NFC awardFrom Wikipedia, the free encyclopediaThe NFC Award or National Finance Commission Award, is the distribution of financial resourcesamong the provinces of Pakistan by the federal government on annual basis. Certain types of taxescollected in each province are pooled, then redistributed according to the NFC formula. What taxes toinclude in the distribution pool and the distribution formula is a subject of debate. Pakistan has had fiveNFC awards formulas. The Fifth NFC Award, adopted in 1997, was supposed to be valid for five yearsbut failure to reach agreement on a sixth has meant that the fifth is still in operation.Taxes included in the pool are (1) income taxes, (2) general sales tax, (3) wealth taxes, (4) capitalgains taxes, and (5) custom duties. The inclusion of custom duties started with the 1997 award. In the1991 award custom duties had gone exclusively to the federal government. Collections for the WorkerWelfare Fund remain in the province where they are collected. Resource royalty is collected by thefederal government and distributed to the provinces based on independent agreements.In principle the 1997 award specifies that 63% of the pooled taxes will go to the federal governmentand 37% will be distributed to the provinces. This was a major change from the 20% federal and 80%provincial split under the 1991 award. However the inclusion of custom duties that had previously been100% federal required an increase in the federal share.Most Tax Receipts are collected from Punjab and Sindh. Almost all custom duties are collected at thePort of Karachi. Most of the pooled taxes in the 1997 Award are collected in Sindh province. Hence the NFC award redistributes taxes from Sindh to the rest of Pakistan.[citationneeded] Based on the average of the years 1997 through 2000, the approximate percentages of pooledtaxes collected by each province are 65% Sindh, 25% Punjab, 7% Khyber-Pakhtunkhwa, and 3%Balochistan. The approximate actual distribution of pooled taxes to the provinces and to thefederal government is 9% Sindh, 23% Punjab, 6% Khyber-Pakhtunkhwa, 2% Balochistan, and 59%Federal.A new NFC Award can not be announced because the four provinces have failed to developconsensus. Consensus has not been reached because Punjab province insists resource distributionon the basis of population alone whereas the other three province, namely Khyber-Pakhtunkhwa,Sindh and Balochistan demand giving importance to the revenue generation by eachprovince, level of poverty in smaller provinces and other related factors as well, while distributing thenational resources among provinces through National Finance Commission.
Finance Minister Shaukat Tarin stated in August 2009, that population wont be the only parameterused in calculating the next NFC award. For the distribution of the new award, factors such asinverse population density and poverty have also been kept in mind.What is NFC Award?The NFC award, National Finance Commission award, is the distribution of financial resourcesamong 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 andthe 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 atthe Port of Karachi.new NFC Award can not be announced because the four provinces have failed to developconsensus. Consensus has not been reached because Punjab province insists resourcedistribution on the basis of population alone whereas the other three province, namely Khyber-Pakhtunkhwa, Sindh and Balochistan demand giving importance to the revenue generation byeach province, level of poverty in smaller provinces and other related factors as well, whiledistributing the national resources among provinces through National Finance CommissionFinance Minister Shaukat Tarin stated in August 2009, that population wont be the onlyparameter used in calculating the next NFC award. 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 NFCIn 1971, Pakistan was cut into two by our enemies with the indirect support of our fellowPakistani’s and hence we lost East Pakistan to Bangladesh. There are many reasons that can beattributed to the 1971 incident but one of the major one is the “Distribution of Resources” amongthe 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 notallowed to take when it actually owned and most of it was used in West Pakistan. This infuriatedthe Bangladeshi people and contributed towards their final revolt against the Government ownedby West Pakistan.It is worth mentioning here for the ready reference of our readers that Bangladesh i.e EastPakistan before 1971, was more populous then West Pakistan but it was still discriminated by theWest Pakistan i.e current day Pakistan. At that time, the distribution of resources based onpopulation was never raised by anyone since it would have resulted in greater share of EastPakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan.Article 160(1) of 1973 ConstitutionNFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to beheld 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 afterconsultation with provincial Governors [Constitution of Pakistan (1973)]. The main charter of NFCis 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 beenkept as the criteria for distribution of NFC award when we all know that demographic changestakes place according to the economic situation. We all know how people from around the globestarted moving towards Middle East and Malaysia when it was economically developed. Not onlythis, Population migration took place in China from less developed Western China towards moreDeveloped Eastern China. Therefore, the distribution of population can never ever be the solecriteria of distribution of resources from the central pool. However, in Pakistan, no governmentwas 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, revenuegeneration, environment, etc. to be taken into account for justifiable of resource distribution. Evenif we look at our neighbouring country India, various criteria are used for resource distributionfrom central to provincial governments. So, in order to achieve equity, such policies should bedevised which take different aspects of development into its account while distributing the
resources. The issue of resource distribution among federal and provincial governments neverproved to be simple and is a much complex issue. But when we go through the history of NFC, itbecomes obvious that the problem of resource distribution is never taken seriously.Controversy on Sales TaxA peep into revenue distribution history of the sub continent reveals that sales tax was inexclusive domain of provincial governments before 1947. It was partly federalized to the extent of50 per cent in 1948-49 budget, the first of independent Pakistan, to meet the impact of massiverefugee 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 inKarachi were ignored. It declared population as the only criterion for distribution of revenue.Previous AwardsSINCE 1973, after the promulgation of a consensus constitution by an elected and populargovernment, there have been three national finance commission awards enforced in 1974, 1991and in 1997. But the three NFCs constituted in 1979, 1984 and 2,000 failed to reach consensusand ended in a deadlock.Of the three commissions that failed, two were formed in 1979 and in 1984 during the military ruleof late General Zia-ul-Haq and the third one, the current NFC was formed in the year 2,000 afterGeneral Musharraf took over the government in October 1999. This NFC continued functioningafter 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 awardset 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 completelyfederalized.The second NFC award was given in 1991 by a political government of PML headed by MianNawaz Sharif. This NFC award recognised for the first time, the rights of the provinces on naturalresources 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 FarooqAhmed Leghari and Prime Minister late Malik Meraj Khalid. It turned out to be the mostcontroversial NFC award, though still operative, despite the expiry of its five- year term in 2002.7th NFC Awards Location: Lahore
Chairperson: Finance Minister Shaukat Tarin Duration of arguments: 3 daysProvincial share of the divisible pool would increase from the present 47.5 per cent to 56 per centin the first year of NFC (2010–2011) and 57.5 per cent in the remaining years of the award underthe vertical distribution of resources. He claimed that this share would virtually be over 60 percent. During Musharraf regime, provinces were demanding for a 50% provincial share in thedivisible pool.The federal government has agreed to cut tax collection charges from 5.0 per cent to 1.0 per centand this amount would also be added to the divisible pool. About the thorny issue of sales tax onservices, he said the NFC recognised sales tax on services as a provincial subject and it mightbecollected by the respective provinces.The multiple indicators under 7th NFC AwardMultiple Indicators Weights1 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 amongthe provinces in following ration. Punjab 51.74% Sindh 24.55% Khyber-Pakhtunkhwa 14.62% Balochistan 9.09%