Revenue Sharing for FATA—A Case for Fair and Symmetric …fata.gov.pk/cp/uploads/publications/14799761625836a048af... · 2020-02-12 · B. Discrepant Resource Allocation to FATA

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2015

Revenue Sharing for FATA—A Case for Fair and Symmetric Application of Equalization Scheme

[POSITION PAPER OF FATA SECRETARIAT FOR NATIONAL FINANCE COMMISSION]

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Contents

Abbreviations & Acronyms ........................................................................................................................... i

Special Status of FATA and the Imperative of Symmetric Policy Principles .............................................. 1

A. Pakistan‘s Revenue Collection and Sharing Arrangements .................................................................. 2

B. Discrepant Resource Allocation to FATA .............................................................................................. 4

The Implicit Outcomes of NFC ................................................................................................................ 5

The Policy Imperative of Equalization ..................................................................................................... 5

Perverse Effects of Oblivion of FATA in Equalization Scheme .............................................................. 7

C. Resource Allocation Analysis ............................................................................................................... 7

D. Geographic Tax Burden across Provinces and FATA ........................................................................ 12

Distribution of taxes paid and effective tax rate ..................................................................................... 12

Geographic Burden of Sales Tax ............................................................................................................ 13

Geographic Burden of Customs Duty on Final Goods ........................................................................... 14

Geographic Burden of Federal Excise Duty (FED) ................................................................................ 16

E. Royalties- Hydel Profit from Warsak Dam and Gomal Zam Dam ..................................................... 16

F. Conclusions and Recommendations ................................................................................................... 18

Annex I: Backgrounder on administrative frameworks in Gilgit Baltistan ................................................ 20

Annex II: Revenue Dimensions of FATA .................................................................................................. 22

Annex III: Province -wise share distribution in NFC awards 1974-2009 ................................................... 39

Annex IV: NFC Award 2009 Formula ....................................................................................................... 40

References ................................................................................................................................................... 41

i

Abbreviations & Acronyms

AGPR Accountant General of Pakistan Revenues

AJK Azad Jammu & Kashmir

APTTA Afghanistan Pakistan Transit Trade Agreement

CARs Central Asian Republics

ECO Economic Cooperation Organization

CAREC Central Asian Regional Economic Cooperation

CCI Council of Common Interests

FATA Federally Administered Tribal Areas

FBR Federal Board of Revenue

FR Frontier Region

GB Gilgit Baltistan

GST General sales tax

KPK Khyber Pakhtunkhwa

NFC National Finance Commission

NHP Net Hydel Profits

NIPS National Institute of Population Studies

PFC Provincial Finance Commission

TIR Transports Internationaux Routiers

( International Road Transport)

1

Special Status of FATA and the Imperative of Symmetric Policy Principles

Federally Administered Tribal Areas (FATA) are a special region of Pakistan requiring high

policy attention. The development needs of the region are specific to the current situation they

also arise from and are amplified by the long term low development effort endemic to its

management.1 At present, high concern with security and peace building translates into increased

resource requirements. For a longer term vision of FATA development, resource allocation to

FATA must be organized on sound policy principles. These policy principles should be in

synchronization with the federation‘s revenue sharing arrangements even while FATA may not

be equivalent to a province. The rights of the people of FATA as citizen of Pakistan remain

indivisible and equal with the residents of provinces of Pakistan. This principle leads to a ready

acceptance of policy symmetry for FATA and also for symmetric revenue sharing arrangements

for FATA.

The discussion presented in this paper attempts to highlight that revenue sharing for FATA

should be organized on a sustainable basis, in synchronization of equalization policy practiced to

the rest of Pakistan. Furthermore, that revenue sharing for FATA should be treated as part of

FATA‘s development policy and it should not be consigned to institutional oblivion as has been

the historical treatment of this subject. The special status of FATA should be an opportunity to

address this discrepancy and it should not be a barrier to keeping the subject in oblivion. For this

purpose, the discussion below distinguished between legal status and policy application and

clarifies the non-equivalence between the two. It disambiguates the fact that legal status of

FATA does not prevent from application of equalization policy to revenue sharing for FATA.

