Federal government wants to exclude customs duties from scope of divisible pool, sources say
The 7th prize, in 2010, attempted to rectify the anomalies by increasing the overall allocation to the provinces to 57.5% and reducing the weight of the population to 82%. Photo: file
ISLAMABAD:
The Center has notified eight committees of the National Finance Commission (NFC), including one on debt utilization and transfer of expenditure to provinces, following the Attorney General’s support to the federal government over Sindh’s objections.
The development came as Pakistan’s top tax expert Dr Hafiz Pasha noted that despite the constitutional obligation to allocate 57.5% of the divisible pool to the provinces, they received only 45.8% in the last financial year after taking into account oil levies and cash surpluses. Dr Pasha made the remarks during a seminar on NFC organized by the Social Policy and Development Center (SPDC).
Finance Minister Muhammad Aurangzeb, who had initially confirmed his attendance, did not show up at the seminar; instead, he met with SPDC representatives at his office. SPDC director general Asif Iqbal said the finance minister had initially confirmed his participation but expressed regret late the previous night.
Meanwhile, the Ministry of Finance has formed committees on eight crucial issues that will shape the 11th NFC awards. The last one, the 7th NFC prize, was decided unanimously 15 years ago for a period of five years. A task force, headed by the Punjab Finance Minister, has also been constituted to make recommendations on the sharing of financial expenditure incurred by the federation in areas of provincial jurisdiction. The formation of the group followed a legal opinion from the Attorney General, after Sindh objected, arguing that cost sharing was not within the mandate of the NFC.
Sources said Sindh may seek its own legal opinion as the federal government continues to spend in areas under provincial control. According to Dr Asad Sayeed, Sindh technical member at the NFC, the federal government retains ministries related to decentralized subjects and has spent Rs 328 billion on them, as highlighted in a 2023 World Bank report.
Khyber-Pakhtunkhwa Financial Advisor Muzammil Aslam has criticized the federal government’s policies, citing energy mismanagement that has contributed to over Rs5,000 billion of circular debt in the power and gas sector and over Rs5,100 billion in payments to Chinese power plants.
Led by Finance Minister Muhammad Aurangzeb, the Center constituted a task force to make recommendations on the composition of divisible taxes, suggesting the inclusion or exclusion of certain taxes in the pool.
The sources said the federal government wants to exclude customs duties from the divisible pool distributed among the five governments.
Another working group was formed to determine the percentage of resources that will be distributed between the center and the four provinces: vertical transfers. Currently, the provinces receive 57.5% while the rest goes to the Centre.
Speaking at the SPDC seminar, Dr. Hafiz Pasha said that during the last financial year, the provinces obtained 45.8% against their guaranteed share of 57.5%. He added that almost 12% of the shares were retained either by imposing an oil tax on products that are not part of the divisible pool or by recovering the money transferred in the form of excess cash.
In the last financial year, the federal government collected over Rs 1.2 trillion in oil levies, and the provinces also saved Rs 921 billion in excess cash to meet the conditions of the IMF program.
Led by Balochistan Finance Minister, the federal government has constituted a task force to decide on the distribution of resources among the four provinces. Currently, more than 82% of resources are distributed based on population.
The seeds of East Pakistan’s separation were sown in the 1960s with the decision to first strip provinces of the right to collect sales tax and then refuse distribution of resources based on population, Dr Asad Sayeed said. Dr Sayeed said that soon after the separation of East Pakistan, the federal government started distributing resources based on population.
KP’s Muzammil Aslam said there was a need to stop incentivizing people and rely more on other indicators, including revenue generation.
The federal government has also appointed a task force to “deliberate and suggest measures to improve the overall tax-to-GDP ratio.” The KP Finance Minister will chair the task force.
The tax to GDP ratio of the FBR is barely 10.3% while the provinces also collect taxes equal to 0.8% of GDP. The FBR has miserably failed to accomplish its task, and its chairman told the Prime Minister that the first half fiscal target could be missed by Rs560 billion.
The Finance Ministry has also notified a task force on direct resource transfers to provinces which will be chaired by the Sindh Finance Minister.
The seventh working group is constituted to make recommendations on the merger of erstwhile FATA and its participation in the NFC. KP Finance Minister would be first in line.
Muzammil Aslam said that more than 5 million people have been added to KP and its area by one-third has been expanded without increasing resources. The financial advisor said KP’s share in NFC should be further increased by over 4% based on the new population size.
The federal government also created a task force on the composition of the national debt and its use. This group will be headed by the Finance Minister of Balochistan.
