space. Prior to the
1991 NFC Award the federal government was liable to finance the budget
deficit of provincial government through deficit grants. The relevant clause
was deleted in 1991 NFC Award. The implications of this deletion were not
good for all provinces and as a result they had to limit their expenditures
according to their resources. Since the general administration expenditures
are more or less fixed, the only scope for expenditure reduction lies in
development which directly impacted social service delivery.

1997 Awrad
The 1997 NFC Award which was announced by the interim government
brought few major changes in the 1991 NFC award. These had far reaching
impacts on the provincial finances in Pakistan.
First major change was the change in the composition of divisible pool i.e.
before the 1997 Award the customs duties did not form part of the divisible
pool and the federal government used to retain the entire proceeds. As for as
the Income tax and sales tax were concerned they were part of the divisible
pool and the federal government after retaining 20 per cent of the proceeds
80 per cent were distributed among the provinces. The 1997 Award
redefined the composition of the federal divisible pool and also the revenue
sharing formula.
The 1997 Award included all taxes in the federal divisible pool out of this
62.5% assigned to the federal government and 37.5% assigned to the
provincial governments.
This was a period of start of globalization in Pakistan and the government
signed WTO treaty in 1994 and began rigorously to implement the crucial
part of its Structural Adjustment Reforms- drastic scaling down of customs
duties. The resulting decline in the tax revenue was compensated by the
expansion in the sales taxes regime significantly and the rationalization in
the income tax regime. Had the 1991 Award distribution arrangement
continued, the provinces would have bear no burden of the decline in
customs duty revenues and would continue to receive 80 per cent of the
additional revenues from income and sales taxes. However, with the help of
the 1997 Award the federal government shifted 37.5% loss in customs duties
to the provinces and enhanced its own share in the income and sales tax
revenues from 20% to 62.5%.
The second most important change in the NFC 1997 was the change in the
financing mechanism of Public Sector Development Program (PSDP).
There are two components of PSDP-federal component and provincial
component- and before the NFC 1997 both components were financed by
the federal government. After the deletion of the provision clause the
provinces were required to finance their own development expenditures. No
new tax was transferred to the provinces to enable them to finance this
additional burden and therefore every rupee of development expenditure
incurred by the provincial governments requires reduction in other
expenditures.

The NFC 1997 hurt the provincial finances from two angles. First, by
sharing the loss in the custom duties revenues with the federal government
and allow federal government to share with them the increase in income and
sales tax revenues. Second the provincial governments were asked to finance
their development expenditure and were not allowed to have deficit in their
budgets.
Under the new scenario of the reduced provincial receipts from the federal
divisible pool and the additional burden of PSDP expenditure, the provincial
governments were allowed to take loans from the federal government to
finance their deficits. The situation is further aggravated when the federal
government charges a very high interest rate on these loans. This high
interest rate was not justified on economic grounds because the federal
government borrowed at lower interest rates from abroad and lends it to
provincial governments at higher rates. In last several years, such
developments have squeezed the fiscal space for the provinces, leaving little
to spend on the provision of social services.
2006 Award
This NFC was announced by a Presidential Ordinance in 2006. This time
too, the federal and the provincial governments were unable to resolve the
issues of vertical and horizontal distribution.
The NFC 2006 proposed a phase wise increase in the share of the provincial
governments in the federal divisible pool from 37.5% to 40.5% in 2006-07
to 45.5% in 2009-10. However, this NFC failed to address the issue of
horizontal distribution among the provinces. This NFC has announced a
formula based grant-in-aid allocation to all provinces including Punjab and
Sindh.
2009 Award
This Award was announced in 2010 and drastically changed both vertical
and horizontal equity.
Vertical formula changed to 57.5: 42.5 in favor the provinces.
Horizontal formula changed from only population to population, revenue
collection & generation, inverse of density and backwardness.