THE Quetta meeting of the National Finance Commission last week has made a marked progress on the outstanding issues related to vertical and horizontal distribution of financial resources.
In a major departure from its past stand, Punjab has also agreed upon adoption of a formula based multiple criteria for distribution of the federal tax revenues between the provinces. But the more difficult part – determination of the weightage of different indicators in the multiple criteria formula for horizontal distribution of federal divisible pool funds – is yet to come.
The major achievements made at the Quetta meeting included consensus over distribution of gas development surcharge (GDS) and gas royalty among the provinces. The NFC has recommended equalisation of GDS, gas royalty and its well-head price in order to remove reservations of Balochistan. After equalizing GDS, royalty and well-head price of gas, Balochistan would be the main beneficiary as it would get additional funds to the tune of more than Rs3 billion from gas development surcharge annually.
The federal government has pledged that it would not allow discrimination against Balochistan on the issue of gas development surcharge in future. The NFC has also recommended payment by centre of arrears on account of gas development surcharge since 2002 to Balochistan. About arrears from 1960 to 2001, the meeting observed that it did not come under the purview of the NFC. But it has recommended that the issue should be made part of the Balochistan package to be announced by the federal government.
The other major stride made at the meeting related to the federal government’s agreement to transfer sales tax on services to the provinces. Finance Minister Shaukat Tarin who chairs the NFC, was reported to have told the newsmen that the meeting had agreed to concede sales tax on services and excise mode to the provinces after hearing the stance of Sindh, the federation and an independent expert. “Sales tax on services is a constitutional right of the provinces,” he was quoted to have said.
Sindh’s technical member Kaiser Bengali described the transfer of provincial sales tax on services to the provinces as a big achievement. He said the provincial sales tax would be collected by the federal government and transferred directly to the provinces. But a Balochistan official said, the mechanism of transfer of provincial sales tax to the provinces was yet to be determined.
Bengali conceded that the transfer of the provincial sales tax, which was made part of the federal divisible tax pool in 2001/02 would hurt Balochistan and the NWFP. He, however, said, “they will be compensated for their losses through an increase in their formula-based share in the pool”. Apart from equalisation of GDS, gas royalty and well-head price, Balochistan is also demanding that its share in the divisible pool should be enhanced as it no longer wanted to live on grants and subventions.
Its officials are hopeful that the removal of provincial sales tax on services from the divisible pool would not cause financial losses to their province or to the NWFP as the federal government would agree to increase the size of the divisible tax pool and cut its share to transfer more funds to the federating units. “We want that the size of the pool should be enlarged by, for example, making proceeds of petroleum levy a part of it. The increased size of the pool plus adoption of multiple criteria (including area as one indicator) for its horizontal distribution will help to increase our formulabased share in the federal funds. That will remove the stigma that we (Balochistan) are living on grants and subventions,” a senior official in the Balochistan finance department said. The most crucial development achieved at the Quetta pertained to Punjab’s departure from its old approach on horizontal distribution of national resources on the basis of population alone. The provincial representatives have for the first time ever informed the commission that the country’s largest province is willing to accept multiple criteria – population, area, backwardness, poverty and revenue generation, for distribution of federal divisible pool funds among the four federating units. That will make the division of funds between the provinces much more equitable and help to defuse tensions between the provinces and curb anti-Punjab sentiments in the smaller provinces on this count.
Tarin has claimed that “all the provinces had adopted an elastic and positive attitude while discussing horizontal distribu tion of the financial resources, demonstrating the provincial and the central governments’ seriousness to resolve all national issues through consensus”.
Even though the Punjab government has agreed to widen the scope of the horizontal distribution formula, experts argue that the determination of weightage of each factor would be the hard part of the NFC negotiations. A sub-committee of the NFC headed by the federal finance secretary and provincial finance secretaries as its members has already been tasked to determine the weightage for every criterion and submit its findings to the commission before its next meeting in Peshawar on October 29 and 30.
The Peshawar meeting is also expected to come up with some sort of announcement on the issue of net hydro power profits between the NWFP and Islamabad.
According to the Punjab government of ficials privy to the commission’s deliberations, Punjab had agreed to have a multiple criteria for resource distribution between the provinces. But, they claimed, the Sindh government was demanding that revenue generation should be given weightage of more than five per cent.
“That is not acceptable to Punjab. Revenue generation should not be given more than two per cent weightage in the horizontal distribution formula. That was what Sindh had demanded in the previous NFC negotiations under the Shaukat Aziz government,” a Punjab cabinet source said.
Bengali said the weightage of each criterion was yet to be decided. “We don’t know the final outcome. The weightage of each criterion will depend on how the numbers fall.” He was hopeful that the NFC meeting in Peshawar would find a consensual solution to the issue of horizontal distribution. We keep our fingers crossed!
