The National Finance Commission (NFC) on Thursday formed more than half-a-dozen committees to determine a new formula for the distribution of financial resources among the Centre and the four federating units, including a working group to address concerns over the mandate of the 10th NFC.

In its maiden meeting, the NFC members underscored the need for limiting discussions within the Constitutional parameters, as the forum faces the uphill task of finalising the next award after a gap almost 11 years.

“We have given comfort to the provinces that we will strictly adhere to the constitutional requirements,” said Finance Minister and Chairman of 10th NFC Dr Abdul Hafeez Shaikh.

The commission has the mandate to decide a new five-year award since the last award expired six years ago. Since then the resources are distributed on an ad hoc basis among the Centre and the four provinces.

The finance minister said that the provinces raised the issue of terms of reference (ToRs) of the NFC, and to address the issue a subgroup was created to clarify the ToRs on financing projects of the national importance.

The last award, finalised in 2010, had increased the share of the provinces to 57.5%. The federal government has been complaining about limited fiscal resources since then, although the provincial shares had been increased on the understanding that the FBR would increase its tax collection.

Under the 7th NFC, the provinces get 57.5% of the total taxes collected by the Federal Board of Revenue – a ratio that the Centre says is too high, while the provinces argue that their financial positions warrant more resources.

“The only solution to the precarious fiscal situation is that the size of the pie has to be increased,” said, Sindh Chief Minister Murad Ali Shah after the NFC meeting.

The meeting formulated seven subgroups, with specific tasks on the basis of the ToRs of the commission with the directive to present their recommendations before the forum in due course of time.

The subgroups on the National Economic Development and Vertical distribution of resources would be chaired by Federal Finance Secretary Kamran Ali Afzal. The subgroup on horizontal distribution of resources would be chaired by Balochistan Finance Minister Zahor Buledi.

The subgroup on meeting cost of erstwhile Fata development would be headed by K-P Finance Minister Taimur Saleem Jhagra. The subgroup on harmonisation of taxes would be headed by the Punjab finance minister and Straight Transfer subgroup will be chaired by the Sindh chief minister.

Shaikh said that the provinces had also given recommendations to discuss the issue of a rising pension bill and better coordination between the federal and provincial tax authorities. “All the provinces agreed that the size of the pie should be increased to address the precarious fiscal situation at the Centre and in the provinces,” Shaikh added.

The finance minister said that the NFC has been mandated by the Constitution to recommend to the president for amicable distribution of financial resources among the federation and the provinces of the net proceeds of the taxes.

The participants discussed the need for harmonisation of revenue collection operations at the levels of federal and provincial governments to broaden fiscal space and streamline the revenue collection.

“It would be unjust to say that the provincial governments have surplus cash,” said Sindh Chief Minister Shah, adding: “The fiscal position of the provinces is as precarious as of the federal government.”

Shah added that the provincial government often faced the issue of paying salaries on the last date of the month. “The only solution to the current fiscal problems is to increase the size of the pie by increasing the federal tax collection,” said Shah. “Under the Constitution, the provincial share in the federal divisible pool cannot be less than the last award,” said the chief minister.

“The FBR’s tax collection is almost at the level of last two years, which created fiscal problems for the provinces,” he continued. “The federal tax collection increased 6% this year, which was far less than the 15% growth recorded by the Sindh Revenue Board.”

At the end of the PML-N term, the FBR’s collection as Rs3.842 trillion that increased to just under Rs4 trillion in two years. “Balochistan has spent an additional Rs250 billion on maintaining law and order and its share should be increased to 15% of the resources being distributed among the provinces,” said Balochistan finance minister Buledi.

Buledi said that the existing share of 9.09% was not sufficient to meet the development needs of the largest province in terms of territory.

The federal government raised the issue of its limited financial resources and sought the support of the provinces. “The Balochistan government has objected to the demand of sharing the expenditure burden of the federal government,” said Dr Kaiser Bengali –technical member of Balochistan.

“All the stakeholders have to sit tighter to find a solution to the fiscal problems being faced by the country,” said K-P Finance Minister Taimur Jhagra. He urged all the provinces to share the cost of the erstwhile Fata development package.