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Fiscal decentralization -Lecture.pptx
1. Fiscal Federalism in Pakistan
by
Dr Shahid Adil
Public Sector Specialist
The World Bank
1
2. • Fiscal Federalism Vs Fiscal Decentralization
• Decentralization- Concept, background, definition and Types
• Fiscal Decentralization- concept, theory and pillars
• Historical Evolution of FD in India-from ancient times to British Raj
• Fiscal Federalism after Independence-NFC Awards
• Fiscal federalism under Local Government System-2010 and 18th
amendment
• Country comparison-Resource sharing formula
• Issues, Challenges and way forward
2
Contents
3. trace out important historical events, enactments and regulations etc. which have made significant
contributions in the field of intergovernmental fiscal relations in Indo-Pakistan.
For analysis of the developments in resource distribution among provinces/units, the authors first
provide the concept of decentralization specifically the fiscal part of it.
The historical developments towards decentralized finance in India is divided into three main periods i.e
prior to British Rule in India, the British Government in India after the war of Independence 1857 and
after creation of Pakistan in 1947 till 1952 (the Raisman Award).
Authors observed that the principles of fiscal federalism in Indio Pakistan gradually evolved from highly
centralized fiscal governance during the initial period of the British rule until provided as an independent
framework after independence. Various parliamentary enactments, executive directions, committees and
commissions as well as individual intervention contributed to this transformation. It concludes that the
British Government in India designed the system of fiscal decentralization in accordance with their own
preferences as provided under Government of India Act, 1935. After Independence various constitutional
developments were made and the legislators preferred to build systems of resource distribution
according to their requirements. However, provisions contained in Government of India Act 1935 laid the
foundations for designing the resource distribution systems in both India and Pakistan after their
independence in 1947.
3
4. • The term fiscal federalism refers to the set of guiding
principles that helps define fiscal relations between
federal and local governments (local here means all
subsequent levels of the government – primarily
provincial or state governments – to whom power is
being devolved).
• The term fiscal decentralization, on the other hand,
refers to the practical application of those principles in
the form of devolution of power from the higher to the
lower tiers of government (Rabbani, 2011).
• Very briefly, federalism is the concept, decentralization
is the operation.
4
Fiscal Federalism Vs Fiscal Decentralization
5. Background
5
• emerging interest in the macroeconomic performance of
developing countries.
• policy option available for enhancing growth and
development potentials is to restructure public sector to
make it more responsive to the public needs.
• To restructure their public sector, states are decentralizing
their functions to the lower levels of governments.
6. Decentralization Defined
6
Rondinelli (1981):“the transfer of responsibility for planning,
management, and resource-raising and allocation from the
central government to (a) field units of central government
ministries or agencies; (b) subordinate units or levels of
government; (c) semi-autonomous public authorities or
corporations; (d) area-wide regional or functional authorities.”
“Decentralisation is the transfer of authority and responsibility
for public functions from the central government to subordinate
or quasi-independent organisations or the private sector”
(Litvack & Seddon, 1999).
7. Types of Decentralization
7
Political
• the transfer of political authority from central to sub national/local level
Administrative
• the transfer of functional responsibilities from central to subnational/ local
authorities
Fiscal
• the extent of authority of the sub-national government in independent decision
making either regarding expenditure assignments or revenue generation.
• the empowerment of people by the (fiscal) empowerment of their local
governments (Bahl, 2005).
8. Types of Decentralization
8
De-concentration
• More frequently used in unitary states- financial and management decision making authorities and responsibilities
are distributed among different levels of the central government.
Delegation
• Decision making and administrative functions are transferred from central government to semi-autonomous
organizations not controlled by the central government but accountable to it.
Devolution
• Responsibilities for decision-making, finance, management and service provision are usually transferred to quasi-
autonomous units of local government.
Privatization
Privatization involves the transfer of responsibility to non-governmental organizations or the private sector.
9. .
9
Musgrave (1959)
• governments generally perform three functions: i) macroeconomic stabilization, ii) income
redistribution, and iii) resource allocation. The central government should be responsible
for first two functions while the allocation of resources should be the responsibility of
subnational/local governments.
