What are NFC Awards? An overview of distribution of taxes between Federation and Provinces

1. Introduction

1.1  Constitution of Pakistan has empowered both Federal and provincial governments to legislate for collection of their revenues in certain jurisdictional manner. Therefore, it is essential to know who authorises which revenues. In this blog we will discuss the mechanism for determination of distribution of revenue among the Federation and Provincial governments.

2. National Finance Commission - NFC

2.1 The president within 6 month of his commencing day and thereafter at intervals not exceeding 5 years shall constitute a National Finance Commission (NFC) which consists of Ministry of Finance for Federal Government and Minister of Finance for Provincial Governments and such other person as may be appointed by the president.

2.2 The core responsibility of National Finance Commission is to recommend the president as to the following matters:

• Distribution of the tax collected within the federal and provincial governments;

• Distribution of grants by the Federal government to the provincial governments;

• Exercise the borrowing powers given to the Federal Government and provincial government by the constitution;

• Any other matter relating to finance refer to the commission by the president;

The above-mentioned taxes include the following:

• Tax on income including corporate tax;

• Taxes on sale and purchase and production of goods and supplies whether manufactured,  consumed, exported or imported;

• Export duties as specified by the president;

• Any other tax as specified by the president;

2.3 It is important to note that any share of provinces prescribed subsequently shall not be less than the its share given by the National Finance Commission in any of its previous awards.

2.4 After the recommendation of National Finance Commission the president shall by an Order specify in accordance with the laid recommendation the specific shares of the proceeds to be allocated to each province and that share shall not become part of Federal Consolidated Fund.

2.5 The president is not bound to follow complete recommendations of the National Finance Commission and is authorized to amend and modify the recommendations relating to the distribution of revenues between Federal Government and Provincial Government as he may deem necessary.

2.6 Notwithstanding Article 78 the proceeds of federal excise on natural gas, oil or any undertaking established or administered by federal government from the bulk generation of power at a hydroelectric station collected by the Federal government shall not form part of Federal Consolidated Fund and shall be transferred to the provinces respectively in which the well of natural gas, oil or hydroelectric station is situated.

2.7 No bill law amendment with regard to taxability and division of revenues to provinces shall be introduced in the national assembly by National Finance Commission without prior sanction of the president as per the provisions of Article 162.

2.8 The provincial assembly may impose taxes up to the limit as specified by the Parliament on persons engage in professions, trade or employment under the provisions of Article 163.

2.9 Both the federal and provincial governments are authorized to make any grant of aid from the consolidated fund of the revenue collected under the provisions of Article 164.

2.10 Both federal and provincial governments are exempted from tax with respect to the property or income held by them in respect of jurisdiction that is to say that the federal government shall not be liable to pay any sort of tax on its property or income situated in any province and vice versa no province shall be liable to pay tax in respect of its property liable to taxation under act of parliament as per the provisions laid down in article 165. However nothing in the said article shall prevent the imposition of fees for services rendered.

3.  FEDERAL LEGISLATIVE LIST

3.1 Federal Legislative List describes jurisdictions whereby Federal Government is empowered to legislate regarding collection of revenue. We will only discuss the areas which relate to taxation.

3.2 Following entries in the Federal legislative list as contained in the Constitution of Pakistan relates to taxes:

• Duties of customs, including export duties.

• Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics;

• Taxes on income other than agricultural income;

• Taxes on corporations.

• Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services.

• Taxes on the capital value of the assets.

• Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.

• Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of any one or more of them.

• Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights.

4. Powers of the Provinces to legislate on taxes

4.1 All taxes other than the mentioned in above list of Federal legislative list as contained in the Constitution of Pakistan are covered in the scope of legislation of Provinces. Accordingly, various types of taxes are introduced by the Provinces:

• Agriculture income tax

• Sales tax on services

• Taxes on transfer of immovable property

• Professional tax

• Tax on luxury houses

• Tax on registration of luxury vehicles etc.

• Property tax