Like other areas of Pakistan, the residents of FATA have a comparable claim on the national

resources. All citizens of Pakistan have an inherent claim on equal access to public services

irrespective of their place of residence. These claims can be addressed through provision of

service delivery which in turn can be carried out by availability of fiscal resources. In the

following sections, an analysis is presented to formulate a policy option for resource allocation to

FATA. The discussion presented below addresses a number of dimensions of public policy on

revenue sharing in Pakistan and in particular presents (a) an analysis of Pakistan‘s revenue

collection and sharing arrangements; (b) FATA‘s historical resource allocations compared with

other areas of Pakistan; (c) application of the equalization scheme for calculation of hypothetical

shares of FATA; (d) disambiguation of FATA‘s contribution to national revenue; and (e) policy

recommendations to address the discrepant resource allocation to this high priority area. The

discussion presents a compelling case of computation of FATA‘s resource allocation on the basis

of the equalization scheme, replacing the age old discretionary basis of allocation. The historic

discretionary basis of allocations is discriminatory, defies equalization and is out of sync with the

policy priority the government accords FATA and development in FATA. As demonstrated

below, the case for a fair application of the equalization scheme to revenue sharing arrangements

1 Ahmed, A. (2011). Pukhtun economy and society: Traditional structure and economic development in a tribal

society. Routledge.

for FATA arise out of principles of equity, regional parity in development as well as the nature

of fiscal arrangements of Pakistan.

A. Pakistan’s Revenue Collection and Sharing Arrangements

As a federation, Pakistan‘s fiscal architecture is organized in the shape of centralized taxation

systems and decentralized expenditures. The taxation systems are mostly assigned to the federal

government while major expenditure responsibilities, that have a direct effect on citizen

wellbeing, are assigned to subnational level, including provinces and regions like FATA. The

centralized taxation assigns most revenue productive tax bases to the federal government. These

include personal income tax, corporate income tax, sales tax on goods, customs and excise duties

on important items with inelastic demand. The provinces on the other hand are assigned land

taxes, agriculture income tax and sales tax on services that are hard to tax bases. The assignment

of sales tax on services has been recently clarified through the 18th

constitutional amendment and

it is now being put to use to raise revenues at the provincial level. The assignment of revenue

productive bases to federal government follows the principles of economic efficiency and is

laced with systems of transfers to improve welfare in multi-tiered governments.2

Under the constitutional scheme in Pakistan, the major expenditure responsibilities are assigned

to provinces and special regions like FATA. In case of the latter, even if the regions do not have

the constitutional status of a province, they are still mandated to carry out all the service delivery

functions assigned to the provinces. The regional administrations, like FATA administration, are

responsible for providing public services to the residents. The expenditures assigned to the

subnational levels inter alia include education, health, roads, agriculture extension, industrial

development, irrigation, and social welfare. The revenue and expenditure assignments in

Pakistan, like other federations, result in a vertical fiscal imbalance that is structural and long

term.3 The subnational governments in Pakistan have access to tax bases that are not revenue

productive and are often beset with structural constraints,4 enhancing their reliance on

intergovernmental transfers. These features of the imbalance necessitate creation and operation

of the instrument of long term intergovernmental fiscal transfers as part of the federal fiscal

architecture. It is important to note that intergovernmental transfers in Pakistan have a long term

role and are an important instrument of public policy. They are certainly not an item to be used at

discretion alone under the budget making provisions of a ministry.

Recognizing the vertical fiscal imbalance in the fiscal constitution of Pakistan, the National

Finance Commission or NFC is created as a constitutional body. While the membership and

mandate of NFC is laid down in the constitutional provisions, the policy decisions are left to the

commission. It is important to distinguish between the constitutional provisions and the policy

2 Koethenbuerger, M. (2008). Federal tax-transfer policy and intergovernmental pre-commitment. Regional Science

and Urban Economics, 38(1), 16-31. 3 Dahlby, B. (2005). Dealing with the fiscal imbalances: Vertical, horizontal, and structural. CD Howe Institute.

4 Cyan, M. R. (2007). Fiscal Architecture-A Fetter on New Local Governments in Pakistan?. Intl Journal of Public

Administration, 30(12-14), 1459-1483.

domain of equalization. While the former are laid down in the constitution, the latter is not

prescribed and remains a legitimate subject for policy discussions and exploration of policy

options.

