NFC Proposals in Light of International Experiences

1. 25th 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

2. 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

3. 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

4. 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

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

6. 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

7. 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

8. Revenue based on population, subvention and OZ grants

9. Population(Census 1998) In Million Population Census Organization 1998

10. Revenue Collection (CED and Income Tax) Billion Rs. NFC Secretariat Working Paper 2002

11. Area Kilometers Source: Economic Survey of Pakistan 2008

12. Fiscal Effort In Million Source: NFC Secretariat Working Paper 2002

13. Revenue Sharing in other Countries: National vs Provinces

14. Sharing Criteria

15. Sharing Criteria in India

16. Sharing Criteria

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

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

19. Proposed Options of Revenue Sharing Source: NFC Secretariat Working Paper 2002

20. Recommendations of WG 3 for 6th NFC Percentage

21. 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

22. 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

23. 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