Principles and proposals
Way forward for a new and just NFC award
First things first
- This piece of writing does not aim to involve itself with a long-form discussion of the complex issues, such as population, poverty/backwardness, or recently proposed performance-based criteria regarding the new National Finance Commission (NFC) award being debated in various circles. Its focus is on the consensus that needs to be built around a new formula for the next award.
- In addition, it solely dwells on evolving a way forward by setting certain principles on which the new NFC award may be deliberated and agreed upon.
- Let it be known from the outset that the writer believes in autonomous individuals and autonomous communities and, by extending this principle further, believes in maximum provincial autonomy. It is in this spirit that solutions are proposed.
How this line of thought ensued
In July 2017, an Islamabad-based think tank, Policy Research Institute of Market Economy (PRIME Institute), held a meeting, and I was part of it. It was a working group that deliberated on the dynamics of the NFC awards. I was merely an observer participant.
During the proceedings, I expressed my astonishment at the principle on which the NFC was built. I asked, “Why are the larger provinces required to provide for Balochistan and KPK? What is the principle that obliges Punjab and Sindh to share their revenue with Balochistan and KPK? Is this a welfare principle? Or is it a charity principle? Why is it so?
To this, Dr Kaiser Bengali, who was a member of the working group, explained that ‘fiscal equalization is inherent in fiscal policy and is recognized as public finance theory. It does not need to be justified.’ [See the minutes/report of the working group.]
I differed and proposed that there should be an economic principle, a rational principle that could make those responsible and accountable to whom is given, and fiscal equalization must be based on such a principle.
Two fundamental principles
Since then, I have been thinking on it.
Though the debate on the NFC award was triggered when the process of the most recent census (March-May 2023) began, the moment its results were made public, the controversies boiled over. In August 2025, the president constituted the 11th NFC award, and after that, the NFC debate is still raging with no meeting of the commission held to date.
One thing that this debate misses is the principles. There is almost no talk of the fundamentals on which a new NFC award is to be based. In a political sense, there is too much noise on the issue of provincial autonomy, especially in and from Sindh. There are justified concerns regarding the rollback of the 18th Amendment, which expanded provincial autonomy.
Under these circumstances, it is necessary to reiterate and adhere to the fundamental principles.
First fundamental principle
Only the citizens of a province have the right to the taxes they pay.
This means that the taxes paid by the citizens of a province will be spent for the benefit of the citizens of that province only.
Second fundamental principle
When someone hires a service from someone else, he pays for it.
Likewise, if a province hires a service from another province, it will pay for it. This is the same as in other cases. If a province hires a service from the federal government or the federal government hires a service from a province, they will pay them.
Basing the new NFC award on these two fundamental principles may resolve the controversies raging around the issue of provincial autonomy and pacify resentful sentiments for a long time to come.
Nawaz Sharif and the charity principle
The PMLN chief, Nawaz Sharif, believes that the NFC Award is a constitutional right, not charity. [See The News International, 13 December 2025]
This hints at the doubts Nawaz Sharif may have in the back of his mind. Since he considers the NFC award a constitutional right, it may be argued that a constitutional right is a right by virtue of being part of the constitution. If it is amended or repealed altogether, it will not remain a constitutional right the same way it used to be, or it will no longer be a right.
It is evident that the substance of the NFC awards has been derived from the principle of charity. It may be mitigated by terming it a brotherhood principle. That is, the way a person helps his brother, friend, or relative without charging any fee in pecuniary terms.
However, it is different from the matters happening between brothers, friends, or relatives; it is geographical political entities, the provinces, and it involves a huge amount of money, the tax money, and it belongs to the people who paid it. And they were paid for certain specific purposes.
For the sake of argument, I propose that it may be resolved by recourse to the will of the people. If the people of a province in a referendum give their consent that this amount may be given to this province or that province, then it is acceptable. Otherwise, the political representatives of the people have no mandate to dole out the money collected from the citizens of a province as taxes for certain other purposes.
The issues being debated around the new NFC award include one that stipulates amendments to the Constitution. Therefore, the constitution may be amended, which will provide for the following based on the above-stated two fundamental principles.
Another anti-18th Amendment and anti-7th NFC award ploy
There was a news item to the effect that the ‘federal government wants to exclude customs duties from the purview of the divisible pool, say sources.’ [See The Express Tribune, 16 December 2025]
This ploy by the federal government aims to defy the first principle.