It is due to this reason that the policy decisions on revenue sharing and setting up

intergovernmental transfers are laid down periodically and enshrined in a legislative order. Often

this is referred to as the NFC award. To operate this constitutional mechanism, the taxes assigned

to the federal government are designated as shared taxes for the purposes of formulating the

divisible pool of resources. Without diminishing the federal taxation powers, in defining the tax

base and selecting tax rates, the shared taxes being part of the divisible pool provide revenues to

federal government and provinces under the periodic equalization schemes decided by NFC.

NFC addresses vertical imbalance by determining the provincial share in the divisible pool of

resources. It has progressively enhanced the provincial share in recognition of service delivery

expenditures assigned to subnational level. As a result of the 7th

NFC, the provincial share has

finally come to 57.5 percent of the divisible pool in FY2015.

A continuing theme in NFC decisions has been its pursuit of equalization.5 The policy decisions

of successive NFCs can be taken to aim for equalization, where revenues are shared on the

principle of citizenship and equitable access to services for all citizens irrespective of their place

of residence instead of revenues being returned to the point of collection. In other words, NFC

deliberations and formulas for allocation among provinces have implicitly recognized horizontal

imbalance across provinces. The revenues assigned to provinces, as transfers under NFC are not

returned to point of collection. Despite somewhat unclear claims based on collection,

equalization has been the dominant policy option adopted by successive NFCs. The seventh NFC

in 2009 decided to further strengthen equalization and determine inter-provincial expenditure

needs through a multivariate formula replacing the earlier formulaic equalization of treating

equal per capita revenue as the basis for sharing.

5 Ahmad, N., & Wasti, S. A. Applied Economic Research Center, Karachi. Intergovernmental Fiscal Transfers in

Asia: Current Practice and Challenges for the Future, in Smoke, P. J., & Kim, Y. H. (Eds.). (2002).

Intergovernmental fiscal transfers in Asia: current practice and challenges for the future. Asian Development Bank.

The case of FATA is presented here in terms of pursuit of fiscal equalization. It is imperative to

view resource requirements of FATA in terms of comparable treatment of FATA with other

regions of Pakistan from the following perspectives:

1. Current security situation and peace building policy requires investments at optimal

levels in public infrastructure and service delivery programs;

2. Residents of FATA like other citizens of Pakistan should have equal access to public

services irrespective of their place of residence;

3. Regional balance in development is essential for economic as well as national wellbeing.

B. Discrepant Resource Allocation to FATA

In order to establish a basis for equalization for FATA, it will be instructive to review the

historical resource allocations to FATA in view of its heightened developmental needs. FATA

are a special region of Pakistan with their specific developmental needs and constraints. In the

last decades continuing militancy has exacerbated both. Since 2014, the government has initiated

efforts in true earnest to stem violence and bring FATA back into the national mainstream of

development. These efforts have achieved unprecedented success in minimizing violence and

conflict in the short time period of a little more than a year. While these efforts continue in

pursuit of their logical conclusion, development work in FATA has also continued. Important

projects and initiatives have been undertaken to build public infrastructure, restore functionality

of service delivery systems and enhance life opportunities for residents of FATA through

creation of economic growth. While these initiatives are important, it cannot be overemphasized

that much more needs to done. The developmental needs of FATA and commensurate revenue

allocations are imperatives to the goals of stabilization, restoration of peace and mainstreaming

of FATA.

The logical culmination of government‘s efforts at restoring peace and stability in FATA would

be robust development of FATA and creation of economic opportunities for its residents. To

establish FATA on a sustainable trajectory of development, it is imperative to ensure predictable

and statutory flows of revenue for public investments programs in the agencies. While the

Fiscal Equalization

Fiscal equalization is a transfer of fiscal resources across jurisdictions with the aim of

offsetting differences in revenue raising capacity or public service cost. Its principal

objective is to allow sub-central governments to provide their citizens with similar sets of

public services at a similar tax burden even if incomes differ across areas.

Hansjörg Blöchliger and Claire Charbit (2008). Fiscal Equalization, OECD Economic

Studies No. 44, 2008/1, OECD.

special status of FATA is recognized, its needs and requirements do not receive due recognition.

