NFC award

What is NFC Award?

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.

Taxes are pooled and distributed: 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.

Taxes included in the pool are (1) income taxes, (2) general sales tax, (3) wealth taxes, (4) capital
gains taxes, and (5) custom duties.

Most Tax Receipts are collected from Punjab and Sindh. Almost all custom duties are collected
at the Port of Karachi.

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 Khyber-Pakhtunkhwa,
Sindh and Balochistan 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

Finance Minister Shaukat Tarin stated in August 2009, that population won't be the only
parameter used in calculating the next NFC award.[2] For the distribution of the new award,
factors such as inverse population density and poverty have also been kept in mind.

Background and History of NFC:

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 1971 incident but one of the major one is the “Distribution of Resources” among
the provinces i.e East Pakistan and West Pakistan. Since East Pakistan was responsible for
majority of our output, it was its right to get the major portion of it as well, however, it was not
allowed to take when it actually owned and most of it was used in West Pakistan. This infuriated
the Bangladeshi people and contributed towards their final revolt against the Government owned
by West Pakistan.

It is worth mentioning here for the ready reference of our readers that Bangladesh i.e East
Pakistan before 1971, was more populous then West Pakistan but it was still discriminated by the
West Pakistan i.e current day 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 East
Pakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan.

Article 160(1) of 1973 Constitution:

NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be
held at the intervals of five years. Its members are Federal Finance Minister (Chairman),
Provincial Finance Ministers and other concerning experts which the President may appoint after
consultation with provincial Governors [Constitution of Pakistan (1973)]. The main charter of
NFC is to recommend on the following [Pakistan (2006b)]:

(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.

Looking at the historic NFC award, one do start wondering as to why Population has only been
kept as the criteria for distribution of NFC award when we all know that demographic changes
takes place according to the economic situation. We all know how people from around the globe
started moving towards Middle East and Malaysia when it was economically developed. Not
only this, Population migration took place in China from less developed Western China towards
more Developed Eastern China. Therefore, the distribution of population can never ever be the
sole criteria of distribution of resources from the central pool. However, in Pakistan, no
government was able to change it. That brings us towards the controversies facing the NFC
Award.

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 neighbouring 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.

Controversy on Sales Tax:

A peep into revenue distribution history of the sub continent reveals that sales tax was in
exclusive domain of provincial governments before 1947. It was partly federalized to the extent
of 50 per cent in 1948-49 budget, the first of independent Pakistan, to meet the impact of
massive refugee influx in Karachi which was then the federal capital.

it was in 1974 NFC award that sales tax was completely federalized and the noises made in
Karachi were ignored. It declared population as the only criterion for distribution of revenue.

Previous Awards:
SINCE 1973, after the promulgation of a consensus constitution by an elected and popular
government, there have been three national finance commission awards enforced in 1974, 1991
and in 1997. But the three NFCs constituted in 1979, 1984 and 2,000 failed to reach consensus
and ended in a deadlock.

Of the three commissions that failed, two were formed in 1979 and in 1984 during the military
rule of late General Zia-ul-Haq and the third one, the current NFC was formed in the year 2,000
after General Musharraf took over the government in October 1999. This NFC continued
functioning after the October 2002 elections with some changes in its composition.

The first NFC award was given in 1974 by the elected government of late Z.A. Bhutto. This
award set population as the only criterion for revenue distribution among the provinces. Custom
duties, the main revenue earner was kept out of the divisible pool and the sales tax was
completely federalized.

The second NFC award was given in 1991 by a political government of PML headed by Mian
Nawaz Sharif. This NFC award recognised for the first time, the rights of the provinces on
natural resources and the provinces were given royalty and gas development surcharge on oil and
gas.

And the third NFC award was declared in February 1997 by a caretaker government of Farooq
Ahmed Leghari and Prime Minister late Malik Meraj Khalid. It turned out to be the most
controversial NFC award, though still operative, despite the expiry of its five- year term in 2002.

7th NFC Awards:

Location: Lahore Chairperson: Finance Minister Shaukat Train Duration of arguments: 3 days

Provincial share of the divisible pool would increase from the present 47.5 per cent to 56 per cent
in the first year of NFC (2010-2011) and 57.5 per cent in the remaining years of the award under
the vertical distribution of resources. He claimed that this share would virtually be over 60 per
cent. During Musharraf regime, provinces were demanding for a 50% provincial share in the
divisible pool.

The federal government has agreed to cut tax collection charges from 5.0 per cent to 1.0 per cent
and this amount would also be added to the divisible pool. About the thorny issue of sales tax on
services, he said the NFC recognised sales tax on services as a provincial subject and it mightbe
collected by the respective provinces.

The multiple indicators under 7th NFC Award

Multiple Indicators Weights

1 Population 82.0%

2 Poverty/Backwardness 10.3%
3 Revenue Collection/Generation 5.0%

4 Inverse Population Density 2.7% (Urban-Rural)

Out of 56 % provincial share of total divisible pool, financial resources will be distributed among
the provinces in following ration.

Punjab 51.74% Sindh 24.55% Khyber-PukhtunKhwa 14.62% Baluchistan 9.09%

references
1. ^ http://www.dawn.com/wps/wcm/connect/dawn-content-
library/dawn/news/pakistan/13+nfc+award+not+to+be+made+on+population+basis+tarin-za-08
2. Wikipedia .com