ISLAMABAD: Confrontation is emerging on the new resource distribution formula as provinces are lobbying for an increase in funds given by the centre while the federal government wants them to share in its expenditure responsibilities to a greater degree.
The tussle has surfaced after the federal government assured the International Monetary Fund (IMF) that it would strike a deal with the provinces to balance revenue and expenditure responsibilities.
Talks on a new 8th National Finance Commission (NFC) Award that will fix the share of the provinces in the federal divisible pool for the next five years are to begin in July.
Since the federal government’s expenditure on debt servicing, defence, and maintaining law and order has increased manifold, it believes the provinces should share the burden. Economists see that as pitching the federation and the federating units into hot debate.
Ahead of the formal talks, provinces have evolved their proposals for a change in the existing resource distribution formula for provinces and the enlargement of the federal divisible pool.
Pakistan moved towards fiscal decentralisation after the 7th NFC Award in 2009 and the 18th Amendment to the Constitution in 2010 that devolved all social sector functions to the provinces. Resultantly, the provinces’ share in federal resources rose to 57.5pc from 49pc. The provinces want this share increased further.The Khyber Pakhtunkhwa government went one step ahead by linking the deal on the 8th NFC Award with the uncapping of net hydel profits (NHP), and payments of past arrears, which amounts to Rs118.48 billion, a claim for un-utilised river water. NHP arrears from 2005-06 to 2013-14 are estimated at Rs166.691bn.
KP has evolved a clear strategy for the next award. “Any attempt or steps of the federal government to minimise provincial resources or ask to finance federal expenditures will be strongly resisted,” provincial finance minister Sirajul Haq told Dawn.
In the 7th NFC Award (2009-14), multiple indicators were included as the criterion for the distribution of resources. The KP government proposes increasing the weightage of poverty/backwardness from the existing 10.3pc to 15pc in the new award.
Another new demand is that provinces that lack infrastructure should be given a weightage of 10pc. This would mainly benefit KP and Balochistan.
In the 7th NFC award formula, population was given a weightage of 82pc, followed by revenue collection/generation at 5pc and inverse population density (IPD) at 2.7pc. The population criterion benefits Punjab, followed by Sindh.
Balochistan and KP are the major beneficiaries of the IPD. This criterion was included in the current award to get extra funds from the federal government for uplift.
A source in the finance ministry said that Sindh is sticking to its demand that revenue generation should be a key determinant. A slight variation in this weightage would increase the share of Sindh, followed by Punjab.
Under the 7th NFC Award, the net share of Punjab from the divisible pool is 51.74pc, followed by Sindh (25.21pc), KP (16.42pc) and Balochistan (9.09pc).
The last NFC Award empowered the provinces to collect sales tax on services. As a result, three provincial revenue boards have been established in Sindh, Punjab and KP collecting 16pc sales tax on services.
Economists believe that this rate is very high and need to be lowered to 5pc (non-refundable) to reduce the cost of doing business in the country.
Every province should introduce lower rates instead of going for the standard rate of 17pc which is applicable on goods by the federal government.
KP finance minister Sirajul Haq also demanded an increase in compensation for violence from the existing 1pc to 5pc. “We will demand this raise in the next award,” he asserted.
The 7th NFC Award granted 57.5pc of most revenues to the provinces, along with a substantial devolution of spending responsibilities and taxation authority in agriculture, property and services, which left the federal government with an imbalance.
To correct this, the federal government has introduced a petroleum development levy (PDL) worth Rs122bn and the Gas Infrastructure Development Cess (GIDC) worth Rs120bn. The amount collected from consumers under these two levies is not part of the divisible pool.
The provinces are now demanding that PDL and GIDC sums be included in the federal divisible pool. However, this will not be possible without a constitutional amendment, according to economist Dr Kaiser Bengali.
The KP government is also demanding the imposition of federal excise duty (FED) on oil. FED is not collected on oil production. Under Article 161 of the Constitution, provinces are entitled to the net FED proceeds on oil.
Royalty on LPG is another area that the provinces want included in the divisible pool.
Under Article 169, the president of Pakistan must constitute a National Finance Commission to review the formula for the distribution of funds, taxes and other monetary assets. The NFC comprises the federal finance minister, provincial finance ministers and non-statutory members appointed by the president after consultations with provincial governors.
Two non-statutory members, Dr Kaiser Bengali for the Sindh and Senator Haji Mohammad Adeel for the KP governments, have resigned and are yet to be replaced.
Haji Adeel confirmed to Dawn that he resigned last August but has not received any confirmation of his resignation. Dr Bengali also confirmed that he resigned from the post but has not been replaced yet.