More importantly, the revenue sharing is not seen as part of FATA‘s development strategy. The

special status of FATA has been used as a reason for non-application of equalization policy as

applicable to the rest of Pakistan without any cogent policy rationale. Its special status instead of

placing the development requirements higher on the policy agenda have receded it into an

institutional oblivion when it comes to revenue sharing between various provinces and regions of

Pakistan. This issue is elaborated in two dimensions below, namely, institutional and historical

revenue patterns.

The Implicit Outcomes of NFC

The constitutional provisions relating to revenue sharing are enshrined in Articles 160 and 161 of

the Constitution of Pakistan. Revenue sharing is decided on a five yearly basis through the

institutional mechanism of the National Finance Commission (NFC) which is periodically

created to decide on the sharing principles and formulas. NFC is created under Article 160 and it

provides membership to the provinces and the federation. FATA‘s interest is supposed to be

represented through the members representing the federation. FATA is a sub-federal region with

a geographic entity even when it is not a province. The NFC dispensation allows for vigorous

enunciation of the interests of the provinces but a weak representation of the special interests of

FATA at this key institutional forum where revenue sharing is decided for the country. Once the

federal share is decided at the NFC, FATA receives budgetary grants akin to departmental grants

in the federal government.

In other words, unlike the high policy importance accorded to revenue allocation to service

delivery for residents of the provinces, the revenue allocation to service delivery for residents of

FATA becomes subordinated to departmental budget making. Its revenue share does not arise

from a statutory basis nor does is follow any formula for calculation. NFC deliberation implicitly

follows the principle of equitable access to services for all citizens of Pakistan irrespective of

their place of residence. In its revenue sharing formula, especially the Seventh Award

recommended in 2009, NFC follows the principles of equalization and aims to provide revenue

equalization to provinces. In other words, the award seeks to equalize per capita revenue

available for provision of public goods to citizens across all areas of Pakistan but explicitly for

those citizens residing in any of the four provinces.

The Policy Imperative of Equalization

Equalization is an important policy objective followed across the world, especially in federal

countries and unitary countries with multiple tiers of government.6 Intergovernmental transfers in

pursuit of this policy objective aim to minimize inefficient economic dislocation of people and

resources for long term economic development of a country.7 Equalization scheme should aim to

6 Hierro, L. A., Atienza, P., & Patiño, D. (2007). Inequality and progressiveness in the distribution of revenues of the

states in federal countries. A comparative study. International Studies Program, Andrew Young School of Policy

Studies, Georgia State University, 07-03. 7 Albouy, D. (2012). Evaluating the efficiency and equity of federal fiscal equalization. Journal of Public

Economics, 96(9), 824-839.

address equity and efficiency in its design and application.8 Due to economic considerations of

efficiency, key revenue productive tax bases are centralized,9 as is the case of strict application

of this economic principle in Pakistan‘s fiscal architecture. The taxes with mobile bases are

mostly assigned to central level government leaving constrained tax space for subnational

governments, rendering them dependent on fiscal flows from central government.10

Following a comparable rationale of efficiency, public expenditures for public goods with

localized benefit areas are assigned to subnational governments like provinces, regions and local

governments.11

The revenue and expenditure assignments result in vertical imbalance which is

defined as the mismatch between expenditure mandates and potential tax revenue assigned at

different levels of government.12

This mismatch between available revenues and expenditure

obligations at various levels of government sets up the need for intergovernmental fiscal

transfers which may help address interregional disparities but also enhance subnational deficits.13

Public policy retains an abiding objective of providing equal access to public services across

regions and jurisdictions.14

In almost all multi-tiered government structures, this is a fundamental

motivation for setting up intergovernmental fiscal transfer schemes.15

Key public policy pursuits

like poverty reduction require availability of comparable levels of financing across

jurisdictions.16

Differential levels of revenue available for provision of services results in three

undesirable consequences: (a) fiscally induced migration may take place from jurisdictions

providing higher levels of services to lower levels of services; (b) inequitable levels of services

may present in different parts of a country; and (c) regional differences may lead to public

disaffection in some parts of the country. Therefore, equalization of revenue per capita available

for public services is an important objective of policy. Tax base endowments differ across

regions leading horizontal imbalance. Intergovernmental transfers are again required to correct

this imbalance and achieve equalization.

