Federal government wants to exclude customs duties from scope of divisible fund, sources say
The seventh award in 2010 attempted to rectify anomalies by increasing the aggregate allocation to the provinces to 57.5% and reducing the population weight to 82%. Photo: archive
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 over Sindh’s objections.
This development came as Pakistan’s top tax expert Dr Hafiz Pasha pointed out that despite the constitutional requirement of allocating 57.5% of the divisible fund to the provinces, they received only 45.8% in the last fiscal year after accounting for oil taxes and surplus cash. 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 his attendance, did not show up at the seminar; instead, he met with SPDC representatives in their office. SPDC director general Asif Iqbal said the finance minister had first confirmed his participation, but last night he expressed regret.
Meanwhile, the Ministry of Finance formed committees on eight critical issues that will shape the 11th NFC award. The last one, the NFC’s seventh award, was agreed upon unanimously 15 years ago for a five-year period. A task force, headed by the Punjab Finance Minister, was also constituted to make recommendations on sharing financial expenditure incurred by the federation in areas under provincial jurisdiction. The group’s formation followed a legal opinion by the attorney general, 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 technical member at the NFC, the federal government maintains ministries linked to devolved subjects and spent Rs 328 billion on them, as highlighted in a 2023 World Bank report.
Khyber-Pakhtunkhwa Financial Advisor Muzammil Aslam criticized the federal government’s policies, citing poor energy management that contributed to more than Rs 5 trillion in circular debt in the power and gas sector and more than Rs 5.1 trillion in payments to Chinese power plants.
Led by Finance Minister Muhammad Aurangzeb, the Center constituted a working group to make recommendations on the composition of divisible taxes, suggesting inclusion or exclusion of certain taxes in the fund.
Sources said the federal government wants to exclude customs duties from the ambit of the divisible fund that is divided among the five governments.
Another working group is formed to determine the percentage of resources that will be distributed between the center and the four provinces – vertical transfers. Currently, the provinces get 57.5% while the rest goes to the Centre.
Speaking at the SPDC seminar, Dr Hafiz Pasha said that in the last fiscal year the provinces got 45.8%, against their guaranteed quota of 57.5%. He added that almost 12% was retained, either by charging an oil tax on products that are not part of the divisible fund or by recovering the transferred money in the form of surplus cash.
In the last fiscal year, the federal government collected more than 1.2 trillion rupees in oil taxes, and provinces also saved 921 billion rupees as surplus cash to meet the conditions of the IMF program.
Headed by the Finance Minister of Balochistan, the federal government constituted a working group to decide the distribution of resources among the four provinces. Currently, more than 82% of resources are distributed based on population.
The seeds of East Pakistan’s separation were sown in the 1960s with decisions to first withdraw the provinces’ right to collect sales taxes 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 incentivising the population and more reliance should be placed on other indicators, including income generation.
The federal government has also notified a task force to “deliberate and suggest measures to improve the overall tax-GDP ratio.” KP Finance Minister will chair the task force.
FBR’s tax-to-GDP ratio barely reaches 10.3%, while provinces also collect taxes equivalent to 0.8% of GDP. The FBR has failed miserably in carrying out its task, with the FBR chairman telling the prime minister that the first half fiscal target may be missed by Rs 560 billion.
The Finance Ministry also notified a working group on direct resource transfers to provinces to be chaired by Sindh Finance Minister.
The seventh working group is constituted to make recommendations on the merger of the former FATA and its participation in the NFC. The KP Finance Minister would take the lead.
Muzammil Aslam said that more than 5 million people have been added in KP and its one-third area has been expanded without increasing resources. The financial advisor stated that based on the new population size, KP’s stake in NFC should increase by more than 4%.
The federal government has also created a task force on the composition of the national debt and its utilization. This group will be headed by the Finance Minister of Balochistan.
