Friday April 19, 2024

Economic reforms: Part - XLVI

By Waqar Masood Khan
March 19, 2019

The next NFC was constituted on July 24, 2009. It was in the backdrop of a major political transition. The decade-old military rule, directly and indirectly, had come to an end.

The arena was open to political forces to do whatever they wanted. Their primary goal, as revealed subsequently, was to undertake constitutional re-engineering in a manner that would make the cost of future military interventions exceptionally high. This was done primarily by weakening the federation and empowering the provinces.

The 18th Constitutional Amendment and 7th NFC Award were the two instruments used to achieve the above objective. The former led to an unprecedented amount of functions performed at the federal level, as well as those where there was a concurrent jurisdiction, transferred to the provinces while the latter awarded a significantly large share of federally collected revenues to the provinces. In several articles, we will closely examine the ramifications of this tumultuous change in revenue-sharing arrangements between the federal and provincial governments.

To see how the NFC evolved and what features were finally built in it, we need to review the terms of reference of the new NFC. Compared to the terms contained in the 1996 Commission, the notification provided for the following three distinct aspects not covered in the TORs of previous NFCs: (a) GST on services; (b) question of rationalisation of payment of royalties on crude oil and of surcharge on natural gas collected by the federal government to the provincial governments; and (c) development and enforcement of a mechanism for setting parameters to achieve fiscal discipline at the federal and provincial levels and for ensuring consistency in maintaining an appropriate fiscal balance at the consolidated level.

Before we discuss the main features of the award, let us discuss these new aspects which were absent in the previous awards.

In the divisible pool, the GST was included in its entirety, without any distinction between goods and services. So the reason for inclusion of GST on services was something else. Probably, it was a preparatory exercise for impending demarcation of GST on services now being allocated to the provinces in unequivocal terms under the 18th Amendment. As it turned out, until the constitutional amendment was in place, the only point of discussion was that of interpretation.

At the federal level, the GST on services was imposed in excise mode with due adjustment as under the GST. For some time, the FBR held the view that, despite the passage of GST on services to the provinces, its application in the excise mode should continue. This would have been tantamount to having two types of taxes on the same tax-base which would have created issues of equity; and, besides, the taxpayer would have been burdened to face two different agencies. The exclusion of GST on services was finally agreed to as a provincial tax, since it was not included in the federal legislative list.

Concerning the rationalisation of royalty and gas development surcharge (GDS) a specially constituted group worked out a new formula for determining royalty and GDS, based on notionally combining the MMBTU of gas to determine the rate of levy but then distributing them on the basis of relative production in the provinces. Interestingly, this meant a gain for Balochistan and loss for Sindh because the BTU values across the two provinces differed significantly. Sindh agreed to this formulation, provided it was compensated for its resulting loss. The rate of excise duty was increased for this purpose. In fact, showing generosity, the rate of excise day was increased from the Rs8 per MMBTU to Rs10 per MMBTU. The cost of this was to be borne by the consumers, whose gas price was estimated to increase by 2 percent.

But more significantly, it was decided that Balochistan would be compensated on the basis of this principle with effect from July 1, 2002 (the last day of the previous Award) until June 30, 2009, a period of seven years, by accruing unpaid arrears. The federal government was to pay these arrears over a five-year period.

The last distinct element in the TOR was to evolve a mechanism for fiscal discipline across both federal and provincial governments. This was a lofty addition, but there is no instrument that can help achieve this objective. Once the funds are transferred to the provinces, the provinces have no obligation under the constitution to give account of their uses to any federal authority. Their respective assemblies and public accounts committees would perform this function just as the National Assembly and the Public Accounts Committee do at the federal level. The NFC addressed this subject and passed resolutions for maintaining fiscal discipline, which had no consequence, despite now having a constitutional provision of review of NFC Award and its implementation after the 18th Amendment. Much of the time such reviews are devoted to ensuring that the federal government has transferred funds in accordance with the award.

When the deliberations of the commission started, the chairman asked the members to list the issues they would like to discuss. They listed eight: (i) horizontal distribution with multiple criteria; (ii) rationalisation of GDS and royalty on gas; (iii) net hydel profit (NHP); (iv) GST on services; (v) war on terror; (vi) distribution of one-sixth of the GST; (vii) vertical distribution; and (viii) benchmarking. There were many items not specified in the TOR issued by the president. In particular, the net hydel profit, war on terror and one-sixth of the GST (which was reserved for onward transfer to local bodies) were not part of the TOR. The NFC was persuaded not to raise the hydel profit issue and the federal government conceded on other matters.

Khyber Pakhtunkhwa was determined to seek a determination on the NHP. While it agreed not to make it part of NFC proceedings, it made it clear that its signing of the award was contingent on satisfactory conclusion of the NHP issue. We will cover the details of this arrangement and other features of the award in the next article.

To be continued

The writer is a former finance secretary. Email: