sabir - nfc award aerc

KEY DEFINITIONS

• INCOME DISTANCE• (Yh-Yi)Pi / Σ (Yh-Yi)Pi where Yh, Yi are per-capita SDP of

the highest and the ith State and Pi is population of ith State

• FISCAL DISCIPLINE• Improvement in (Own Revenues/Revenue Expenditures)

/(Average of All States)

• TAX EFFORT• Estimated from ratio of per-capita tax collected & SDP of the

State

NFC AWARD: HISTORICAL PERSPECTIVE

• Raisman Award 1951• NFC Award 1962• NFC Award 1964• NFC Award 1970• NFC Award 1974• NFC Award 1979 (inconclusive)• NFC Award 1985 (inconclusive)• NFC Award 1990-91• NFC Award 1995 (inconclusive)• NFC Award 1996-97• NFC Award 2002 (inconclusive)• Distribution Order 2006• NFC Award 2009-10

WHY NFC AWARD CRITICAL FOR PROVINCIAL GOVERNMENTS?

Financial status of provincial governments largely hinges on federal transfers to the provinces constituted through NFC award

Over-dependence (60% in LDCs, 33% in OECD and more than 80% in Pakistan) on the federal government for resource generation

Narrow base of own resources

Vertical Distribution of Divisible Pool since 1974

Divisible Pool NFC 1974 NFC 1990 NFC 1996

A. Income &

Corporation Tax

80% 80% 37.5%

B. Other Direct Taxes - - 37.5%

C. Sales Tax 80% 80% 37.5%

D. Central Excise Duty

- Tobacco

- Sugar

-

-

-

-

80%

80%

37.5%

E. Import Duties - - 37.5%

F. Export Duties

- Cotton

-

80%

-

80%

-

Distribution Order 2006

• Provincial share in the Divisible Pool to be increased to 41.5% in 2006-07 to 46.25% in 2010-11

• Rs 27.75 billions for grants-in-aid to be distributed in the ratio of 11%, 21%, 33%, 35 % to Punjab, Sindh, Balochistan, KPK respectively

• Grants-in-aid to be increased annually in line with the growth in net proceeds of the divisible pool taxes.

Key Issues• GST services (CE Mode) part of divisible pool

and divided on NFC Formula basis• Since 2000, Federal government is collecting

GST services and distributing it on population basis

• 1/6th GST levied in lieu of OZT is part of divisible pool

• Formation of two divisible pools, one based on population and another on an unknown criterion

Horizontal Distribution of Divisible Pool

• Historically horizontal distribution of divisible pool is largely based on population

• Population is a basic parameter relating to fiscal needs for socioeconomic development and commonly used with varying weights for horizontal fiscal equalization

• But population as a sole criteria is not a good way because:– Income and socio-economic development differentials between

provinces ignored if all treated equally

– Ignore province-wise contribution in national resources

– Ignore needs of population in provision of certain basic public services like education, health and drinking water

CHARACTERISTICS OF FACTORS

• Accurately reflect the specific characteristics (they should be statistically sound)

• Regularly updated in the future • Come from an independent source respected by all

stakeholders• Be drawn from a source that cannot be

manipulated by one or more tiers of government • Reflect needs or demands for public goods

Possible Indicators

Population Geographical Area

Contribution in FBR Taxes Fiscal Discipline

Expenditure on HRD Inverse Population Density

Population below Poverty line

Index of Backwardness/ Deprivation

Tax Effort Index of Infrastructure

Financial Implications of 7th NFC Award

10

Major Issues Resolved• Collection Charges reduced from 5% of

Divisible Pool to 1%.

• Provincial share enhanced from 47.5% to 56 and then 57.5%.

• Multiple Criteria accepted

• GST Services devolved?

• Computation of GDS for addressing Balochistan’s Issue

11

Vertical Sharing Government of Pakistan acknowledged the greater needs

of Provinces & has almost reversed the 1996-97 formula

12

Federal Provincial

5th NFC Award (1996-97) 62.5% 37.5%

2006 Distribution Order (last Year)

52.5% 47.5%

2010-11 44.00% 56.00%

2011-12/2014-15 42.5% 57.5%

Multiple Criteria

13

Population 82.0%

Backwardness/Poverty 10.3%

Revenue Collection/Generation 5.0%

Inverse Population Density(IPD)

2.7%

Revenue Collection / Revenue Generation Share

14

Punjab Sindh KPK Balochistan

Total Taxes less Islamabad

27% 70% 3% 1%

Electricity 63% 28% 7% 2%

Total Taxes 50% + Electricity 50%

44% 50% 5% 1%

Calculation of Backwardness

15

Punjab Sindh KPK Balochistan

UNDP HDI 2003 23.4% 24.3% 25.9% 26.5%

FBS HDI 2008 21.1% 26.2% 23.2% 29.5%

Poverty (1998-99) 25.0% 19.8% 34.4% 20.8%

Average Poverty 23.2% 23.4% 27.8% 25.6%

Computation of Provincial Shares

Indicators Punjab Sindh KPK Balochistan

Population 57.36 23.71 13.82 5.11

IPD 4.32 7.18 6.51 81.99

Average Poverty 23.16 23.41 27.82 25.61

Hybrid Revenues 44.00 50.00 5.00 1.00

Horizontal Share 51.74 24.55 14.62 9.09

GST on Services

17

It has been agreed that

“NFC recongnized that Sales Tax on Services is a Provincial subject under the Constitution and the Provinces may collect this tax if they so desire”

The Federal Government would remove central excise on Telecommunication, Banking, Insurance etc.

Comparison between 7th NFC Award with Distribution Order 2006

18

Punjab Sindh KPK Balochistan Total

Transfers Based on 7th NFC Award

Total Divisible Pool Transfers 470.8 223.4 133.1 82.7 910.0War on Terror 0.0 0.0 15.4 0.0 15.4Additonal 0.66% of DP 0.0 6.0 0.0 0.0 6.0GST Services 36.3 40.7 9.4 2.0 88.5

Total Transfers (Rs. in Billion) 507.1

270.1

157.9

84.7

1,019.9

Total Transfers Share 49.7% 26.5% 15.5% 8.3% 100.0%

Transfers Based on as per Presidential Order 2006

Total Divisible Pool Transfers 416.5 187.4 99.6 39.2 742.7Grant in Aid 6.0 11.4 19.0 17.9 54.3GST Services 8.8 3.6 2.1 0.8 15.3

Total Transfers (Rs. in Billion) 431.3

202.4

120.7

57.9

812.3

Total Transfers Share 53.1% 24.9% 14.9% 7.1% 100.0%

Rs. in Billion

Comparison between 7th NFC Award with Distribution Order 2006

19


Total Transfers (Rs. in Billion)

Based on 7th NFC Award 507.1

270.1

157.9

84.7

1,019.9

Based on Presidential Order 2006

431.3

202.4

120.7

57.9

812.3

Net Gain (Rs. In Billion) 75.9

67.7

37.2

26.8

207.6

Net Gain (%) 17.6% 33.5% 30.8% 46.2% 25.6%

Total Transfers Share (%)

Based on 7th NFC Award 49.7% 26.5% 15.5% 8.3% 100.0%Based on Presidential Order 2006 53.1% 24.9% 14.9% 7.1% 100.0%

Net Gain (+)/Loss (-) -3.4% 1.6% 0.6% 1.2% 0.0%

20

Comparison of NFC AwardsAll Amounts are in 2010-2011 Values (Rs in Billion)


Revenues

Total Transfers As per 1991 Award 633.9 262.0

152.7 56.5

1,105.2


87.6 36.7

609.0

Total Transfers As per 2006 Presidential Order 431.3 202.4

120.7 57.9

812.3


157.9 84.7

1,019.9

Share

Total Transfers As per 1991 Award 57.4% 23.7% 13.8% 5.1% 100.0%

Total Transfers As per 1997 Award 56.3% 23.3% 14.4% 6.0% 100.0%Total Transfers As per 2006 Presidential Order 53.1% 24.9% 14.9% 7.1% 100.0%

Total Transfers As per 2009 Award 49.7% 26.5% 15.5% 8.3% 100.0%

sabir - nfc award aerc

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