The government eventually gathered the 11th National Finance Committee to reach a new NFC award to replace the 7th NFC prize, which was agreed in May 2010.
The NFC award is supposed to last only five years, but until a new prize is agreed, the old prize continues.
The 7th NFC Award, one of the most structurally damaging awards in Pakistan’s federal fiscal health, lasted 15 years. It would be tax weakening for Pakistan if this committee does not agree with a new, more rational prize.
According to the 7th NFC prize, 57.5% of total federal tax revenue are transferred to the four provinces. In addition, an additional 1% is given to Khyber Pakhtunkhwa to fight the war against terrorism and an additional two -thirds of 1% of the divisive swimming pool is distributed to Sindh for Octroi resignations in 1998.
The federal government must also bring the total cost of governments Gilgit Baltistan, AJK and former-Fata. Together, these costs come close to 62% of the federal government’s revenue.
Since 62% of citizens’ taxes go to the provinces, the possibility of reducing income tax or sales rates does not even occur unless we diminish the provincial share of the NFC award.
Pakistan has experienced slower economic growth compared to most other developing countries than the broadcast of the 7th NFC prize. This does not necessarily mean that the slower growth is due to the 7th NFC prize, but it seems an important factor.
This is mainly due to the fact that, in the last two decades, despite the younger and higher taxes, we are executing large fiscal deficits – and these deficits have put negative pressure on our current account and currency.
Since constant pressure, even a slight economic growth, forces the deficit of our running account to climb and crush our currency. We’ve seen these boom and quick-bust episodes many times in the recent past.
If you consider federal government spending, there are three large heads: exchange of revenue with the provinces, federal government spending and debt service. Since debt service cannot be reduced unless interest rates are reduced and do not pay would mean default, the only two heads left where we can reduce governments’ spending reduce the provincial transport and spending of the federal government.
Last year, the federal government garnered about 12 trillion Rs in taxes and was still a trillion deficit of RS8. Now, if the federal government wanted to bring the deficit to the end, it would have to increase no more trillion Rs, but other trillions of RS20s in taxes, because the first RS12 trillions of new revenue should go to the provinces. This would mean total taxes of 32 trillion Rs or more than 30% of GDP. This, of course, is neither possible nor desirable.
How should the NFC prize be reformed? The biggest problem with the 7th prize is not the total money going to the provinces, but the fact that for every new rupee coming to the federal government, the first 60 paisas must go to the provinces.
Therefore, it would be prudent to change the prize so that the existing money going to the provinces remain at the existing interest rate and the amount, but the federal government should maintain 80% of any increase in tax revenue.
BISP should be transferred to the provinces or if the federal government continues to manage it, the budget amount should come from the provinces.
At the same time, it is imperative for agricultural income to enter the federal tax net.
Some provinces have begun to tax international trade. This does not appear to be foreseen by the Constitution. The Commission should clarify this and also if customs duties should be part of the divisive pool.
The provinces, on the other hand, will discuss why the oil levy should not be part of the divisive pool. Finally, since the 18th amendment states that the next NFC prize may increase the provincial shares but not reduce them, while the new award is agreed, a new modification of the Constitution will also become necessary.
There are many issues that the new committee must discuss. I hope that the national interest is prevalent for parish and political interests.
Disclaimer: The views expressed in this piece are the same and do not necessarily reflect Geo.tv’s editorial policy.
The author is a former finance minister.
Originally published in The news
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