NFC Award

The NFC Award or National Finance Commission Award, is the distribution of financial resources among the provinces of Pakistan by the federal government on an annual basis. Certain types of taxes collected in each province are pooled, then redistributed according to the NFC formula. What taxes to include in the distribution pool and the distribution formula is a subject of debate. Pakistan has had five NFC awards formulas. The Fifth NFC Award, adopted in 1997, was supposed to be valid for five years but failure to reach agreement on a sixth has meant that the fifth is still in operation.

Taxes included in the pool are (1) income taxes, (2) general sales tax, (3) wealth taxes, (4) capital gains taxes, and (5) custom duties. The inclusion of custom duties started with the 1997 award. In the 1991 award custom duties had gone exclusively to the federal government. Collections for the Worker Welfare Fund remain in the province where they are collected. Resource royalty is collected by the federal government and distributed to the provinces based on independent agreements.

In principle the 1997 award specifies that 63% of the pooled taxes will go to the federal government and 37% will be distributed to the provinces. This was a major change from the 20% federal and 80% provincial split under the 1991 award. However the inclusion of custom duties that had previously been 100% federal required an increase in the federal share.

Most Tax Receipts are collected from Punjab and Sindh. Almost all custom duties are collected at the Port of Karachi. Most of the pooled taxes in the 1997 Award are collected in Sindh province. Hence the NFC award redistributes taxes from Sindh to the rest of Pakistan. Based on the average of the years 1997 through 2000, the approximate percentages of pooled taxes collected by each province are 65% Sindh, 25% Punjab, 7% Khyber-Pakhtunkhwa, and 3% Balochistan. The approximate actual distribution of pooled taxes to the provinces and to the federal government is 9% Sindh, 23% Punjab, 6% Khyber-Pakhtunkhwa, 2% Balochistan, and 59% Federal.

A new NFC Award can not be announced because the four provinces have failed to develop consensus. Consensus has not been reached because Punjab province insists resource distribution on the basis of population alone whereas the other three province, namely Khyber-Pakhtunkhwa, Sindh and Balochistan demand giving importance to the revenue generation by each province, level of poverty in smaller provinces and other related factors as well, while distributing the national resources among provinces through National Finance Commission.

Finance Minister Shaukat Tarin stated in August 2009, that population won't be the only parameter used in calculating the next NFC award. For the distribution of the new award, factors such as inverse population density and poverty have also been kept in mind.