Economic reforms: Part - XXXX

The Distribution of Revenue Order, 1971 faced a void after the separation of East Pakistan. In its aftermath, it took a while before a fully democratic constitution went into effect in August 1973. In the interim, the share assigned to East Pakistan in the 1971 order, was assigned to the federal government.

Article 160 of the new constitution carried the sub-headline of “National Finance Commission” and its clause (1) declared that “within six months of the commencing day and thereafter at intervals not exceeding five years, the president shall constitute a National Finance Commission consisting of the minister of finance of the federal government, the ministers of finance of the provincial governments, and such other persons as may be appointed by the president after consultation with the governors of the provinces”. Clearly, this was in line with the previous constitutions – of 1956 and 1962 – but, unlike the latter, the periodic constitution of the NFC was made obligatory.

The duties of the commission were elaborated as: (a) distribution of divisible taxes between the federal and provision governments; (b) grants-in-aid to provinces; (c) exercise of the borrowing powers of the federal and provincial governments; and (d) any financial matter referred to the commission by the president. This was similar to earlier terms

of reference.

The taxes forming the divisible pool were also the same as in the previous constitutions. These were: (a) income tax, including corporation tax, except on remuneration paid out of the consolidated fund; (b) taxes on the sales and purchases of goods; (c) such excises as may be prescribed by the president; (d) export duties on cotton; and (e) other taxes as the president may specify. Note that rather than specific excise duties on tea, tobacco and betel nuts, specified under earlier schemes, here it was left at the discretion of the president (read: federal government). The commission was notified on February 7, 1974 in accordance with the composition provided in Article 161(1). Based on its recommendations, the president promulgated the ‘Distribution of Revenue and Grants-in-aid Order 1975’, which was made effective from July 1, 1975.

The Award 1974, as it has come to be known, made several departures from the past. First, it was a straightforward transfer, as it simply assigned 80 percent of the share of revenues in the divisible taxes to provinces. Second, after considerable deliberations, and after overcoming many differences, the commission recommended that the most equitable way to distribute provincial shares among the provinces was on the basis of population. Thus Punjab was assigned a share of 62.25 percent; Sindh, 22.50 percent; NWFP, 13.39 percent and Balochistan, 3.86 percent, reflecting their respective shares in the population. Accordingly, the criteria of revenue deficit and share in collection of revenues were abandoned.

Third, the commission brought back the grants-in-aid, which were excluded in the 1970 Award. However, these were restricted to the smaller provinces of Balochistan and NWFP.

The commission held an extensive debate on the borrowing powers of the federal and provincial governments and the need for placing limits thereof. The commission felt that, as in the past, there was no need to put any limit on the federal government’s borrowing powers as that would work against the balance of convenience. Regarding provincial borrowings, it was argued that since fiscal and monetary policies were the responsibility of the federal government, it was imperative that provincial borrowings were supervised by the federal government.

It was further stated that such a conclusion was also warranted by clause (3) of Article 167 which already provides for necessary safeguards when it stipulates that: “A provincial government may not, without the consent of the federal government, raise any loan if there is still outstanding any part of a loan made to the province by the federal government, or in respect of which guarantee has been given by the federal government; and consent under this clause may be granted subject to such conditions, if any, as the federal government may deem fit to impose”. The continuation of the existing regime of borrowing was, therefore, recommended.

The federal government, as in the past, retained the revenues from wealth tax and customs duties exclusively for its use. Wealth was a minor tax but customs duties were the largest source of revenue, hence it provided adequate resources for the federal government’s responsibilities. The share of provincial transfers from federal taxes rose from 27 percent in 1965 to nearly 30 percent in 1974.

The commission also deliberated on an interesting point of law regarding its tenure. It was held that the commission would dissolve after it made its recommendations and an order was issued by the president. This meant that the commission was not a standing body. The limitation of period for formation only required the president to constitute the commission no later than after every five years, but the president can make one at any time before the expiration of five years if it was considered necessary to seek its views on a financial matter connected with the scope of its work.

Clause (6) of Article 160 states: “At any time before an order under clause (4) [referring to the commission’s recommendations] is made, the president may, by order, make such amendments or modifications in the law relating to the distribution of revenues between the federal government and the provincial governments as he may deem necessary or expedient”. Reading this clause in conjunction with the non-standing nature of the commission, it appears that the president, after constituting a commission, acquires the ability to amend an existing order as he deems fit.

Be that as it may, a remarkable development took place. The Second Constitutional Amendment changed the scope of tax on sales and purchases by including in it imports, exports, manufacturing and production. Customs duties were no longer an exclusive federal revenue. and the divisible pool was significantly enhanced. However, no reference was made to the NFC for revision, since it stood dissolved after announcing the award. However, it would have a major impact on future awards.

To be continued

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