Oates (1972 ) and Tiebout (1956)
• ……decision-making on expenditures at lower levels of government is more responsive to
diversified local preferences and needs and, therefore, more conducive to allocative
efficiency.
Oates(1993)
• ---- locally determined policies are better able to take into account the regional and local
conditions.
Theoretical basis
10. 10
Bird and Wallich (1993)
• FD improves efficiency in the public sector, increase competition among sub-national
governments in delivering public services and stimulates economic growth. It may retard
economic growth if it brings macroeconomic instability when it is not accompanied by
enhancing the skill of local government apparatus and also by better political
accountability.
12. Pillars/Building Blocks of Fiscal Decentralization
12
Fiscal Decentralization
Intergovernmental
Fiscal
Transfers
Sub
national
Borrowing
Revenue
Assignment
Expenditure
Assignment
13. Resource Transfer System in India- Ancient Times
13
• Roots from ancient Indian literature- Arthshastra, Indica, Pali literature, and
regional scripts such as Rajtarangini written by kalhan and records of some
foreign travelers.
• A rudimentary form of decentralized governance system- Panchayats meaning
the “Council of Five”-Vedic periods
• Performed administrative, judicial and sometimes developmental functions and
represented the feudal aristocracy having no mass participation
• The villages were autonomous bodies -periods of Ramayana and Mahabharat.
14. Mughals –urban people and focused on Urban Administration
Kotwal-key stone of Municipal organization
Appointed under Sanad –order of Emperor
• Maintenance of Law and Order
• Maintain body of horses, city guards and army of
spies.
• Appoint Mir Mullahs for each ward
• Kept register of houses and roads, direct the
location of cemeteries, slaughterhouses and
sweeper colonies
• Market control, checking weights and measures,
supervise local prices
• Levy the local taxes, market dues and toll and
transit duties
14
The Mughals
19. First Municipal Corporation
The first Municipal Corporation was set up in Madras in 1688 by the East India Company
with a purpose of handing over the financial matters of local administration to the local city
council. In writing to the Madras Council on 28 September 1687, the Directors, with the
consent of the Crown, advised the setting up of a municipal corporation for Madras;
observing that: the people would more willingly and liberally disburse five shillings towards
the public good being taxed by themselves, than sixpence imposed by our despotic powers.
It was laid down that the town clerk and the judicial recorder must be Englishmen, but that
the Court of Aldermen should consist of three English freemen, three Portuguese, and
seven ‘Moors and Gentoos’-all to be chosen by a general body of ‘Burgesses’. The Mayor
was to be elected from amongst the Aldermen. The corporation was to be responsible for a
number of public services, including the upkeep of a town-hall and a school. The
corporation was also a judicial body constituting a court of record in civil and criminal
cases. However the expectations of the Directors that local self-self-government would
stimulate greater taxation were sadly disappointed. The inhabitants objected strongly to
new taxes, and municipal institutions did not prosper
19
20. .
William Messy (1866-68) principles
and Col . Strachey formula
01
02
03
04
05
06
no significant contribution -
serious considerations to
have a system in place for
sharing of resource
inculcated a sense of
financial responsibility in the
PG to reduce the financial
burden of the CG
no mechanism for financial
arrangements in the country
and no concept of annual
budgeting and any
standardized system of
accounting.
Introduction of a system where the CG had control
over the entire finance and made discretionary grants to
the lower level of Governments (Mr. James Wilson - first
financial member of the Governor General’s Council)
Proposal to grant
some financial powers,
including power to
taxation, to the PGs.
PGs were vested with
the power to raise
revenue through
taxation for financing
public works (Samuel
Laing - successor of
James Wilson)
The Local Governments
were merely the collecting
agents. no direct interest
in revenue collection as
the whole amount went to
central government which
controlled the smallest
details of every branch of
the expenditure.
07
Conceptualization of decentralized finance- 1858 to 1871
21. .
21
PFSs
No change in the resource sharing principle
was made under the ‘Provincial Financial
Settlements’ of 1887, 1892, and 1897.
04
05
06
01
03
02
Lord Hardinge 1912
• Converted the ‘quasi- permanent
settlement’ into ‘Permanent Settlement’.
• scheme remained in operation till 1918-
19.
