What are the expected questions about NFC award? Please anyone tell which areas to cover about NFC, its history, 7th NFC, Future implications.. what else?

Guys here is a rough draft about NFC award that is comprehensive. It contains all useful information you may need to know about NFC except a critical analysis which I will post within few days, InshAllah. I collected the data from different sources.. it is not formally shaped as some developments of past have been pasted without changing them to present tense due to shortage of time.. but if u go thru this, it will greatly help you.


NFC AWARD

What is NFC Award?

The NFC award, National Finance Commission award, is the distribution of financial resources among the provinces of Pakistan by the federal government on annual basis.

Taxes are pooled and distributed: Certain types of taxes collected in each province are pooled, then redistributed according to the NFC formula. What taxes to include in the distribution pool and the distribution formula is a subject of debate.

Taxes included in the pool are
(1) income taxes,
(2) general sales tax,
(3) wealth taxes,
(4) capital gains taxes, and
(5) custom duties.

Most Tax Receipts are collected from Punjab and Sindh. Almost all custom duties are collected at the Port of Karachi.

new NFC Award can not be announced because the four provinces have failed to develop consensus. Consensus has not been reached because Punjab province insists resource distribution on the basis of population alone whereas the other three province, namely North-West Frontier Province, Sindh and Balochistan demand giving importance to the revenue generation by each province, level of poverty in smaller provinces and other related factors as well, while distributing the national resources among provinces through National Finance Commission

Finance Minister Shaukat Tarin stated in August 2009, that population won't be the only parameter used in calculating the next NFC award.[2] For the distribution of the new award, factors such as inverse population density and poverty have also been kept in mind.

Background and History of NFC:

In 1971, Pakistan was cut into two by our enemies with the indirect support of our fellow Pakistani’s and hence we lost East Pakistan to Bangladesh. There are many reasons that can be attributed to the 1971 incident but one of the major one is the “Distribution of Resources” among the provinces i.e East Pakistan and West Pakistan. Since East Pakistan was responsible for majority of our output, it was its right to get the major portion of it as well, however, it was not allowed to take when it actually owned and most of it was used in West Pakistan. This infuriated the Bangladeshi people and contributed towards their final revolt against the Government owned by West Pakistan.


It is worth mentioning here for the ready reference of our readers that Bangladesh i.e East Pakistan before 1971, was more populous then West Pakistan but it was still discriminated by the East Pakistan i.e current day Pakistan. At that time, the distribution of resources based on population was never raised by anyone since it would have resulted in greater share of West Pakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan.

Article 160(1) of 1973 Constitution:

NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be held at the intervals of five years. Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President may appoint after consultation with provincial Governors [Constitution of Pakistan (1973)]. The main charter of NFC is to recommend on the following [Pakistan (2006b)]:

(1) The distribution of specified taxes, duties between federation and provinces.
(2) The disbursement of grants to provincial governments.
(3) The borrowing powers exercised by federal and provincial governments.
(4) Any other financial matter referred to commission.

Looking at the historic NFC award, one do start wondering as to why Population has only been kept as the criteria for distribution of NFC award when we all know that demographic changes takes place according to the economic situation. We all know how people from around the globe started moving towards Middle East and Malaysia when it was economically developed. Not only this, Population migration took place in China from less developed Western China towards more Developed Eastern China. Therefore, the distribution of population can never ever be the sole criteria of distribution of resources from the central pool. However, in Pakistan, no government was able to change it. That brings us towards the controversies facing the NFC Award.

There is a need for inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, environment, etc. to be taken into account for justifiable of resource distribution. Even if we look at our neighbouring country India, various criteria are used for resource distribution from central to provincial governments. So, in order to achieve equity, such policies should be devised which take different aspects of development into its account while distributing the resources. The issue of resource distribution among federal and provincial governments never proved to be simple and is a much complex issue. But when we go through the history of NFC, it becomes obvious that the problem of resource distribution is never taken seriously.

Controversy on Sales Tax:

A peep into revenue distribution history of the sub continent reveals that sales tax was in exclusive domain of provincial governments before 1947. It was partly federalized to the extent of 50 per cent in 1948-49 budget, the first of independent Pakistan, to meet the impact of massive refugee influx in Karachi which was then the federal capital.

it was in 1974 NFC award that sales tax was completely federalized and the noises made in Karachi were ignored. It declared population as the only criterion for distribution of revenue.

Previous Awards:

SINCE 1973, after the promulgation of a consensus constitution by an elected and popular government, there have been three national finance commission awards enforced in 1974, 1991 and in 1997. But the three NFCs constituted in 1979, 1984 and 2,000 failed to reach consensus and ended in a deadlock.

Of the three commissions that failed, two were formed in 1979 and in 1984 during the military rule of late General Zia-ul-Haq and the third one, the current NFC was formed in the year 2,000 after General Musharraf took over the government in October 1999. This NFC continued functioning after the October 2002 elections with some changes in its composition.

The first NFC award was given in 1974 by the elected government of late Z.A. Bhutto. This award set population as the only criterion for revenue distribution among the provinces. Custom duties, the main revenue earner was kept out of the divisible pool and the sales tax was completely federalized.

The second NFC award was given in 1991 by a political government of PML headed by Mian Nawaz Sharif. This NFC award recognised for the first time, the rights of the provinces on natural resources and the provinces were given royalty and gas development surcharge on oil and gas.

