A GREAT deal of confusion is being stirred around the question of provincial allocations under the National Finance Commission award. A couple of things must be borne in mind when advancing suggestions or ideas about how the NFC ought to be changed. First, the funds being divided up under the NFC award do not belong to the federal government. They belong to the federation as a whole, which includes the federal government as well as the provinces. This is important because some people seem to think that the funds are the property of the federal government which is giving these to the provincial governments. This is not the case.
Second, the relationship between the centre and province in a federation is not that of a senior and junior partner. It is a relationship of equals. This is important because some people seem to think that the federal government should ask the provincial governments to explain what they are doing with the funds that are ‘given’ to them, and perhaps develop known performance metrics to measure outcomes and link future disbursements to success. The provincial governments, in a federation, are not accountable to the centre for anything. They are accountable to their voters.
To understand this better, it is important to go into a bit of history. Pakistan’s fiscal federalism was born out of the Government of India Act, 1935, which gave the provinces the right to collect all taxes on incomes, sales and production within their territory. The central government was to sustain itself on taxes on foreign trade and non-tax collections only. This was fairly standard practice in federations of that time, for example, Australia. It was also common for federating units to vertically delegate powers to levy and collect certain taxes to the central authorities against an agreement that such an arrangement would either be temporary, or the funds collected would be transferred back to the provincial authorities as per a formula.
These delegations of power happened for various reasons. In some countries, they happened to help the central authorities meet war expenses. In India this delegation happened to help meet the requirements of creating a national market, and in Pakistan it happened for helping create a national market and helping the centre meet the extraordinary burden of state making in the days following Partition.
Do the provinces have the right to ask where all the money poured into SOEs since 2009 has gone?
Needless to say, once delegated upwards, the powers to levy and collect these taxes were never returned. In all countries where this happened, this turned into a source of friction that was settled, often partially, through some sort of an arrangement. In Pakistan, such an arrangement never materialised, and this refusal to honour the provinces’ rights over their own resources became one of the points of friction in the wrangling between East and West Pakistan over the distribution and allocation of state resources. But since Pakistan was a dictatorship in those days, there was no way within the system for the aggrieved party (the eastern wing) to seek redressal. The rest, as they say, is history.
The matter was resolved in the 1973 Constitution, through the creation of the NFC mechanism, and the associated structures to deal with state resources. The Constitution created a divisible pool where all taxes collected via those heads that are supposed to belong to the provinces will be deposited. Once in the divisible pool, the resources were then to be transferred to all federating units — the centre and the four provinces — according to a formula developed consensually and updated every five years. There is, therefore, one Federal Divisible Pool into which all resources that belong to the federation as a whole are deposited. And there are five consolidated funds, one for each of the four provinces and one for the federal government, into which the resources of the divisible pool are transferred. Each unit owns the resources in their consolidated fund. All of them collectively own the resources in the divisible pool.
So it is wrong to think that the money collected under the taxes identified as part of the divisible pool are somehow the property of the federal government, even if the powers to levy and collect these taxes are with the federal government. And the Constitution ensures that ownership rights do not vest with any federating unit until after they have been transferred.
If the federal authorities demand results for the money that has been transferred to the provinces under the NFC award, then the provinces have the same right in reverse. So it is true that the provinces have failed in producing health and education improvements or in mobilising some new revenue heads like agriculture taxation. But the federal authorities have also failed in reforming the state-owned enterprises or in raising their tax-to-GDP ratio above 10 per cent. In FY24, for example, the government extended Rs1.586 trillion in fiscal support to the SOEs while they, in turn, contributed Rs367 billion in taxes.
Do the provinces have a right to ask where all the money poured into the SOEs over the years since 2009 has gone? Are these SOEs today powering Pakistan’s exports? Are they drivers of technological innovation? Is PIA an airline competitive with its counterparts in Turkey, Ethiopia or Thailand? Why does the federal government still carry these entities and their losses? Should the provinces demand performance-based indicators from the federal authorities for reforms in tax reform or SOE restructuring before agreeing to any federal allocations under the NFC award?
Let’s agree this would be a fruitless discussion between the centre and province. Neither is answerable or accountable to the other. They are both answerable to their voters (in theory anyways). And neither has the right to impose performance criteria on the other. If the federal authorities feel they are poorer after making all the NFC transfers, they should walk the hard road of tax reform rather than look to cannibalise the federation to secure their own survival.
The writer is a business and economy journalist.
Published in Dawn, December 4th, 2025
