A MAJOR confusion is brewing over the issue of provincial allocations under the National Finance Commission’s allocation. A couple of things should be kept in mind when coming up with suggestions or ideas on how NFC should be changed. First, the funds distributed under the NFC award do not belong to the federal government. They belong to the federation as a whole, which includes both the federal government and the provinces. This is important because some people seem to think that the funds are the property of the federal government which gives them to the provincial governments. This is not the case.
Secondly, the relationship between the center and the 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 provincial governments to explain what they are doing with the funds they are “given,” and perhaps develop known performance metrics to measure results and link future disbursements to success. Provincial governments, in a federation, are not accountable to the center for anything. They are accountable to their voters.
To understand this better, it is important to delve a little into history. Pakistan’s fiscal federalism was born from the Government of India Act of 1935, which gave provinces the right to collect all taxes on income, sales and production within their territory. The central government had to be supported only by taxes on foreign trade and non-tax collections. This was fairly standard practice in federations at the time, for example in Australia. It was also common for federated units to vertically delegate powers to collect certain taxes to central authorities against an agreement that such an arrangement would be temporary or the funds collected would be transferred back to provincial authorities according to a formula.
These delegations of power occurred for several reasons. In some countries, they helped central authorities cover war expenses. In India, this delegation helped meet the requirements of creation of a national market, and in Pakistan it helped create a national market and helped the center meet the extraordinary burden of state creation in the post-partition days.
Do the provinces have the right to ask where all the money invested in state-owned companies since 2009 has gone?
Needless to say, once delegated upwards, the powers to collect these taxes were never returned. In every country where this happened, it became a source of friction that was resolved, often partially, by some kind of agreement. In Pakistan, such an agreement never materialized, and this refusal to respect the rights of the provinces over their own resources became one of the sticking points in the disputes 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 redress. The rest, as they say, is history.
The issue was resolved in the 1973 Constitution, through the creation of the NFC mechanism and associated structures to manage state resources. The Constitution created a divisible fund where all taxes collected through those heads that are supposed to belong to the provinces will be deposited. Once in the divisible fund, the resources had to be transferred to all federated units (the center and the four provinces) according to a formula developed by consensus and updated every five years. There is, therefore, a Divisible Federal Fund in which all the 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, to which the resources of the divisible fund are transferred. Each unit owns the resources of its consolidated fund. They all collectively own the resources of the divisible fund.
Therefore, it is mistaken to think that the money collected under the taxes identified as part of the divisible fund is in any way property of the federal government, even if the powers to levy and collect these taxes belong to the federal government. And the Constitution guarantees that property rights do not vest in any federative unit until they have been transferred.
If federal authorities demand results on the money transferred to the provinces under the NFC award, the provinces have the same right in reverse. Therefore, it is true that the provinces have failed to produce improvements in health and education or mobilize some new revenues, such as agricultural taxes. But federal authorities have also failed to reform state-owned enterprises or raise their tax-to-GDP ratio above 10 percent. In FY24, for example, the government provided Rs 1,586 trillion in fiscal support to state-owned enterprises, while they, in turn, contributed Rs 367 billion in taxes.
Do the provinces have the right to ask where all the money invested in state-owned companies over the years since 2009 has gone? Are these state-owned enterprises driving Pakistan’s exports today? Are they drivers of technological innovation? Is PIA a competitive airline with its counterparts in Türkiye, Ethiopia or Thailand? Why is the federal government still burdened with these entities and their losses? Should provinces require federal authorities to require performance-based indicators for tax reforms or restructuring of state-owned enterprises before accepting any federal allocation under the NFC award?
Let us agree that this would be a fruitless discussion between the center and the province. Neither is responsible or accountable to the other. Both are accountable to their voters (at least in theory). And neither has the right to impose performance criteria on the other. If federal authorities feel they are poorer after making all the NFC transfers, they should take the difficult path of tax reform instead of seeking to cannibalize the federation to ensure their own survival.
The author is a business and economic journalist.
khurram.husain@gmail.com
X: @khurramhusain
Published in Amanecer, December 4, 2025.
