What is NFC Award?

The NFC award, National Finance Commission award, is the distribution of financial resources among the provinces of Pakistan by the federal government on annual basis.
Taxes are pooled and distributed: Certain types of taxes collected in each province are pooled, then redistributed according to the NFC formula. What taxes to include in the distribution pool and the distribution formula is a subject of debate.
Taxes included in the pool are (1) income taxes, (2) general sales tax, (3) wealth taxes, (4) capital gains taxes, and (5) custom duties.
Most Tax Receipts are collected from Punjab and Sindh. Almost all custom duties are collected at the Port of Karachi.

Background and History of NFC:

In 1971, Pakistan was cut into two by our enemies with the indirect support of our fellow Pakistaniís and hence we lost East Pakistan to Bangladesh. There are many reasons that can be attributed to the 1971 incident but one of the major one is the ďDistribution of ResourcesĒ among the provinces i.e East Pakistan and West Pakistan. Since East Pakistan was responsible for majority of our output, it was its right to get the major portion of it as well, however, it was not allowed to take when it actually owned and most of it was used in West Pakistan. This infuriated the Bangladeshi people and contributed towards their final revolt against the Government owned by West Pakistan.

It is worth mentioning here for the ready reference of our readers that Bangladesh i.e East Pakistan before 1971, was more populous then West Pakistan but it was still discriminated by the West Pakistan i.e current day Pakistan. At that time, the distribution of resources based on population was never raised by anyone since it would have resulted in greater share of East Pakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan.

Article 160(1) of 1973 Constitution:

NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be held at the intervals of five years. Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President may appoint after consultation with provincial Governors [Constitution of Pakistan (1973)]. The main charter of NFC is to recommend on the following [Pakistan (2006b)]:
(1) The distribution of specified taxes, duties between federation and provinces. (2) The disbursement of grants to provincial governments. (3) The borrowing powers exercised by federal and provincial governments. (4) Any other financial matter referred to commission.
There is a need for inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, environment, etc. to be taken into account for justifiable of resource distribution. Even if we look at our neighboring country India, various criteria are used for resource distribution from central to provincial governments. So, in order to achieve equity, such policies should be devised which take different aspects of development into its account while distributing the resources. The issue of resource distribution among federal and provincial governments never proved to be simple and is a much complex issue. But when we go through the history of NFC, it becomes obvious that the problem of resource distribution is never taken seriously.

Controversy on Sales Tax:
A peep into revenue distribution history of the sub continent reveals that sales tax was in exclusive domain of provincial governments before 1947. It was partly federalized to the extent of 50 per cent in 1948-49 budgets, the first of independent Pakistan, to meet the impact of massive refugee influx in Karachi which was then the federal capital.
it was in 1974 NFC award that sales tax was completely federalized and the noises made in Karachi were ignored. It declared population as the only criterion for distribution of revenue.

Previous Awards:
SINCE 1973 after the promulgation of a consensus constitution by an elected and popular government, there have been three national finance commission awards enforced in 1974, 1991 and in 1997. But the three NFCs constituted in 1979, 1984 and 2,000 failed to reach consensus and ended in a deadlock.
Of the three commissions that failed, two were formed in 1979 and in 1984 during the military rule of late General Zia-ul-Haq and the third one, the current NFC was formed in the year 2,000 after General Musharraf took over the government in October 1999. This NFC continued functioning after the October 2002 elections with some changes in its composition.
The first NFC award was given in 1974 by the elected government of late Z.A. Bhutto. This award set population as the only criterion for revenue distribution among the provinces. Custom duties, the main revenue earner was kept out of the divisible pool and the sales tax was completely federalized.
The second NFC award was given in 1991 by a political government of PML headed by Mian Nawaz Sharif. This NFC award recognized for the first time, the rights of the provinces on natural resources and the provinces were given royalty and gas development surcharge on oil and gas.
And the third NFC award was declared in February 1997 by a caretaker government of Farooq Ahmed Leghari and Prime Minister late Malik Meraj Khalid. It turned out to be the most controversial NFC award, though still operative, despite the expiry of its five- year term in 2002.

7th NFC Awards:
Location: Lahore Chairperson: Finance Minister Shaukat Train Duration of arguments: 3 days
Provincial share of the divisible pool would increase from the present 47.5 per cent to 56 per cent in the first year of NFC (2010-2011) and 57.5 per cent in the remaining years of the award under the vertical distribution of resources. He claimed that this share would virtually be over 60 per cent. During Musharraf regime, provinces were demanding for a 50% provincial share in the divisible pool.
The federal government has agreed to cut tax collection charges from 5.0 per cent to 1.0 per cent and this amount would also be added to the divisible pool. About the thorny issue of sales tax on services, he said the NFC recognized sales tax on services as a provincial subject and it might be collected by the respective provinces.
The multiple indicators under 7th NFC Award
Multiple Indicators Weights
1 Population 82.0%
2 Poverty/Backwardness 10.3%
3 Revenue Collection/Generation 5.0%
4 Inverse Population Density 2.7% (Urban-Rural)
Out of 56 % provincial share of total divisible pool, financial resources will be distributed among the provinces in following ration.
Punjab 51.74% Sindh 24.55% Khyber-Pakhtunkhwa 14.62% Balochistan 9.09%