In a major departure from its past stand, Punjab has also agreed upon adoption of a formula based multiple criteria for distribution of the federal tax revenues between the provinces. But the more difficult part – determination of the weightage of different indicators in the multiple criteria formula for horizontal distribution of federal divisible pool funds – is yet to come.
The major achievements made at the Quetta meeting included consensus over distribution of gas development surcharge (GDS) and gas royalty among the provinces. The NFC has recommended equalisation of GDS, gas royalty and its well-head price in order to remove reservations of Balochistan. After equalizing GDS, royalty and well-head price of gas, Balochistan would be the main beneficiary as it would get additional funds to the tune of more than Rs3 billion from gas development surcharge annually.
The federal government has pledged that it would not allow discrimination against Balochistan on the issue of gas development surcharge in future. The NFC has also recommended payment by centre of arrears on account of gas development surcharge since 2002 to Balochistan. About arrears from 1960 to 2001, the meeting observed that it did not come under the purview of the NFC. But it has recommended that the issue should be made part of the Balochistan package to be announced by the federal government.
The other major stride made at the meeting related to the federal government’s agreement to transfer sales tax on services to the provinces. Finance Minister Shaukat Tarin who chairs the NFC, was reported to have told the newsmen that the meeting had agreed to concede sales tax on services and excise mode to the provinces after hearing the stance of Sindh, the federation and an independent expert. “Sales tax on services is a constitutional right of the provinces,” he was quoted to have said.
Sindh’s technical member Kaiser Bengali described the transfer of provincial sales tax on services to the provinces as a big achievement. He said the provincial sales tax would be collected by the federal government and transferred directly to the provinces. But a Balochistan official said, the mechanism of transfer of provincial sales tax to the provinces was yet to be determined.
Bengali conceded that the transfer of the provincial sales tax, which was made part of the federal divisible tax pool in 2001/02 would hurt Balochistan and the NWFP. He, however, said, “they will be compensated for their losses through an increase in their formula-based share in the pool”. Apart from equalisation of GDS, gas royalty and well-head price, Balochistan is also demanding that its share in the divisible pool should be enhanced as it no longer wanted to live on grants and subventions.
Its officials are hopeful that the removal of provincial sales tax on services from the divisible pool would not cause financial losses to their province or to the NWFP as the federal government would agree to increase the size of the divisible tax pool and cut its share to transfer more funds to the federating units. “We want that the size of the pool should be enlarged by, for example, making proceeds of petroleum levy a part of it. The increased size of the pool plus adoption of multiple criteria (including area as one indicator) for its horizontal distribution will help to increase our formulabased share in the federal funds. That will remove the stigma that we (Balochistan) are living on grants and subventions,” a senior official in the Balochistan finance department said. The most crucial development achieved at the Quetta pertained to Punjab’s departure from its old approach on horizontal distribution of national resources on the basis of population alone. The provincial representatives have for the first time ever informed the commission that the country’s largest province is willing to accept multiple criteria – population, area, backwardness, poverty and revenue generation, for distribution of federal divisible pool funds among the four federating units. That will make the division of funds between the provinces much more equitable and help to defuse tensions between the provinces and curb anti-Punjab sentiments in the smaller provinces on this count.
Tarin has claimed that “all the provinces had adopted an elastic and positive attitude while discussing horizontal distribu tion of the financial resources, demonstrating the provincial and the central governments’ seriousness to resolve all national issues through consensus”.
Even though the Punjab government has agreed to widen the scope of the horizontal distribution formula, experts argue that the determination of weightage of each factor would be the hard part of the NFC negotiations. A sub-committee of the NFC headed by the federal finance secretary and provincial finance secretaries as its members has already been tasked to determine the weightage for every criterion and submit its findings to the commission before its next meeting in Peshawar on October 29 and 30.
The Peshawar meeting is also expected to come up with some sort of announcement on the issue of net hydro power profits between the NWFP and Islamabad.
According to the Punjab government of ficials privy to the commission’s deliberations, Punjab had agreed to have a multiple criteria for resource distribution between the provinces. But, they claimed, the Sindh government was demanding that revenue generation should be given weightage of more than five per cent.
“That is not acceptable to Punjab. Revenue generation should not be given more than two per cent weightage in the horizontal distribution formula. That was what Sindh had demanded in the previous NFC negotiations under the Shaukat Aziz government,” a Punjab cabinet source said.
Bengali said the weightage of each criterion was yet to be decided. “We don’t know the final outcome. The weightage of each criterion will depend on how the numbers fall.” He was hopeful that the NFC meeting in Peshawar would find a consensual solution to the issue of horizontal distribution. We keep our fingers crossed!
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