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January 1, 2020

Fiscal federalism


January 1, 2020

Pakistan’s federal constitution lays out a framework of regulation between the federal government and the constituting provinces, which since the 1973 constitution remains at the core base of controversy and discontent among the provinces.

Successive federal governments led by civil and military rulers have done everything possible to undermine the federation by intentionally ignoring the laws governing the federation.

In the absence of national parties and in the wake of rising regionalism in the country, the interests of smaller provinces are at stake as the numerical size of Punjab allows it to form the federal government with or without the support of the three smaller provinces. The fundamental structural problem remains unaddressed.

The tree smaller provinces will continue to feel insure and abandoned if constitutionally mandated institutions like the National Finance Commission (NFC) and the Council of Common Interests (CCI) were left inactive. The constitution requires a quarterly meeting of the CCI which is headed by the prime minister and the four chief ministers.

Without the approval of this forum even foreign loans and attached conditions cannot be approved by the federal cabinet alone. Under the law, the federal government is required to seek the consent of the CCI in fiscal matters. This was done in a recently held meeting of the CCI, which approved the IMF’s Extended Fund Facility 2019-2022, and amendments to the Ogra Ordinance 2002. The amendment to the Ogra ordinance allows it to set the price without requiring further approvals, as envisioned earlier.

It has been four years that the NFC award has been deadlocked. The PML-N government delayed the due award and the PTI is playing the same tactics. The last award was given after 20 years, in complete violation of the constitution. When the NFC meeting is not held, the provinces can only write letters to the federal government; no one has ever gone to the Supreme Court to hold the government in power accountable for not following the constitution.

For the 9th NFC Award, will it take the federal government another 15 years to come up with an agreed award of financial resource distribution? These years-long and decades-long delays clearly suggest that the federal mechanism is not working, and there is a need to fix this structural statement.

Pakistan is not the only federal structure government in the world; there are many small and big countries that are run under federal constitutions. The United States is one of them, where there is hardly any dispute between the federal government and 50 states. There is criticism and question around federal grants and subsidies, but not fundamental questions of injustice and usurpation of the resources of one state by another or by the federal government. Like Pakistan, the US too has small and big states, but no one ever claims of being robbed of its resources. Why is that so?

The US has become a functional federal country without controversies. Delaware, a state with less than one million, and California with 40 million people do not have to fight and accuse each other on who is taking away whose resources. That’s because the federal government does not have to engage in resource distribution; there are laws that regulate the ownership of resources and taxes.

If Pakistan were to decide that the general sales tax (GST) belongs to the provinces (as it is a universally local/state tax) it would cease to be an issue in Pakistan. The issue of income tax distribution could be resolved by abolishing the divisible pool and criteria of distribution. Pakistan would need to separate federal and state/province income tax and let the centre keep current share of 43.5 percent and allow the provinces to collect 57.5 percent from their respective provinces.

Let the provinces live within the resource limit to what their people contribute. Allowing provinces to keep what comes from their home province would end the questions of usurpation and moving the financial resources of one province to another.

A formula of finance distribution on any criteria will not work; temporary arrangements would help calm down the anger and frustration of people in smaller provinces, but it does not solve the long-standing question of ownership and justice. The NFC has been a failure; no government takes it as a constitutional obligation. Even if this milestone is achieved, the question of shifting the resources of one province to the other in guise of the divisible pool does not go away. Such concerns regarding the federal divisible pool and criteria would continue to divide provinces.

Sindh is not wrong in feeling that it contributes more to the federal kitty in all forms of taxes – from income to GST, income from natural resources to royalty and surcharge. Sindhis feel they are feeding the rest of the country while their own people in backward districts suffer poverty, disease and hunger. This has to end.

For a stable and functional federal democracy, Pakistan will need to abolish the NFC, the divisible pool and replace it with a new tax collection mechanism, let each province collect and keep their own revenue and let the federation keep its own share, without hassle and dispute of sharing. The world around us should help us learn lessons and fix long-lasting divisive issues.

Email: [email protected]

Twitter @mushrajpar