25 th Annual Convention of SANA on July

25 th Annual Convention of SANA on July 2 -6, 2009, Saint Louis, USA NFC Proposals in Light of International Experiences Dr. Fateh M. Mari Karachi, Pakistan

NFC • National Finance Commission is Constituted by President of Pakistan under Article 160 and 163 of 1973 Constitution • NFC is a recommending body, headed by Federal Finance Minister. It includes provincial finance ministers as members • NFC is responsible for finance award which transfers revenue to the federating units so that the development across provinces is at par, equitable service delivery and participation of federating units is ensured

Functions of NFC • Transfer of resources from centre to provinces – Assignment of revenues from several taxes – Compulsory and optional sharing of taxes – Grants-in-aid – Discretionary grants – Coordination of Public borrowing and central loans to the states

NFC: Background • First NFC Award 1956 as per formula developed in 1951 • Second NFC Award 1962 • Third NFC in 1975 -76 under 1973 Constitution • NFC constituted in 1979 and 1985 could not decide

Background Cont: • • Fourth NFC announced in 1990 Fifth NFC Award in 1997 Sixth NFC in 2003 Seventh NFC is under order

Special Features of Different Awards • Ratio of Divisible Pool for Provinces was 20 percent in all NFC Awards till 1997 • NFC Award 1997 increased the ratio to 37. 5 % • 1991 Award included excise duty on sugar and tobacco in divisible pool • NFC 2003 increased percentage of divisible pool

Sharing Criteria of NFC till todate in Pakistan • Divisible pool is divided on the basis of population • Straight Transfers (Royalty and surcharge on petroleum and gas, excise duty on gas, GST on services and net profit hydrel electricity) • Subventions to provinces on need basis

Revenue based on population, subvention and OZ grants Province Population % Punjab 57. 88 Federal Transfer % 47 Sindh 23. 28 26 NWFP 13. 54 16 Balochistan 5. 30 11

Population (Census 1998) In Million Punjab Sindh NWFP Balchistan Total 72. 6 30 17. 5 6. 5 57. 23 % 23. 68 % 13. 86 % 5. 14 % 126. 6 100% Population Census Organization 1998

Revenue Collection (CED and Income Tax) Billion Rs. Punjab Sindh NWFP Balchistan Total 73 77 14 5 169 43. 20 % 45. 56 % 8. 28 % 2. 96 % 100 NFC Secretariat Working Paper 2002

Area Kilometers Punjab Sindh NWFP Balchistan Total 206251 140913 74522 347188 768874 26. 8 % 18. 3 % 9. 7 % 45. 2 % 100 % Source: Economic Survey of Pakistan 2008

Fiscal Effort In Million 00 -01 Punjab Sindh NWFP Balchistan Total Current Expenditure 93223 61784 30005 17498 202510 Prov. Tax Receipts 10485 7524 1469 550 20028 Tax receipt as % 11. 25 of Cur Exp. 12. 18 4. 90 3. 14 31. 47 On 100 Basis 38. 70% 15. 57% 9. 98% 100% 35. 75% Source: NFC Secretariat Working Paper 2002

Revenue Sharing in other Countries: National vs Provinces Countries Revenue Share with out Transfer % Revenue Share with Transfers % Argentina 62 : 38 75 : 43 Brazil 36 : 64 34 : 66 Colombia 85 : 15 63 : 37 India 68 : 32 44 : 56 Indonesia 94 : 6 82 : 18 Malaysia 90 : 10 87 : 13 Pakistan 95 : 5 67 : 33

Sharing Criteria Country Sharing Criteria Percentage Argentina Population 65 Development Gap 25 Inverse Population Density 10 Population 70 Equal Share 30 Colombia

Sharing Criteria in India Sharing Criteria 10 62. 50 Area 7. 50 Index of Infrastructure 7. 50 Tax Efforts 5. 00 Fiscal Discipline Excise Duty Population Income Distance Method (Poverty) Income Tax Percentage 7. 50 Population 10 Income Distance Method (Poverty) 62. 50 Area 7. 50 Index of Infrastructure 7. 50 Tax Efforts 5. 00 Fiscal Displine 7. 50

Sharing Criteria Country Sharing Criteria Percentage Indonesia Collection 100 Japan Collection 100 Malaysia Collection 100 Mexico Population 50 Collection 50 Minimum Responsibility of Government 40 Population 40 Social Development Sectors 15 Collection 5 Population 70 Land Area 20 Equal Share 10 Nigeria Philippines

Revenue Sharing in Other Countries • Canada (10 provinces) • Canadian Equalization Program • Established Program Financing • Canadian Assistance Plan

Proposed Formula by Federal Government in 2002 • • Population Revenue Collection Area Fiscal effort (Note different weights were proposed to different indicators under that formula)

Proposed Options of Revenue Sharing Indicator Option III Option IV Option VI Population 55 60 65 62 Rev Cole (CED and IT) 15 15 10 15 12. 5 15 Area 15 15 10 10 10 8 Fiscal Effort 15 10 15 15 12. 5 15 Total 100 100 100 Source: NFC Secretariat Working Paper 2002

Recommendations of WG 3 for 6 th NFC Percentage Options Punjab Sindh NWFP Balochistan Present Share 57. 88 23. 28 13. 54 9. 55 Option I 47. 39 28. 39 12. 66 11. 56 Option II 48. 46 27. 65 12. 58 11. 31 Option III 49. 62 27. 58 13. 15 9. 65 Option IV 48. 91 27. 67 12. 87 9. 55 Option V 49. 81 27. 76 12. 96 9. 48 Option VI 49. 70 28. 77 12. 95 8. 75

Opinion of Punjab on the Proposed Formula • Population is not the sole criteria for revenue distribution • Formula should base on the autonomy given under 1973 constitution • Each country has its uniqueness so international experiences can not be applied

Opinion of NWFP • Social Indicators and index of infrastructure needs to be added • Poverty or income distance from the national average needs to be considered in the formula • Fiscal discipline induces high spenders • Income tax is not adjusted by location effect

Proposed Recommendations • NFC should be an autonomous, independent and permanent body formed by senate of Pakistan • The process of NFC award should be transparent, accountable and participatory • Senate should ratify the recommendations of NFC • The information of taxes and revenues should be made public