The National Finance Commission (NFC) is a constitutional body in Pakistan tasked with ensuring a fair distribution of financial resources between the federal government and the provinces. It was established under Article 160 of the Constitution of Pakistan, making it an essential part of the country’s federal financial structure.
In simple terms, the NFC decides how taxes collected at the federal level (like income tax, sales tax, customs duties, and others) are shared among the federal government and the provinces. The goal is to promote equity, address provincial needs, and support balanced development across the country.
Why is the NFC Important?
The NFC ensures financial fairness in Pakistan by addressing the economic disparities between provinces. Its significance lies in:
- Promoting Equity: It ensures provinces with fewer resources or underdeveloped regions get their fair share.
- Strengthening Provincial Autonomy: By allocating funds directly to provinces, it empowers them to manage their own development and infrastructure.
- Building National Harmony: Fair distribution reduces tensions and builds trust between the federal and provincial governments.
How Does the NFC Work?
The NFC primarily focuses on the divisible pool, a collection of federal taxes. Here’s how it functions:
1. Revenue Collection:
The federal government collects taxes such as:
- Income Tax
- Sales Tax
- Customs Duties
- Federal Excise Duty
2. Revenue Distribution Formula:
The divisible pool is distributed among the provinces based on an agreed formula. Factors considered in this formula include:
- Population: Historically, this has been the primary factor.
- Backwardness: Provinces with higher poverty levels get additional funds.
- Revenue Generation: Provinces contributing more to federal revenue are compensated.
- Inverse Population Density: Areas with sparse populations receive extra resources due to logistical challenges.
3. The NFC Award:
The NFC meets periodically (ideally every five years) to revise the revenue-sharing formula. These discussions result in an agreement, called the NFC Award, which is approved by the President of Pakistan.
Examples of NFC’s Impact
1. Balochistan’s Development Boost:
Balochistan, despite being Pakistan’s largest province in land area, has a small population and low revenue generation. The NFC ensures it gets additional resources to address these challenges and promote development.
2. Punjab’s Share Based on Population:
Punjab, being the most populous province, traditionally receives the largest share of the divisible pool. However, recent awards have also considered other factors to make distribution fairer.
3. Sindh’s Revenue Contribution:
Sindh generates significant revenue for the federal government due to its industrial and port activities. The NFC formula acknowledges this and allocates a proportionate share back to the province.
Challenges in NFC Implementation
While the NFC is crucial for equitable resource distribution, it faces several challenges:
- Delayed Awards: Political disagreements among federal and provincial governments often delay new awards.
- Revenue Generation Conflicts: Provinces argue that they should have more control over the collection of taxes within their territories.
- Transparency Issues: Lack of clear mechanisms to track fund utilization creates inefficiencies.
- Evolving Economic Needs: The current formulas don’t fully address emerging financial challenges like urbanization or digital economies.
Key NFC Awards
7th NFC Award (2009)
This was a landmark award in Pakistan’s history:
- Reduced population weightage from 100% to 82%.
- Introduced backwardness, poverty, and revenue collection as additional factors.
- Allocated 56% of the divisible pool to provinces, increasing to 57.5% later.
- Provided Balochistan a significant increase in its share for development.
8th and 9th NFC Awards
These awards have faced delays due to political disagreements. The upcoming awards are expected to address modern economic realities, such as provincial contributions to the digital and services economy.
The Way Forward
The NFC plays a pivotal role in ensuring financial equity across Pakistan. To enhance its effectiveness:
- The federal and provincial governments must collaborate to finalize timely awards.
- Greater transparency is needed in fund utilization to build trust.
- The formula should adapt to new challenges like urbanization, climate change, and emerging industries.
By continuing to evolve, the NFC can be a powerful tool for national progress, ensuring every province has the resources needed to grow and thrive.