And the third NFC award was declared in February 1997 by a caretaker government of Farooq Ahmed Leghari and Prime Minister late Malik Meraj Khalid. It turned out to be the most controversial NFC award, though still operative, despite the expiry of its five- year term in 2002.

7th NFC Awards:

Location: Lahore
Chairperson: Finance Minister Shaukat Train
Duration of arguments: 3 days

Provincial share of the divisible pool would increase from the present 47.5 per cent to 56 per cent in the first year of NFC (2010-2011) and 57.5 per cent in the remaining years of the award under the vertical distribution of resources. He claimed that this share would virtually be over 60 per cent. During Musharraf regime, provinces were demanding for a 50% provincial share in the divisible pool.

The federal government has agreed to cut tax collection charges from 5.0 per cent to 1.0 per cent and this amount would also be added to the divisible pool. About the thorny issue of sales tax on services, he said the NFC recognised sales tax on services as a provincial subject and it mightbe collected by the respective provinces.

The multiple indicators under 7th NFC Award

Multiple Indicators Weights

1 Population 82.0%

2 Poverty/Backwardness 10.3%

3 Revenue Collection/Generation 5.0%

4 Inverse Population Density 2.7% (Urban-Rural)


Out of 56 % provincial share of total divisible pool, financial resources will be distributed among the provinces in following ration.

Punjab 51.74%
Sindh 24.55%
NWFP 14.62%
Balochistan 9.09%

Thank you guys for this useful information but i need explanation of few points given below. Your early response is much awaited.

What I know in this context is that as per Govt of India Act 1935 (constitution of Pakistan after independence until we developed our own), Entry 48 List II,7th Schedule, sales tax and advertisement tax was provincial subject. India uptill now retains the same status but seven month after independence, while presenting First Budget in Assembly for fiscal year 1948-49, Finance Minister Ghulam Mohammad declared that direct taxes are not enough for central govt to bear its expenses, therefore it was agreed by provincial assemblies to transfer the collection of sales tax to the centre for two years. Hence for the time being, it was completely transferred to Centre (not 50%, and centre was to pay certain amount in lieu of these taxes). Please correct me if I am wrong...

Later in 1951, Finance Minister further sought extension of two years. West Pakistan agreed with some reservations, East didn't. However, bill was passed by assembly despite serious apprehensions of East Pakistan.

FY 1952-53 was fateful year of provincial autonomy and finances. The constitution was amended and Entry 54 was introduced in List I (Federal Legislative List) and sales tax was permanently made a federal subject (mark this expression) and provinces were left with advertisement tax only.

Again, majority of members of NFC (of both East & West Pakistan) tried to restore the sales tax to provinces in 1962 but in vain.

This is the history of controversy over collection of sales tax. I am afraid, I don't see anywhere the 50% collection by Centre and vice versa....

Another example of the fact that: Worst democracy is better than best dictatorship

Again, what i recall is that the sales tax was already federalised (as already cited) and was retained as the federal subject in ZAB era also by again making an excuse of political unstability after debacle of East Pakistan. However it was promised that certain concessions shall be made to provinces in the coming time. Bottomline is: NFC of 1974 wasn't the first one to completely federalise the sales tax, it just retained the status quo. I humbly seek correction from your side, if any.

In the current award it has been decided that sales tax on services would be made provincial subject wheras sales tax on goods would be retained by Islamaabad. Can anyone help me understand the distribution in amount/%age of sales tax on goods and services ?

Although this award won't prove to be a panacea to past grievances of provinces but still, allotting 56.5% (and 57% in next four years) in distribution pool for provinces is a step in the right direction !

Well, I took all info from reliable sources of internet.. The point that u want to know is taken from this article..para 13

http://www.dawn.com/2005/06/06/ebr15.htm

Sales tax is levied on both goods and services... From now on.. Sales tax on services will be collected by Provincial Govts. But sales tax on goods will be collected by Federal Govt. This means (which i understand) that only Sales tax on goods will be a part of divisible pool, from which all provinces as well as federal govt will benefit but sales tax collected from services would be entirely the income of relative province.

56.5% reserved for provinces is out of 100% divisible pool. The rest reserved for federal govt. Out of this 56.5%, provinces will be given their share according to reserved percentages;

Punjab 51.74%
Sindh 24.55%
NWFP 14.62%
Balochistan 9.09%


Hope ure queries are answered.

Thank you for your timely response but the facts i've quoted are also authentic. See the link below:
http://urdunews.wordpress.com/2009/0...utional-trick/

I would appreciate if you spend some time reading this and guide me accordingly....

Well, I know this. My question was that what exactly is amount of sales tax on services as compared to that on goods. I mean: is it just a lolly pop given by the central govt to satiate the provinces for the time being and keeping the larger chunk to itself.

Yeah that was quiet clear in your original post. I was just hailing this move of Federal govt as it was much needed.

I am afraid, no !

Hmm... yeah there is a clash in information.. there is little that I can help in this matter. And Sales Tax on goods is 16% in Pakistan.. I studied this during my course of Taxation. Don't know about services.

Do share if you come across any solution. I'll do the same.

well according to me share of resources should not be on just population scale
balochistan should be given more share of nfc i guess punjab is developed but wht about balochistan it should be developed other provinces should help out in this this is one of the issue which led balochistan to demand 4 another state (which is wrong ) all rughts should be given to balochistan as gas resources are of balochistan and govt. pay royalty 4 that ... well according to me its wrong