Distribution of Financial Resources After 18th Constitutional  Amendment – 7th NFC Award

As a result of the 18th Constitutional Amendment, the seventh National Finance Commission (NFC) award was announced in 2010. It was generally praised for successfully persuading Punjab to accept many factors rather than just population for the distribution of financial resources from the federation.  The NFC award in 2010 was welcomed as a great step toward granting financial autonomy to provinces, their long-standing desire, and their share, which climbed dramatically as a result. This was only the fourth conclusive award, following those in 1974, 1991, and 1997.

The 18th constitutional amendment made sure that the share of provinces decided in a previous NFC award was final and could not be disputed by any government with less than a two-thirds majority in parliament. This made sure that the award could not be rolled back, which is the number needed to change the constitution.

Two intended aims of the seventh NFC award and eighteenth amendment have yet to be met

  • One percent annual growth in the tax to GDP ratio, which would have automatically expanded the pie, moderating the federal government’s desire for its lost part.The tax-to-GDP ratio is now less than 10%
  • Devolution of several subjects to provinces, including agriculture, education, and health, remains a pipe dream, as provinces have not strengthened their capacity to deliver on these devolved subjects, and the federal government has not closed these ministries or departments, despite the formation of an inter-provincial coordination ministry at the federal level. To put it in historical context, no administration has undertaken policies that would have accomplished these two aims since 2010.

Regardless of the two unmet targets, it is worth noting that the federating units began to collect taxes on services, a provincial subject, which were previously collected by the Federal Board of Revenue (FBR) for a 2% fee, with the proceeds going into a divisible pool to be distributed according to the pre-seventh award formula (with Punjab a clear winner as population was the major criteria). It’s not surprising that Sindh took the lead because at the time, its main negotiator insisted that the state collect its own sales tax on services.

Since then, all federating units have established their own revenue collection boards or authorities, and collections under this heading have become more important since they have not only broadened their scope but also increased their capacity. What’s troubling is that, while all provinces have shown they can tax and collect taxes on services, none of them have taxed farm income, which is a provincial matter according to the constitution.

The reason is well-known: wealthy landlords who don’t live in the country are still overrepresented in our provincial and federal assemblies. They also vote against any attempt to tax their incomes, no matter if the country is run by a military dictator or a democratic government.

To sum up, now that the architect of the seventh NFC award is back in charge, it is hoped that he will pay close attention to the persistent mitigating factors that are impeding the NFC improvements he predicted in 2010. There is a need to begin conversations with the federating units to iron out all difficulties before discussing the next NFC award. Unfortunately, this is improbable, not only due to the current situation of the economy but also due to the visibly hostile political climate.

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Usman Rasheed & Co Chartered Accountants is a leading financial advisory and audit firm in Pakistan, having offices in Islamabad, Quetta, Lahore, Karachi, Peshawar & Gilgit. The firm is providing Audit, Tax, Corporate, Financial, Business, Legal & Secretarial Advisory services and other related assistance to local and foreign private, public and other organizations working in Pakistan

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