Process started
Mayo Plan 1871
Lord Rippon Formula
settlements on quinquennial basis from
1882.
Lord Curzon 1904
• quasi-permanent Settlements
in place of quinquennial
arrangements.
• Royal Commission on
Decentralization 1908
Strengthening
1877, Lord Lyton- Sir John
Strachey
Informal Arrangements finance- 1871 to 1919
22. .
22
Passed into law. received the Royal assent
on August 4, 1935.Came into force on April 1,
1937.
• political leadership did not accept., it
marked the turning point in the evolution of
federal financial relation.
• Niemeyer Award - 50 per cent of the net
proceeds of income tax to the Provinces
according to the fixed percentages
• Centre should retain for the first five years
out of the Provincial share a sum
equivalent to the amount by which the
Central share plus the contribution from
Railways fell short of Rs.13 crores a year
and that the amount retained from the
Provincial share should be surrendered to
the Provinces over a further period of five
years.
• During this long period of imperial rule,
principles of fiscal federalism were
developed through parliamentary
enactments and executive directions.
Govt of India Act 1935
Structure
Federal form of government and “fully responsible”
government in the provinces.
Distribution of Powers
Seventh Schedule to the Act. List I and List II(Fed
and Pro respectively. List III- both
Formula for sharing
no prescribed formula for vertical and horizontal
sharing of the divisible taxes and duties
Niemeyer Award (April, 1936)
specific recommendations regarding vertical and
horizontal sharing of resources
WW II
increase in Capital expenditures of the Centre. Steps
were taken to strengthen the center. Order of Council
was amended
Cabinet Mission Proposal 1946
all subjects other than the Union Subjects and all
residuary powers vest with the provinces. Retention of
all subjects other than those ceded to the Union
23. • Under Niemeyer Award-1936 sales tax was a provincial subject while income tax
collections to be redistributed were prescribed as 50 percent of the total
collection.
• After the creation of Pakistan, till March 1952, same award was followed
although with some adjustment in railway budget, sharing of income and sales
tax.
• In addition Sindh and NWFP were given annual grants of Rs 10 million and Rs
10.5 million, respectively. However when the financial position of Sindh
improved, these grants were used to settle its federal debt thus it was virtually
getting no grants at the time of independence.
• Raisman Award -50% ad hoc share of sales tax to FG. Out of the proceeds of 50%
income tax East Pakistan got 45% and West Pakistan 55% divided Punjab, Sindh,
NWFP and Bhawalpur, Khairpur, Balochistan states union and residual as 27, 12,
8, 4, 0.6, 0.6, and 2.8% respectively. Rs 12.5 m subvention to NWFP.
23
Raisman Award 1952
24. 24
1947
1935-
1947
• Govt. of India Act-
1935-Namyer Award.
1919-
1935
• Formal Arrangements
1871 -
1919
• The informal
arrangements.
1858-
1871
• Conceptualization
Phases of Fiscal Decentralization-Pre-Partition
Partition
26. • Fiscal Federalism under Indian Constitution is a result of historical
evolution spreading for almost a century.
• Over the time, a too rigid unitary system with immense scope of
discretionary power to the Central Government was transformed into a
constitutionally regulated federal system.
• Through various commissions, committees and parliamentary
enactments this was achieved.
• While drafting a new formula for resource distribution in Pakistan, the
framer took into consideration the basic structure and provisions of the
Government of India Act, 1935 in the field of financial relations between
the center and the provinces.
26
Summary of Journey up to 1952
27. Pool
• Out of the divisible pool (70 percent of sales tax plus other taxes),
East Pakistan and West Pakistan got 54 and 46 percent share
respectively.
Distribution
• 30 percent of sales tax was specified to the provinces on the bases of
collection in their respective areas.
• While the remaining duties on agricultural land and capital value tax
on immovable property were given to the units as per their collection.
27
5 Revenue Sharing Under One Unit-1961 Award
1955-one unit
Two Awards-1961-65
28. Pool
• National Finance Commission was set up under Article 144 of the 1962
constitution.
• The divisible pool -income tax, sales tax, excise duty and export duty.
Distributi
on
• 30% of sales tax was distributed in accordance with its collection in each
province.