In principle, the customs duties collected within a province belong to the citizens of that province alone. Why does the federal government lay claim to that collection? This is against the spirit of both the 18th Amendment and the 7th NFC Award.
The only claim that the federal government lays claim to is the amount of fee that it needs to be paid for the services it rendered to a province or all four provinces. In this case, the federal government collected the customs duties on behalf of the provinces, and it may charge a fee only and nothing else.
The shape of the new NFC award
The fundamental principle on which the 7th NFC award was based, and which is still operative, is the charity principle or the brotherhood principle. The provinces from which larger amounts of revenue were collected were made to pay or were bound to pay to other provinces from which smaller amounts of revenue were collected.
This disincentivized immeasurably and gave rise to many political ills. The higher numbers for the population of a province were claimed, and the results of a population census were always controversially debated. This increased the already huge distrust, and it may be argued that it helped put the family planning efforts on the backburner and hindered the planning for the infrastructure.
The havoc that the criteria of poverty/backwardness may have played is open for both empirical research and freefall imagination!
Most importantly, the huge amounts that the provinces with smaller amounts of revenue received were spent without any consideration given to the way it was earned by the people of another province and paid as taxes. It was a free lunch!
One may like to dive into the hundreds of billions of rupees that brought no infrastructure or development to the people of Balochistan, for example. However, this is not the argument. It is only one of many consequences.
Pay for using someone else’s money
This needs to be changed. The new NFC award may be built on the basis of new fundamental principles: Pay for using someone else’s money.
That is, if province X provides an amount of money to province Y, province X has the right to charge a fee. Say it is an interest. It is acceptable in whatever form it acquires. Province Y has all the obligations to pay the fee agreed upon mutually. Now, province Y is free to use this money carelessly or responsibly. However, it must pay the fee and the original amount.
The same principles apply to all dealings between the provinces and between the federal government and a province.
That is, if a province renders a service or sells a good to another province or the federal government, the latter will have to pay the agreed-upon fee for the service or the price of the good. Likewise, if the federal government renders a service or sells a good to a province, it has all the right to receive the agreed-upon fee or price, as the case may be. Nothing is for free!
As far as the determination of the fee is concerned, it is a matter to be negotiated mutually between the two or more parties and decided by them only.
Imaginarily, it may be as little as 0.1% or as a party deems fit. Alternatively, it may be as high as the availability of money with one party is concerned, or it may depend on how eagerly one party needs it, that is, the dynamics of the market. Or it may be influenced by the values and culture of one party that sells its money or the party that wants to buy someone else’s money.
This new mechanism requires entirely different articles compared to the present ones to be incorporated into the Constitution and substantial amendments to the existing articles.
No doubt, a widespread campaign spearheaded by civil society and the media is a sine qua non so that this sort of revolutionary NFC award is negotiated and agreed upon by and between the provincial and federal governments.
The case of foreign debt and defence expenditure
One party to the NFC debate in the newspapers and WhatsApp groups raises two crucial issues and challenges the existing formula under which the federal government retains 42.5% of the divisible pool and disburses the remaining 57.5% among the provinces according to a pre-set criteria.
They ask how to cater to foreign debt and defence expenditure.
Foreign debt
Given the acceptance of the two fundamental principles, the resolution of both issues requires no superintelligence and is far easier if the two fundamental principles are used as guiding principles.
For the sake of analysis and convenience, it may be supposed, and justifiably so, that an amount of ‘FD’ foreign debt must have been taken verily for a geographical part of the country; no doubt, other than the areas of Gilgit-Baltistan and Azad Jammu and Kashmir (in their case, that debt will be considered their debt). That is, that part of the foreign loan was meant for a part of this or that province out of the four provinces. Part of the foreign loan will have to be transferred to the books of that province. This will include interest payments and service charges.
In the same manner, every part of the loan may be disbursed and allocated where it is due and then is thus retired.
The loans that the federal government contracted and used for its own projects and institutions, such as the Federal Bureau of Revenue (FBR), will remain for the federal government to take care of.
Defence expenditure
Defending the geographical boundaries of the country is an important part of the budget that the federal government prepares annually. Presently, the budgetary allocation for defence expenditure is made by the federal government out of its share from the divisible pool, and it stands at 42.5%. It is objected that the two areas, foreign debt and defense, consume most of the money that comes to the share of the federal government.
