Sunday April 14, 2024

Economic reforms: Part-XXXXI

By Waqar Masood Khan
January 01, 2019

The 1975 NFC Award was the first under a constitution made by a constituent assembly after Independence. Unfortunately, the democratic process would soon be disrupted yet again and the field of revenue distribution would not witness a new distribution order for nearly 15 long years.

A new commission was constituted in July 1979, as required under the constitution. Interestingly, the terms of reference for the commission expanded the scope of the divisible pool by including excise duties on tobacco and tobacco manufactures – a significant source of revenue – in the pool. We have already noted in the previous article in this series that the scope of sales tax was amended through a constitutional amendment in 1975 by adding all taxes on sales and purchase of goods imported, exported, manufactured and produced. But this was not shared as the 1975 order was not revised.

Despite holding a number of meetings, the commission was unable to submit a formal report making recommendations for the new award. In these circumstances, the following Clause (6) of Article 160 of the Constitution was pressed into service: “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”.

In its absence, the distribution order remains in force. Earlier, the 1974 Commission had also interpreted that the commission wasn’t a standing forum as it expires after it has made recommendations.

Utilising this provision, the 1975 distribution order was extended by default as it didn’t carry an expiration date. But more importantly, the then president General Ziaul Haq, after the census results for 1981 were released, amended the order by issuing the Distribution of Revenues Order 1983 (President Order No 8 of 1983) whereby the shares of provinces were modified as follows: from 60.25 percent to 57.97 percent for Punjab; from 22.50 percent to 23.34 percent for Sindh; no change for the then NWFP; from 3.86 percent to 5.30 percent for Balochistan. The order otherwise remained in force.

Yet another commission was constituted in July 1985 when a new democratic government came to office after non-party based elections. The commission held 10 meetings and was reportedly ready to finalise its report, comprising unanimous recommendations, when the assembly was dissolved and an interim government was in office. The commission was set to meet on October 26 to sign the report. But given the fact that political upheavals were taking place in the backdrop of General Ziaul Haq’s death in a plane crash in August 1988, it decided that the task should be left to the new government that would be constituted after the new elections.

A natural question to ask is how the financial arrangements evolved between the federal and provincial governments during this period. Interestingly, a novel arrangement was evolved. The federal government allowed provinces to incur deficits and it was understood that the overall bill would be picked up by the federal government by charging the net balances to government borrowing from the central bank. This essentially meant that the provinces’ extra needs were met through borrowings.

In a consolidated fiscal framework, with a fixed expenditure pattern, such an arrangement is neutral, in the sense that higher transfers would have made the federal government borrow extra resources directly rather than pick up the net tab of the provinces. But such a system could give rise to misincentives by inducing higher expenditures than necessary. Accordingly, a correction was needed.

A new commission was eventually constituted in July 1990 by the government, which was elected after November 1988 elections. However, after the dismissal of the government in August 1990 and subsequent elections, the new elected government once again constituted a new commission. This would succeed in giving a new award along with breaking new grounds in the working of the NFC.

The terms of reference were much wider than those assigned to previous commissions. In fact, the president used clauses (2)(d) and 3(v) of Article 160, which empower him to refer any matter relating to finance to the commission for its consideration and add new taxes in the divisible pool.

The president thus included duty on excise on tobacco and tobacco manufactures and on sugar in the divisible pool. In addition, royalty on oil and surcharge on gas were added for the commission to consider.

The approach adopted by the commission was somewhat new in its application, even though others had also used it in their preliminary work. This was related to forecasting the pattern of expenditures of all governments. At the outset of the discussion, all governments expressed grave fiscal constraints as resources were insufficient to meet even the most pressing expenditures.

The demands put forward by provinces for distribution included: (a) transfers be made commensurate with provincial needs; (b) provinces be given a share in the profits of trading corporations dealing in agriculture produce; (c) urbanisation be checked and resources be made available for providing adequate civic amenities; (d) special treatment be accorded to underdeveloped provinces; (e) the net proceeds of taxes be distributed on the basis of area or collection; (f) surcharge on gas be given to provinces; and, (g) sales tax be transferred to provinces.

These demands were unrealistic. The working groups formed by the commission began to make expenditure forecasts based on past trends. However, each province demanded base correction, claiming those were highly constrained as the federal government had limited deficit grants mostly for development purposes and the revenue budget was frozen at a fixed level. Not only that, they wanted to use 1987-88 as the benchmark, which was used by a previous commission, and demanded a growth of at least 20 percent to project expenditures up to the level of base year (1991-92), and expected future projections to be done on a similar growth rate. Obviously, this was not acceptable to the federal government, which offered a past benchmark adjustment (1987-88) at the rate of nine percent and future projections from the base (1991-92) at 10 percent.

To be continued

The writer is a former finance secretary. Email: