NFC Proposals in Light of International Experiences Dr. Fateh M. Mari Karachi, Pakistan 25 th Annual Convention of SANA on July 2-6, 2009, Saint Louis, USA

NFC National Finance Commission is Constituted by President of Pakistan under Article 160 and 163 of 1973 Constitution NFC is a recommending body, headed by Federal Finance Minister. It includes provincial finance ministers as members NFC is responsible for finance award which transfers revenue to the federating units so that the development across provinces is at par, equitable service delivery and participation of federating units is ensured

Functions of NFC Transfer of resources from centre to provinces –Assignment of revenues from several taxes –Compulsory and optional sharing of taxes –Grants-in-aid –Discretionary grants –Coordination of Public borrowing and central loans to the states

NFC: Background First NFC Award 1956 as per formula developed in 1951 Second NFC Award 1962 Third NFC in under 1973 Constitution NFC constituted in 1979 and 1985 could not decide

Background Cont: Fourth NFC announced in 1990 Fifth NFC Award in 1997 Sixth NFC in 2003 Seventh NFC is under order

Special Features of Different Awards Ratio of Divisible Pool for Provinces was 20 percent in all NFC Awards till 1997 NFC Award 1997 increased the ratio to 37.5 % 1991 Award included excise duty on sugar and tobacco in divisible pool NFC 2003 increased percentage of divisible pool

Sharing Criteria of NFC till to- date in Pakistan Divisible pool is divided on the basis of population Straight Transfers (Royalty and surcharge on petroleum and gas, excise duty on gas, GST on services and net profit hydrel electricity) Subventions to provinces on need basis

Revenue based on population, subvention and OZ grants ProvincePopulation %Federal Transfer % Punjab Sindh NWFP Balochistan5.3011

Population ( Census 1998) PunjabSindhNWFPBalchistanTotal %23.68 %13.86 %5.14 %100% In Million Population Census Organization 1998

Revenue Collection (CED and Income Tax) PunjabSindhNWFPBalchistanTotal %45.56 %8.28 %2.96 %100 NFC Secretariat Working Paper 2002 Billion Rs.

Area PunjabSindhNWFPBalchistanTotal %18.3 %9.7 %45.2 %100 % Source: Economic Survey of Pakistan 2008 Kilometers

Fiscal Effort 00-01PunjabSindhNWFPBalchistanTotal Current Expenditure Prov. Tax Receipts Tax receipt as % of Cur Exp On 100 Basis35.75%38.70%15.57%9.98%100% In Million Source: NFC Secretariat Working Paper 2002

Revenue Sharing in other Countries: National vs Provinces CountriesRevenue Share with out Transfer % Revenue Share with Transfers % Argentina62 : 3875 : 43 Brazil36 : 6434 : 66 Colombia85 : 1563 : 37 India68 : 3244 : 56 Indonesia94 : 682 : 18 Malaysia90 : 1087 : 13 Pakistan95 : 567 : 33

Sharing Criteria CountrySharing CriteriaPercentage ArgentinaPopulation65 Development Gap25 Inverse Population Density10 ColombiaPopulation70 Equal Share30

Sharing Criteria in India Sharing CriteriaPercentage Income TaxPopulation10 Income Distance Method (Poverty)62.50 Area7.50 Index of Infrastructure7.50 Tax Efforts5.00 Fiscal Discipline7.50 Excise DutyPopulation10 Income Distance Method (Poverty)62.50 Area7.50 Index of Infrastructure7.50 Tax Efforts5.00 Fiscal Displine7.50

Sharing Criteria CountrySharing CriteriaPercentage IndonesiaCollection100 JapanCollection100 MalaysiaCollection100 MexicoPopulation50 Collection50 NigeriaMinimum Responsibility of Government 40 Population40 Social Development Sectors15 Collection5 PhilippinesPopulation70 Land Area20 Equal Share10

Revenue Sharing in Other Countries Canada (10 provinces) Canadian Equalization Program Established Program Financing Canadian Assistance Plan

Proposed Formula by Federal Government in 2002 Population Revenue Collection Area Fiscal effort (Note different weights were proposed to different indicators under that formula)

Proposed Options of Revenue Sharing IndicatorOption IOption IIOption IIIOption IV Option VOption VI Population Rev Cole (CED and IT) Area Fiscal Effort Total100 Source: NFC Secretariat Working Paper 2002

Recommendations of WG 3 for 6 th NFC OptionsPunjabSindhNWFPBalochistan Present Share Option I Option II Option III Option IV Option V Option VI Percentage

Opinion of Punjab on the Proposed Formula Population is not the sole criteria for revenue distribution Formula should base on the autonomy given under 1973 constitution Each country has its uniqueness so international experiences can not be applied

Opinion of NWFP Social Indicators and index of infrastructure needs to be added Poverty or income distance from the national average needs to be considered in the formula Fiscal discipline induces high spenders Income tax is not adjusted by location effect

Proposed Recommendations NFC should be an autonomous, independent and permanent body formed by senate of Pakistan The process of NFC award should be transparent, accountable and participatory Senate should ratify the recommendations of NFC The information of taxes and revenues should be made public