NFC Proposals in Light of International Experiences

Dr. Fateh M. Mari

Karachi, Pakistan

25th Annual Convention of SANA on July 2-6, 2009, Saint Louis, USA

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 to-date 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 % Federal Transfer %

Punjab 57.88 47

Sindh 23.28 26

NWFP 13.54 16

Balochistan 5.30 11

Population(Census 1998)

Punjab Sindh NWFP Balchistan Total

72.6 30 17.5 6.5 126.6

57.23 % 23.68 % 13.86 % 5.14 % 100%

In Million

Population Census Organization 1998

Revenue Collection (CED and Income Tax)

Punjab Sindh NWFP Balchistan Total

73 77 14 5 169

43.20 % 45.56 % 8.28 % 2.96 % 100

NFC Secretariat Working Paper 2002

Billion Rs.

Area

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

Kilometers

Fiscal Effort

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 % of Cur Exp.

11.25 12.18 4.90 3.14 31.47

On 100 Basis 35.75% 38.70% 15.57% 9.98% 100%

In Million

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

Colombia Population 70

Equal Share 30

Sharing Criteria in IndiaSharing Criteria Percentage

Income Tax Population 10

Income Distance Method (Poverty) 62.50

Area 7.50

Index of Infrastructure 7.50

Tax Efforts 5.00

Fiscal Discipline 7.50

Excise Duty 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

Nigeria Minimum Responsibility of Government

40

Population 40

Social Development Sectors 15

Collection 5

Philippines Population 70

Land Area 20

Equal Share 10

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 I Option II Option III Option IV

Option V Option VI

Population 55 60 65 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 100 100 100 100 100 100

Source: NFC Secretariat Working Paper 2002

Recommendations of WG 3 for 6th NFC

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

Percentage

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