SBP terms NFC award approval as significant development

KARACHI - State Bank of Pakistan has termed that the approval of 7th National Finance Commission (NFC) Award 2009 by all four provincial and the federal governments as a very important and welcome development, reflecting political will to resolve key issues.
The SBP in its first quarterly report issued on Tuesday has said that the National Finance Commission is constituted by the President of Pakistan under article 160 of the constitution which recommends an appropriate mechanism of revenue sharing between the federation and provinces. Keeping in view the regional disparities in level of economic activities and revenue generation capacities, the constitution of Pakistan empowers federal government to collect certain types of taxes from all over the country and to put them in a divisible pool. These resources are then distributed among four units of the federation so that their financial needs can aptly be met.
Report maintained that in order to maintain harmony and a sense of brotherly bond among provinces, a consensus over resource sharing formula is highly important.
The report said that the 7th NFC 2009 award introduced significant changes in resource distribution mechanism to the satisfaction of all units of the federation.
Under the award, the federal government agreed to increase the share of provinces in divisible poll to 56 percent in the first year of NFC and to 57.5 percent in the remaining years of the award from existing level of 47.5 percent. The federal government has also agreed to reduce collection charges to just one percent from the existing level of five percent, which will increase the actual transfers to the provinces from the divisible pool, report remarked.
To increase the share of Balochistan to 9.09 percent, the three provinces agreed to slash their percentage shares. The NWFP is entitled to get an additional one percent of the total divisible pool, regarding its role as a frontline province in the continued war against terror. This would be equivalent to 1.83 percent of the provincial poll. Similarly, the centre also gave the option to the provinces by allowing them to collect sales tax on services.
SBP pointed out that another notable development was the consensus on using other parameters in addition to population for revenue sharing among the provinces. To assign weight to poverty and backwardness, the NFC used database from three studies, i.e. 1999-2000 report of Poverty Reduction Strategy Paper (PRSP), Human Development Index (HDI) of 2003-04, and HDI 2007-08 developed by Federal Bureau of Statistics (FBS).
Again to resolve the conflict among provinces regarding use of studies, NFC agreed to use average of the three reports.
To resolve the issue regarding the use of indicator to assign weight to revenue generation or collection, NFC used the electricity consumption by collections of withholding tax. In order to avoid conflicts on the distribution of 2.5 percent GST, the federal government agreed to transfer Rs 6 billion to Sindh from its own kitty.
It may be noted here that as per constitution, the NFC has to be constituted after every five years as starting from 1974; seven NFC awards have been announced up till now with the most recent coming in December 2009.
The first NFC was constituted in 1974 that recommended population as the criterion for resource distribution among the provinces. The second (1979) and third (1985) NFCs could not offer any recommendations; thus resources continued to be distributed according to the first award until 1990. In 1990, fourth NFC award was announced through which the divisible pool was expanded and special grants were also provided to the provinces. The provinces right on net hydel profit, development surcharge (on gas) and excise duty on crude oil was also admitted in that award. However, the fifth successful NFC award was announced in 1996. It brought more sophistication to the mechanism of inter- governmental fiscal transfers. All taxes, royalties and development surcharges were included in the divisible pool that drastically increased the pie.