• Respective share out of divisible pool between center and provinces
were 35:65 %.
Share
• The share of East Pakistan and West Pakistan remained unchanged.
• On 1st July 1970 the West Pakistan was disband into Punjab, Sindh,
NWFP and Balochistan.
• 46 percent share was distributed as 56.5, 23.5, 15.5 and 4.5 percent
respectively among the new provinces.
28
Revenue Sharing Under One Unit-1964 Award
29. 1970
• Committee
• Amicable
intergovernmental
Resource
distribution
pool reshuffled
• vertical resource
distribution-
federal/ provincial
• 20:80 percent
Sales Tax
Distribution
• 30 percent of the
allotted sales tax
redistributed among
the provinces according
to the collection from
the respective areas.
29
5 National Finance Committee 1970
30. • Under Article 160(1) President of Pakistan
is empowered to constitute the National
Finance Commission (NFC)
• deals with the distribution of resources
between federal and provincial
governments and meets after every five
years(Part VI of the Constitution).
• consisting of the Minister of Finance
of the Federal Government, the
Ministers of Finance of the Provincial
Governments, and such other persons
as may be appointed by the President
after consultation with the Governors
of the Provinces
30
National Finance Commission -1973 Constitution
31. income tax, sales tax and export duty- basis
of population -vertical resource distribution
at a fixed ratio of 20:80.
Punjab had an increased share of 60.25
percent over 1970’s whereas Sindh, KPK and
Balochistan got a share of 22.50 percent,
13.39 percent and 3.86 percent respectively.
favorably tilted towards heavily populated units
such as Punjab and unfavorable for less populated
units like NWFP (now KPK) and Balochistan.
an arrangement was made to compensate the
weak financial position of Balochistan and KPK
being the smaller units by allocated annual grants
of Rs 50 million and Rs 100 million respectively.
1974
31
The 1st NFC Award 1974
32. NFC
• No meeting
• 1974 NFC award was followed in the interim period.
Census
• 1981, population census – adjustment of distribution proportionate to
population .Relief for the smaller units. Situation improved for the provinces of
Balochistan and Sindh, Share of KPK could not improve because of unchanged
population parameters.
Share
• New share ratios for the federating units of Punjab, Sindh, KPK and
Balochistan was 57.97 percent, 23.34 percent, 13.39 percent and 5.30
percent respectively.
32
The 2nd NFC Award 1979
34. • Included the excise duties on sugar and tobacco
• number of taxes/duties such as income tax, sales tax,
export duty and excise duty. The federal government
still kept the customs duty.
Expansion
• No consensus - continue previous criterion of population. The
20:80 formula remained in vogue-Volume of money increased
• Relocation of proceeds to the provinces for the first time on net
hydel profit, development surcharge on gas and excise duty on
crude oil. This increased the volume of transfers of federal tax
revenue to provinces from 28 percent to 45 percent
Award
• The new share distribution for Punjab, Sindh, KPK and
Balochistan was 57.88, 23.28, 13.54 and 5.30% respectively
• The FG also provided special grants to the provinces to meet
their developmental needs. They were also advised to
generate funds from their own revenues.
Distribution
34
The 4th NFC Award 1990
35. .
35
01 Provision of matching grants to
the provinces up to a certain
limit provided they exceeded
their revenue target of 14.2
percent.
Separation of public
expenditures into priority and
non-priority expenditures,
The former comprised expenses on debt
servicing, defense, development and
social sector, while the latter included
expenditures on general administration,
law and order and community services .
Constituted in December
1996, announced in
February 1997.
The divisible pool included all taxes/duties (excluding
excise duty on gas charged at well head), and any
other tax collected by federal government. Provinces
also received net development surcharges on natural
gas and royalties on crude oil.
New population census
in 1998, in the light of
which the shares in the
divisible pool were
further revised on 1st
July 2002.
02
03
04
05
06
07
The 20:80 share ratio was
changed to 62.5 percent
for the federal government
and 37.5 percent for
provinces.
1996
The 5th NFC Award 1996
36. .
36
6th NFC
On 22nd July, 2000, the 6th NFC was
constituted - could not gather
consensus . demands of a higher
share in the divisible pool (up to 50
percent) and the diversification of the
share distribution criteria.
