In 1968, the Ayub government celebrated a decade of development (1958-68) but the regime was gone in March1969. There is hardly an example in the country’s history where such contrasting fortunes would result within such short period of time. Another martial law was imposed by Ayub’s hand-picked general.
The new government would undertake far-reaching political reforms such as scrapping the 1962 constitution and holding new elections for a constituent assembly to write a new constitution. The Legal Framework Order (LFO), which Yahya Khan promulgated on March 30, 1969, acted as an interim constitution but pre-emptively announced the fundamental contours of the new constitution, with the provision that the president could reject a constitution if it did not adhere to these principles.
Thus the principle of parity enshrined in the 1956 constitution, which was the major source of alienation of the East Pakistan, was removed and provincial units were restored. The inexorable force of unfortunate events, ensued in the aftermath of the December 1970 elections, the delay in the transfer of powers to the winner and the armed intervention from India, eventually led to the separation of the eastern wing of the country.
In was in the backdrop of such tumultuous changes evolving on the horizon, that an NFC was constituted in April 1970 headed by the then finance minister, Nawab Mozaffar Ali Qizilbash, and having as members finance ministers of the five provinces and some technical members, which were subsequently enlarged to give more representation to East Pakistan.
Curiously, the committee (as it was designated, rather than ‘commission’) was given two different sets of TORs – one, to deal with revenue distribution, the proper work of the NFC, and two, to study the extent of economic disparity between the two wings of the country. It held four meetings during April 12, 1970 to May 12, 1971. The grimness of circumstances surrounding its work was reflected in its foremost conclusion: “In view of the special circumstances, the committee decided not to submit a formal report but to make recommendations to [the] government with respect to various matters referred to it”. This was essentially a response to the question of disparity which the committee thought was addressed in the National Economic Council.
The recommendations made by the committee were finally approved by the president and promulgated in the form of ‘The Distribution of Revenue Order, 1971’. Article 3 of the order thus stated: “Provincial governments shall be assigned in each financial year a share of the net proceeds of the following taxes and duties levied and collected by the central government that year calculated according to the percentages specified against each, that is to say – (a) Taxes on income 80%; (b) Duties of excise on tea, tobacco and betel nuts 80%; (c) Taxes on sales and purchases 80%; (d) duties on export of jute and cotton 80%”.
Clause 4 of the order, on the other hand, dealt with the allocation of shares to the provincial governments, and thus stated: “The sums assigned to the provincial governments under Article 3 shall be distributed among provinces in the following manner – (1) Taxes on sales and purchases: As to 30 percent of the sum assigned in a financial year as respect taxes on sales and purchases, East Pakistan shall receive an amount bearing to the said 30 percent the same proportion as collections in the province in the year bear to the total collections, and as to the balance 70 percent of the sum so assigned each year, East Pakistan shall receive 54 percent. The remaining amount of the sum assigned shall be paid to the other provinces.
“(2) Other taxes and duties: Of the sums assigned in each financial year as respect taxes and duties specified in Article 3 other than taxes on sales and purchases, East Pakistan shall receive 54 percent and the other provinces together shall receive 46 percent; (3) The share assigned under clause (1) or under clause (2) to the provinces, other than the province of East Pakistan, shall be distributed amongst those provinces on the basis of percentages specified against them – Punjab 56.5%; Sind 23.5%; North-West Frontier Province 15.5% and Balochistan 4.5%.
This was a very drab order missing many frills and trappings, such as provision of grants, debt relief and borrowing powers and any mention of how the new transfers would be used. It was more like an attempt to meet a constitutional need even though a constitution was not in place.
Yet, it was the dynamic of the circumstances surrounding the award that a significantly larger share of resources, than in the past, was transferred to the provinces. Raising the provincial share in the divisible pool to 80 percent – from 65 percent – was a quantum jump. But the structure of the divisible pool remained unchanged as the number of divisible taxes remained the same. By not providing grants-in-aid, some savings were effected for the centre.
The committee, despite giving a simple recommendation, decided to publish the minutes of all the four meetings it held together with the working papers prepared by the centre and each province for the committee’s deliberations. These documents contain a trove of information not only about the state of fiscal affairs at the time but also the thinking of members participating in those deliberations.
A couple of themes are worth noting. To a suggestion that distribution of revenues should be based on the deficit of each province on its revenue account, the view that prevailed was that such a scheme is not incentive-compatible, as it may induce unnecessary non-development expenditures besides discouraging own revenue effort or not rewarding those who would do so at their own.
Another point of deliberation was on debt relief, whereby some provinces were of the view that they were saddled with suppliers’ credits carrying hard terms as well as the cash loans from the central government with short grace periods and high interest rates. No recommendation was made by the committee in this regard as it thought a much higher share of the divisible pool was transferred to the provinces. The next award would, therefore, witness a significant rationalisation of the sharing arrangement.
To be continued
The writer is a former finance secretary. Email: waqarmkn@gmail.com