I believe that there is no need to go into the statistical details of that issue. Not only the spirit of the 18th Amendment and the 7th NFC award, but also the essence of the above-stated two fundamental principles require that the issue of defence expenditure should go to the provincial assemblies of Punjab, Sindh, KPK, and Balochistan, and to the G-B and AJK assemblies to look into and devise a mechanism for the purpose. This is a matter of principle and should be decided in the same manner.
Two solutions to resolve this issue may be proposed.
First, if the issue of foreign debt is negotiated and settled between the provinces and the federal government and, of course, between the G-B and the AJK on the one hand and the federal government on the other, since after this issue is resolved, the federal government does not require any funds to take care of the foreign debt payments, now what remains to be discussed is the issue of defence expenditure.
Second, either the present mechanism should be retained with certain changes and improvements, or an entirely new mechanism should be developed.
If the new NFC award is prepared and settled in the same spirit that the two fundamental principles inspire, there will be no need for a big federal government. It may now keep allocating defence expenditure from its share of the divisible pool, and as is sometimes the case in an imposed war from outside or such an emergency, it may request the provincial assemblies to contribute to that emergency fund. It would then be for the representatives of the people of that province to see to it and do what they deem fit in this regard.
Alternatively, a new mechanism may be devised to meet the defence expenditure.
In that case, it will be for the seven geographical entities to take care of the country’s defence needs. The federal government (Islamabad Capital Territory, ICT), Punjab, Sindh, KPK, Balochistan, G-B, and the AJK. They may debate this in their respective assemblies and devise a new mechanism for the same.
In this regard, I would like to present two proposals.
They may either allocate the annual federal defence expenditure out of their budgets using the total revenue they raise or introduce a new tax, a federal defence tax, to contribute to the federal defence expenditure.
Ultimately, it is for the representatives of the people of a province or the G-B and AJK to deliberate and decide on the issue.
New mechanisms needed
Although various experts on tax laws, especially my friend Dr Ikarmul Haq, advocate the dismantling of the FBR and the setting up of a new tax authority, the National Tax Agency (NTA) (see his book: Towards Flat, Low-Rate, Broad and Predictable Taxes), I am in partial agreement, that is, with the first part of his proposal only.
I believe that no federal authority or agency is needed to collect taxes, whatever their nature. In the spirit of federalism, it is for the governments of the provinces and the G-B and AJK to collect taxes from their people and then transfer the agreed-upon share to the federal government for various services rendered by it. The federal government will collect taxes from people residing within the jurisdiction of the ICT.
People-oriented tax reforms
As stated in the very beginning, it is autonomous individuals and autonomous communities that the various forms of government and various systems of representative democracy exist for, and as there is always room for improvement in them, it is in this spirit that the following people-oriented tax reforms are proposed.
- No new tax is to be imposed or an existing one increased without obtaining the direct consent of the people, that is, via a referendum.
- Income tax should be abolished.
- Private businesses need no documentation to pay taxes but for their own use.
- Consumption tax is to be retained, in one digit, at the point of sale. Food and other necessities of daily life can be taxed, but only by a meager percentage.
- The taxes on life-saving medicines need entirely to be waived off. Other medicines may be taxed at a rate of 0.1 percent or so.
- The size of federal, provincial, and G-B and AJK governments needs to be cut down at least by 50%.
- Let everyone import and let everyone export.
- No licensing is needed; only registration works well.
- The taxes on imports and exports need to be brought down to a level such as one digit only.
- The governments need to post all of their income/expenditure accounts transparently on a website especially dedicated for the purpose on a weekly basis.
Conclusion
The proposed reforms envisage a Pakistan the state of which exists for each and every citizen and not vice versa, as has been the case factually. The state of Pakistan and all of its resources are presently utilized but for the benefit and luxurious life of Riyasati Ashrafiya [See the writer’s book in Urdu: پاکستان میں ریاستی اشرافیہ کا عروج], that is, Ashrafiya that lives off the resources the state owns, creates, and generates but are constitutionally, legally, and morally meant for the citizens of Pakistan.
Having said that, it is hoped that all those souls who share the same dream for the people of Pakistan will take it up as a task that we all require to achieve and realize a Pakistan where the reforms proposed above are actualized and that we will work to realize that dream through all moral, peaceful, legal, and constitutional means. And when such a Pakistan is achieved, it will prove to be a beacon of light for all the people of the world, who inhabit various countries, to replicate that dream coming true for them also.
Khalil Ahmad
5 March, 2026
Lahore