In July, 2005, another NFC was
constituted but no progress
DRGO,
1997- new
NFC from
1st July,
2006.
The provincial share in total divisible
pool and grants was revised to 45
percent (share) for the 1st financial
year with an annual increase of 1
percent up to 5 years and a
maximum share of 50 percent.
The divisible pool comprised the
same items as in the 5th NFC award.
The federal government shared 1/6th
of the net sales tax proceeds to the
provinces for onward transfer to the
district governments and cantonment
boards.
The 6th NFC Award 2000
37. .
37
DRGO,
1997- new
NFC from
1st July,
2006.
•The net share for Punjab, Sindh,
KPK and Balochistan was 50.00
percent, 34.85 percent, 9.93 percent
and 5.22 percent respectively. While
the provincial share in the divisible
pool for Punjab, Sindh, KPK and
Balochistan was 57.36 percent,
23.71 percent, 13.82 percent and
5.11 percent respectively.
The provincial allocation of total
subvention/grants was increased
from Rs 8.7 billion to Rs 27.75 billion
and could further be enhanced in the
event of growth in the net proceeds.
Allocated Rs 3.05 billion and Rs 5.83
billion for each. Amount of shares,
subvention and grants increased by
Rs 51 billion
The 6th NFC Award 2000
38. .
38
1973 Constitution—Part VI -NFC-Article 160
LGOs,2001------PFC Three Tiers Federation, Provinces and local (district,
tehsil/town/ taulka and union council)-Article 140-A
18th amendment----More decentralization- Changes in FLL (Part 1&II),Concurrent
list abolished (entries 1-47 removed), CCI Strengthened, more resources to
provinces
Fourth Schedule- FLL (Part I&II)- Functions/Expenditure responsibilities of each
tiers of Government
Fed. and Prov. Govt. Revenue Assignments
Fiscal Decentralization - post 2000
39. The 18th Constitutional Amendment promulgated in 2010 and the 7th NFC Award
that preceded it established the framework for fiscal decentralization in Pakistan.
Considered to be the most far-reaching reform in the country’s constitutional history,
it significantly increased the overall share of sub-national governments in the
country’s revenues and reestablished fiscal autonomy of the provinces in taxing and
spending decisions.
The 18 th Constitutional Amendment abolished the Concurrent Legislative List
(CLL),61 devolving nearly all 47 responsibilities of the CLL to the provinces.
It also strengthened the role of key constitutional bodies, including the Council of
Common Interests (CCI)62 and the National Economic Council (NEC)to coordinate
intergovernmental relations.
39
40. • Article 140- A of the Constitution (18th amendment)-
formal recognition to local governments
• Provincial governments to frame their own local
government laws within the parameters of the plan.
• Accordingly, provincial governments promulgated Local
Government Ordinances (LGOs) during August,2001
• The LGO (with amendments in 2002) gives clear powers,
responsibilities and service delivery functions at three levels
of LG: district, tehsil and union.
• The districts have to administer social and human
development services such as primary and basic health,
education and social welfare, whereas tehsil levels have to
deal with the municipal services such as water, sanitation
and urban services.
• Considerable financial resources were assigned at the
disposal of the local governments and empowered to raise
their own revenues through taxation at local level.
40
New Local Government System -2000
41. • Provinces were required to devise mechanisms of formula-
driven block grants to transfer revenues to local governments-
PFC
• The PFC to ensure the distribution of resources between the
provincial and local governments out of the proceeds of the
Provincial Consolidated Fund into a Provincial Retained Account
to be distributed to the three tiers of local government in the
provinces.
• Only policy issues, guidelines and monitoring functions were to
remain with provincial and federal governments
• LGs were to decide budgets and expenditures for most of the
services.
• Additional special purpose and conditional transfer were to be
provided by higher levels of government, such as poverty
reduction interventions, local economic development and
natural resource management.
41
New Local Government System -2000
42. • The shares of each local government tier are to be provided on
monthly basis.
• Budgetary transfers were non lapsable.
• On the development side, federal and provincial programs overlap
local functions.
• Both federal and provincial governments finance programs in
education and health.
• Most donor financed programs have followed an approach where
local governments have been given some discretion in expenditure
choices.
