National Finance Commission (NFC) Award

Since 2015, multiple NFCs have been formed but failed to reach a consensus. The federal government often argues for a reduction in the provincial share (57.5%) to cover rising security and debt costs, while provinces refuse any reduction, citing Article 160(3A).

Due to the 'Inverse Population Density' criterion and the fixed percentage that doesn't decrease with population shifts, Balochistan receives the highest per capita transfer among the four provinces to compensate for its vast geography.

To maximize the amount available for the provinces, the federal government agreed to reduce its service fee (collection charges) for tax administration from 5.0% to just 1.0% in the 2010 7th NFC Award.

Under Article 160(4), once the NFC has made its recommendations, the President shall, by Order, specify the share of net proceeds of taxes to be given to the provinces. The President acts on the advice of the Prime Minister, but the Award itself is based on the commission's consensus.

Population is the heaviest weighted factor (82%) in the NFC formula. Therefore, any change in population data in a new Census (like the 2017 or 2023 Digital Census) drastically changes the financial shares of the provinces, making census results a sensitive political issue for the NFC.

The 2006 Interim Award was a presidential intervention. It started the provincial share at 41.5% with a mandate to increase it by 1% annually, reaching 46.25% by the end of the five-year cycle, setting the stage for the massive jump to 57.5% in 2010.

Straight transfers are based on the 'Point of Origin' principle (Article 161). If a province like Punjab produces very little natural gas compared to Sindh or Balochistan, its straight transfers from gas royalty will be significantly lower.

While Sales Tax on Goods is federal, Sales Tax on Services is provincial. The federal government (FBR) has often proposed a 'National Tax Agency' or a unified sales tax to bring services into the federal net for better collection, but provinces have resisted this to maintain their fiscal autonomy.

The FBR is the primary tax collection agency for the federal government. It collects the income tax, sales tax, and customs duties that form the bulk of the divisible pool shared with the provinces via the NFC.

Based on data used during the 2010 negotiations, Balochistan and certain regions of KP had the highest poverty indices. Consequently, they receive a larger relative share of the 10.3% allocated for 'Poverty and Backwardness'.

Federal critics argue that while 57.5% of resources go to provinces, the Center is left with 42.5% to pay for 100% of defense, 100% of national debt servicing, and federal administration, leading to a massive federal deficit while provinces often run surpluses.

As a requirement of the 7th NFC Award, the Federal Finance Minister presents a monitoring report every six months to show the actual tax collections and the exact amounts transferred to each province, ensuring accountability.

The 1991 NFC Award was reached during Nawaz Sharif's first term. It was significant for expanding the divisible pool and providing a better share to the provinces compared to the 1974 arrangement.

Khyber Pakhtunkhwa's share is 14.62% of the provincial pool. This is separate from the 1% 'War on Terror' grant which it receives from the total divisible pool before the vertical split.

While Governors may be consulted by the President during the appointment of provincial members (experts), they are not members of the Commission themselves. The core members are the five Finance Ministers (1 Federal + 4 Provincial).

The merger of FATA into KP has increased the province's population and land area, along with a massive need for developmental funding in the war-torn tribal regions. KP argues that its 14.62% share is no longer sufficient to cover these new responsibilities.

The 7th NFC Award in 2010 used the data from the 1998 Census, which was the latest officially notified census at that time. One of the reasons for the delay in the new award is the dispute over the 2017 and 2023 census results.

The entire net proceeds of customs duties (after deducting the 1% collection charge) are part of the divisible pool. These are then split 42.5% to the Center and 57.5% to the Provinces collectively.

The SBP manages the 'Federal Consolidated Fund' and the 'Provincial Consolidated Funds.' As the FBR collects taxes, the money is held at the SBP and then transferred to the provinces based on the NFC formula instructions from the Accountant General of Pakistan Revenues (AGPR).

Under the 'NFC (Amendment) Act' and constitutional conventions, the President has the power to extend the existing Award if a new consensus is not reached. This is why the 2010 Award is still in effect in 2024.