FATA region ranks low on local revenue capacity. At the same time, expenditure assignment is

mandated to be symmetric to the provinces. FATA Administration cannot refrain from provision

of education and health or other public services on account of not having a provincial status in

8 Widmer, P., & Zweifel, P. (2012). Fiscal equalization, Tiebout competition, and incentives for efficiency in a

federalist country. Public Finance Review, 40(1), 3-29. 9 Bahl, R., & Cyan, M. (2011). Tax assignment: does the practice match the theory?. Environment and Planning C:

Government and Policy, 29(2), 264-280. 10

Brosio, G., & Ahmad, E. (2008). Political economy of multi-level tax assignments in Latin American countries:

earmarked revenue versus tax autonomy. IMF Working Papers, 1-27. 11

Bird, R. M., & Vaillancourt, F. (2008). Fiscal decentralization in developing countries. Cambridge University

Press 12

Eyraud, L., & Lusinyan, L. (2013). Vertical fiscal imbalances and fiscal performance in advanced economies.

Journal of Monetary Economics, 60(5), 571-587. 13

Eyraud, L., & Lusinyan, L. (2011). Decentralizing Spending More than Revenue: Does It Hurt Fiscal

Performance?. IMF Working Papers, 1-33. 14

Qiang, M. H. C. L. Q. (2008). On Equality of Basic Public Service in Urban and Rural Areas [J]. Finance &

Economics, 12, 019. 15

Boex, J., & Martinez-Vazquez, J. (2005). The determinants of the incidence of intergovernmental grants: A

survey of the international experience. Andrew Young School of Policy Studies Research Paper Series, (06-52). 16

Hofman, B., & Guerra, S. C. (2007). Ensuring inter-regional equity and poverty reduction. In Fiscal Equalization

(pp. 31-59). Springer US.

the constitution. The vertical imbalance in case of FATA reaches serious proportions as it does

not have access to shared taxes like the provinces.17

The land taxes available to provinces are

absent due to underdeveloped land administration. Similarly, sales tax on services, an important

and emerging source of revenue for the provinces, is still not practicable in FATA due to the

ongoing security operations. As a result of these factors, FATA region also ranks low on

horizontal balance.

Perverse Effects of Oblivion of FATA in Equalization Scheme

NFC attempts to address the vertical and horizontal imbalances for provinces. In the NFC award

(2009) the share of the provinces has increased in recognition of vertical imbalance to 56 percent

in the year 2010-11 and from there on to 57.5 percent in 2015-2016. The NFC formula after

years of debate has also included a stronger equalization component in it. FATA does not benefit

from it due to its special status. In fact, it remains in an institutional oblivion as the expenditures

needs of FATA are neither presented nor discussed in NFC deliberations.

FATA receives revenues through budget allocations as opposed to entitlement shares. The

recurrent and capital budgets are financed through allocations in the federal budget. This

mechanism has resulted in low expenditures in FATA leading to weak public infrastructure and

underperforming systems of service delivery. A review of expenditures and revenues is provided

below in comparison with provinces and other areas of Pakistan to highlight the historical low

funding of FATA‘s development and public services.

C. Resource Allocation Analysis

Stabilization of FATA and sustainable restoration of peace require a strategy that includes

provision of security, justice and social services. Through provision of public services, citizen

trust will be created. Besides responsive governance framework, appropriate resource allocation

and spending efficiency are key contributing factors for provision of the aforementioned

services. The past low levels of funding have resulted in low development indicators of FATA.

Table 1 provides a snapshot of the key indicators of FATA, GB and KP.

17

The shared taxes assigned concurrently to the federal government and provinces are not shared on account of

being levied equivalently across all the provinces. These include direct taxes like personal income tax as well as

indirect taxes like sales tax on goods and custom duties where the economic incidence is on the citizens all over the

country.