• Provincial level offices play an active role in planning, project design,
implementation, accounts and accountability.
42
New Local Government System -2000
43. • Local Governments own source revenue is very low –
more than 90 percent have not been devolved to
raise new taxes and still primarily depend on
provincial and federal funds
• More than 90 percent of the total budget of local
governments is being spent on non-developmental
expenditures.
• In practice the provinces exercise controls on
expenditures.
• The districts have only a fraction of their
revenue raised locally. They are largely dependent
on provincial transfers.
43
New Local Government System -2000
44. • In April 2010, the 18th amendment to the 1973
Constitution of Pakistan effective since 2011-12- 100
changes
• Strengthened decentralization process- the devolution of a
range of functional responsibilities to provincial
governments in line with provisions of the Constitution.
• Removed CLL, certain functions of the federal government
have been devolved to the provinces--17 ministries
• The provincial governments have to discharge all the
devolved functions
44
Decentralization 18th Amendment
45. • Given formal recognition to local governments by inserting
clause 140- A
• Each province to establish a local government (LG) system
with all the political, administrative and financial authorities
and responsibilities to the local governments.
• Many items have been deleted from the federal list and
placed under the provinces for tax purposes -reduced
federal government’s revenue.
• Council of Common Interest (CCI) gets more powerful role
with an expanded list of items that were contained in the
erstwhile CLL.
• Provinces have been authorized to raise domestic and
foreign loans with the approval of the National Economic
Council (NEC)-Provinces have been strengthened so far as
their finances are concerned.
45
Decentralization 18th Amendment
46. • Provinces have also become entitled to collect entire
amount raised by excise duty on oil and natural gas.
• National Finance Commissions (NFCs) will be bound
to issue awards not less than the combined share of
the provinces in the central divisible pool.
• The provincial access and control over natural
resources have also been enhanced and provinces
have been given the right to levy taxes on services.
• Although,18th amendment, in the short run, has
politically empowered the provinces thereby
strengthening the federation, yet the changing
political imperatives have introduce new challenges
for the federation.
46
Decentralization 18th Amendment
47. NFC
Random
Transfers
Revenues
Straight
Transfers
47
The random
transfers -revenue
shares, grants,
straight transfers
and loans.
Income tax, sales
tax, custom
duties, and excise
duties are shared
as the revenue
resources.
The FG collects
straight transfers but
pay to provinces, e.g.
royalties, etc.
NFC Award The Divisible Pool
• The distribution of
specified taxes, duties
between federation and
provinces
• The disbursement of grants
to provincial governments
• The borrowing powers
exercised by federal and
provincial governments
• Any other financial matter
referred to commission
Charter
F G levies
and retains
all non-tax
receipts.
48. • Federation
• Provinces
• FANA,FATA,GB
ICT,AJK
Structure
• Federation
• Provincial
• LGs
Collection/Division
• NFC
• PFC
Mechanism
48
Inter Governmental Fiscal Arrangements under 1973 Constitution
49. .
49
Distribution of
Resources
Systemic Formula Based
Method
Random
Methods
(Grants)
Special
Grants
Parliamentarian
& Executive’s
Discretionary
Funds
Local to Local
( District to
Union/TMA
Federal to
Local
NFC
(Federal to
Provincial)
PFC
(Province
to Local)
Mechanism for Resource Distribution among different Tiers of Government
50. .
