Economic reforms: Part - XXXVII

The Ayub government finally realised the need for a new finance award in December 1961, without waiting for the promulgation of the 1962 constitution (June 1962), when it appointed the first NFC after the Raisman Award 1951.

It was an authoritarian initiative, under the powers conferred on the chief administrator of martial law under the Order of 1958, and it basically comprised bureaucrats. H A Majid, the then finance secretary, headed the NFC.

The main task for the NFC was “to look into the whole problem of the allocation of sources of revenues between the centre and the provinces, keeping in view the growing responsibility of the provinces in financing the development programme”. Since it was not a political exercise, the commission submitted its report in January 1962. Its recommendations were adopted with some modifications and a presidential order called the Distribution of Revenue and Consolidation of Loans Order, 1962 came into effect on July 1, 1962.

The salient features of the order included: “(1) the provinces shall be assigned each year a share of the net proceeds of the following taxes and duties levied and collected by the central government in that year, calculated according to percentage as follows – (i) taxes on Income: 50 percent; (ii) sales tax: 60 percent; (iii) federal excise duties on tea, betel nuts and tobacco: 60 percent; (iv) export duties on jute and cotton: 100 percent (2) The sums assigned to the provinces as above shall not form part of the Federal Consolidated Fund and shall be distributed between the provinces as follows – (i) sales tax: Of the 30 percent of the sum assigned in each year, each province shall receive an amount bearing to the said 30 percent in the same proportion as the collection that province in that year bears to the total collection and of the balance 70 percent, of the sum so assigned in each year, East Pakistan shall receive 54 percent and West Pakistan 46 percent; (ii) other taxes and duties: Of the sum so assigned in each year, East Pakistan shall receive 54 percent and West Pakistan 46 percent. (3) all loans made by the central government to the provinces after August 14, 1947 (other than foreign loans, including the rupee part thereof), and outstanding as on June 30, 1961, shall be written down by 50 percent and converted into one loan bearing an interest at the rate of 3.5 percent and shall be payable by the provinces concerned to the central government over a period of twenty-five years, beginning on the first day of July 1961”.

In the last article, we had pointed out that the 1962 constitution would make remarkable move toward giving more autonomy to the provinces. Since a much larger set of responsibilities was to be assigned to the provinces, as compared to previous constitutions, it was natural to provide commensurate resources as well. This was done under the 1962 award, which was a quantum leap from the miserly Raisman Award that had given 12 percent of the share of divisible resources to the provinces. In contrast, the 1962 Award would assign 27 percent of the divisible pool, more than doubling the level of transfer. This extraordinary increase provided the provinces with a much greater share in resources, enabling them to bring development to the people according to their aspirations.

This was made possible by an across-the-board increase in the share of provinces in the divisible pool taxes. Except for income and corporation taxes, where the share was unchanged at 50 percent, the provincial shares were significantly increased from 50 percent to 60 percent, whereas the export duties on cotton and jute were transferred fully. This last measure meant a very high transfer to the provinces.

Earlier, only 62.5 percent of duties on jute was given to East Pakistan while duties on cotton were retained by the centre. The taxes collected by the central government, such as estate and succession duties in respect of agricultural land taxes and the tax capital value of immovable property, continued to be assigned to provinces, as in the past.

The income tax also included corporate tax. However, an interesting element of the levy surcharge was introduced within these taxes to be retained by the centre. This was the revival of the provision that existed in Government of India Act 1935, where in all divisible taxes, a portion in the form of surcharge was excluded from sharing. This was, in some sense, a cushion against the higher transfer effected to provinces.

Notice also that the population was not uniformly the basis of the division of proceeds of all the taxes. In particular, and given the fact that the sales tax originally was a provincial tax, a portion (30 percent) was reserved for distribution based on the point of collection and distributed according to the share of collection each province had in total collection. For the rest of the taxes, population was effectively the basis as the two provinces share the taxes in the ratio of 54 percent and 46 percent.

Given a much larger transfer to provinces, the need for subventions and grants was limited and, therefore, a small grant of Rs22.7 million was recommended and approved only for West Pakistan.

The most unique recommendation of the award was the one relating to the consolidation of loans of the provinces owed to the Centre. The award made a major concession to provinces by writing-off their loans to the extent of 50 percent and then converted the entire set of loans into a single loan bearing an interest at the rate of 3.5 percent. Even as the debt burden wasn’t very high, this measure provided another source of transfer as it allowed savings in debt-servicing costs of the provinces. In the Raisman Award, it was decided that the provinces would leave the raising of loans to the central government, which, in turn, would meet the borrowing needs of the provinces. This aspect was implicitly preserved in the 1962 award.

In our next article, we will see a further improvement in transfers when a proper NFC was constituted under the 1962 constitution, which gave us a new award in 1965. This award took into account the political dynamics associated with resource distribution. After the new constitution was adopted, martial law was lifted and a political dispensation was put in place – though it proved transient.

To be continued

The writer is a former finance secretary. Email: waqarmkn@gmail.com