50
Stage 3 Federal Government
Stage 1:NFC
NFC
Provincial Government
Stage 2: PFC
Local Governments
(Districts/Municipal)
Stage 4
Local Governments
(Tehsil/Union Councils)
Resource Transfer Arrangements
Vertical
FG to
PGs
Horizontal
Between
PGs
52. Years Fed: Prov. Punjab Sindh K.P.K Balochistan Total
1974 20:80 60.25 22.5 13.39 3.86 100
1979 20:80 57.97 23.34 13.39 5.3 100
1984 Interim Award
1991 20:80 57.87 23.29 13.54 5.3 100
1997 62.5:37.5 57.88 23.28 13.54 5.3 100
2000 Interim Award
2010 44:56 51.74 24.55 14.62 9.09 100
52
NFC Awards Over the Years
(7th Award: 44:56 for 1st year and for remaining years in will be 42.5:57)
53. Factors
1st NFC
1974
4th NFC
1991
5th NFC
1997
DRGO
2006
7th NFC
2009
Population 100 100 100 100 82
Poverty/
Backwardness
- - - - 10.3
Revenue
Collection/
Generation
- - - - 2.5 +2.5 = 5.0
Inverse
Population
Density
- - - - 2.7
53
Formula for Horizontal Distribution of Divisible pool (Percentage)
54. 7
th
NFC
Award Divisible pool Transfers
Straight Transfers
Grants and Others
Collection Charges by Federal Government reduced from 5% to 1%
1% allocated to KPK against War on Terror
General Sales Tax on services accepted as provincial tax
Increased Provincial shares from 46.25% to 57.5%. Decreased FG
share from 44% to 42.5%.
Formula for Gas Development Surcharge revised
Rate of excise duty on gas increased from Rs5.09 to Rs10 per
MMBTU.
Discretionary grants-in-aid to all provinces were abolished.
Sindh was given a grant of 0.66 % of the provincial divisible pool
Arrears on the payment of hydel profits to KPK
Arrears of Gas Development Surcharge (GDS) to be paid
retroactively to Balochistan
Decreased FG share from 44% to 42.5%.
56. Change
• Changed Horizontal and vertical distribution due to change in formula
• Increased share in the straight transfers
Addition
• Payment of net hydel profit from WAPDA at a capped level of Rs 6 billion annually to
KPK .
• PSDP funded different development projects in the provinces either fully or on the basis
of 50:50 shares.
Funds
• Federal government also transferred non-development funds to provinces for
compensation of victims of natural hazards and other difficult situation.
• Reduction in collection charges (from 5 percent to 1 percent), almost 70 percent
resources collected at the federal level are now going to provinces.
•Reduced inequalities
56
NFC Award- 2010
58. • Addressed the issue of share in royalty i.e exploitation of
gas from Balochistan
• Announced with consensus-Diversified formula-Allocated
higher resources to provinces
• Punjab sacrificed its share 5.62% which was distributed
among other units
• Provinces have more subjects under 18th Amendment-
demanding greater resources.
• FATA has been merged into KP-its share automatically
increased at least on the basis of population area and
poverty
• Federal government is facing financial constraint-win- win is
a challenge
58
Salient Features of 7th NFC Award
59. • Shrinking of Gross Divisible Pool:
- The Federal Government intends to reduce the size of gross divisible
pool by 8 percent
- This would reduce the size of the Federal Divisible Pool (FDP) to 92
percent from the current 99 percent.
- This will also indirectly increase the federation’s share to 50 percent
from the current 42.5 percent of FDP and the provincial shares will
reduce vice versa.
• Low Tax to GDP ratio
- Federal government to increase tax to GDP ratio from 10.2pc to
13.85pc by 2014-15 while the provincial governments were to increase
their contribution from 0.5pc of GDP to 1.15pc in five years with
annual increase of 0.10-0.15pc.
- However, both federal and provincial governments have failed to
achieve this target
59
Issues and Challenges
60. • Constitutional Limitation
- Article 160 (3A) of the Constitution of Pakistan
mentions that:
“The share of the Provinces in each Award of
National Finance Commission shall not be less
than the share given to the Provinces in the
previous Award.”
- Thus, the Federal government is bound to
increase the share of provinces in the Federal
Divisional Pool.
60
Issues and Challenges
61. • Punjab’s share dropped while the share of Balochistan increased considerably.
• Since 2014, the federal government has sought an additional 6-7% rise in its share for
expenditure on security, law and order as well as for development in Azad Kashmir and Gilgit
Baltistan regions.
• Majority of the provincial tax assignments are subject to a rule known as “through a bar” in the
federal tax list- a particular part and portion of the tax base comes under the federal domain
while the residual tax base comes under the provincial jurisdiction (agriculture income tax and
capital gains tax).
• According to the census, the population of Punjab increased from 73.6 Million in 1998 to 110
Million in 2017, with an average growth rate of 2.1 percent.
• Growth rate of population density remained the lowest in Punjab in relation to other provinces as
well as the national average
61
Issues and Challenges
62. • To cut fiscal deficit, government should reduce ministries-
reduce non developing expenditures rather eyeing on the
provincial share
• In 10th Award provinces to pitch in expenditures in Public debt,
disaster mitigation, public enterprises losses, subsidies,
allocation to GB, AJK and newly merged tribal districts in KP
62
63. • Some demands are unjustified like sharing the public debt
which is contracted by the Federal government
• Increased spending did not necessarily lead to better social
sector indicators-population growth
• In some areas there is genuine need to re work- low taxation
and low tax to GDP ratio that was not anticipated at the time of
7th NFC Award
• Respect to principle of federalism rather than control over
power and money that belongs to provinces and should
ultimately passed to local governments
• Still more efforts are needed to strengthen devolution-provinces
not devolved power at lower level
63
Way Forward
64. • Adjustment in the weights of respective indicators,
alternate composition of existing indicators, and
inclusion of new indicators.
• A gradual shift from a needs-based approach to an
efficiency/performance based resource distribution.
• Increase the weightage of population density due to
its social and environmental consequences.
• Some weight to tax effort and financial discipline in
the horizontal sharing formula should be given
64
Way Forward
65. • Weightage to achieving social outcomes should also be
included in the horizontal sharing formula
• Role of provinces is required to increase for tax collection.
Local Taxation-widen the tax base
• Capacity building of provinces and local governments and
robust accountability mechanism
65
67. Legislative Responsibilities Services Actual allocation of functions
Federal Government
• Defense
• External affairs and foreign aids
• Post, telegraph, telephone, radio
and TV
• Currency and foreign exchange
• Institutes for research
• Nuclear energy
• Parts and aerodromes
• Shipping, air service, railways,
and Highways
• Stock exchanges
• Geographical and meteorological
survey
• Censuses
• Mineral oil and national gas
• Industries
Federal Government
67
68. Legislative Responsibilities Services Actual allocation of functions
Provincial Governments
(18th Amendment)
• Population planning
• Electricity (except KESC)
• Curriculum development,
syllabus planning, and
centers of excellence
• Tourism
Provincial Government
• Social welfare and
employment exchanges
• Vocational/Technical
training
• Historical sites and
monuments
68
69. Legislative Responsibilities Services Actual allocation of functions
Provincial Governments
• Law and order, justice
• Highways and urban transports
• Agriculture extension and
distribution of inputs
• Irrigation and land reclamation
• Secondary and higher education
Provincial Government
Local Governments
• Curative health
• Land development
• Primary education
Provincial Governments
• Preventive health
• Farm to market roads
• Water supply, drainage and
sewerage
Provincial /Local Governments
69
70. 70
Federal Government Provincial Governments
Direct Taxes/Duties Indirect Taxes/Duties Direct
Taxes/Duties
Indirect Taxes/Duties
Personal Income
Tax (excluding Agri.
Income Tax)
Corporate Income
Tax
Capital Value tax
(Excluding
immovable
property)
• Custom Duties
• Excise Duty (excluding on
Alcohol and narcotics)
• Production capacity tax
• Taxes on goods and
passengers levied on
terminal
)
Property tax
Capital
Gains tax
Agriculture
Income Tax
Capital
Value Tax on
immovable
Property
Excise duties levied On
alcohol and narcotics)
Sales Tax on Services
Stamp Duties
Duty on electricity
Hydro profit tax
Registration fee
Mutation
Motor Vehicle tax
Professions Tax
Editor's Notes
1961 Award: Sales tax was to be collected by the provinces and transferred to the divisible pool whence they would be returned a 30% share based on their contribution. East Pakistan’s share rose to 54% under this award, while that of West Pakistan fell to 46%.
1964 Award: 30% of the sales tax was distributed to each province based on its collection, as in the previous award. Whereas the share of East Pakistan and West Pakistan remained unchanged at 54 and 46%, respectively, the overall share of the provinces rose to 65% while that of the centre fell to 35%.
1970 Award: The characteristic feature of this award was the change in the centre provinceratio from 35:65 to 20:80. The shares of East and West Pakistan remained the same. (Ahmad, Mustafa, & Khalid, 2007).