Table 1: Key Comparative Indicators

Dimension FATA GB KPK

Area in Square kilometers 27,220 72,971 74,521

Population in million (NIPS estimates for

FATA and KP)

4.4 1.3 24.9

Poverty ratio 60%18

25% 29%

Adult literacy rate (Age 15 and over) 28.4% 50.1% 48%

Literacy Female 7.8% Data not available

after 1998

30%

Under 5 Mortality rate/1000 births 104 89 70

Maternal Mortality rate/100,000 live births 380 Data not available

after 1998

275

Sources: FDHIS 2015, PDHS 2012-13; GB economic report (2011); AKRSP socioeconomic survey (2005);

www.fata.gov.pk; National Institute of Population Studies; GB Economic Report (2011)

In addition to chronic low funding of public services, a number of reasons can be attributed to

poor social indicators in FATA. Table 1 shows that FATA lags behind significantly in

development indicators despite its substantial area and population in comparative terms with

neighboring province and the policy recognition of GB as a governance entity. This paper

however focuses on the fiscal dimension to explore the impact of resource allocation on

socioeconomic development of FATA. The analysis in this section provides a comparison with

GB and KP. Comparison with GB is based on the non-provincial status and similarities in the

allocation procedures particularly predating the GB Presidential order 2009. While comparison

with KP gives a perspective of resource gap owing to the status of FATA not being a direct

beneficiary of the National Finance Commission‘s awards for resources distribution. Time

series analysis of resource allocation and comparative analysis of different jurisdictions

illustrates the gaps not only in resource allocation but also shows spending inefficiencies,

however this study focuses on the former only. The fiscal analysis is based on the GOP

budgeting system reflecting recurrent and development (capital) budget allocations separately.

Recurrent budget fundamentally finances the costs of running the government and provision of

public services, which in turn contribute, to attainment of higher development indicators. Large

and lumpy gaps in financing cannot be bridged by expenditure efficiencies alone. Table 2 shows

the per capita resources available for government‘s functioning in FATA and the public sector

development portfolio. The size of discrepancy and the historical trend shows that public sector

investments in FATA have remained low over a long period of time and have created a lag in the

development of FATA.

18

According to PCNA report, 60% of the population in FATA is living below poverty line.

Table 2: Per Capita Allocations

Recurrent budget Development budget

Year FATA GB KP FATA GB KP

2006-07 1,564 3,317 3,317 2,250 3,096 1,505

2007-08 1,672 3,967 4,240 2,344 3,531 2,229

2008-09 2,095 5,511 7,289 2,961 4,270 2,347

2009-10 3,027 6,341 9,210 2,563 4,531 2,890

2010-11 2,560 9,140 12,710 4,688 5,065 3,914

2011-12 3,829 7,401 9,266 3,125 5,591 4,810

2012-13 3,918 11,377 11,613 4,774 6,184 5,506

2013-14 4,521 12,452 12,768 5,781 6,898 6,667

Source: Budget Books Ministry of Finance, FATA Secretariat and Finance Department, Government of Khyber

Pakhtunkhwa.

Notes: The per capita allocations are shown in nominal rupees and were calculated using population data from

Pakistan Bureau of Statistics in case of FATA and KP and GB Scouts population data for GB. In line with the NFC

method the population census data has been used to derive per capita allocations. The budgeted amounts reflect on-

budget data of internally and externally funded programs in development budget

Public sector financing is the primary source of funding the development sector, however the

non-government entities also play an important role in the socio-economic development of a

territory, particularly in social mobilization and awareness.19

Given the public sector being the sole support for FATA‘s development, the adequacy of public

funding becomes all the more important and acute given the fragility of situation and the

significance of state institutions establishing the legitimacy through provision of security and

social services. Table 3 provides an overall picture of the total budget allocations.

Table 3: Per Capita total budget allocations

Year FATA GB KP

2006-07 3,814 6,413 4,822

2007-08 4,016 7,498 6,469

2008-09 5,055 9,781 9,636

2009-10 5,590 10,871 12,101

2010-11 7,248 14,205 16,624

2011-12 6,954 12,992 14,076

2012-13 8,692 17,561 17,119

2013-14 10,303 19,350 19,435

19

Commenting on the health indicators in GB, World Bank GB economic report (2011) notes that the ‗performance

on various health indicators, however, seems much stronger in areas where CSOs, such as AKHSP, are

complementing public services.‘ The technical and financial support provided by the Aga Khan Foundation agencies

is in addition, though not to the same tune but plays a significant role in improving the livelihoods of the residents of

GB. This complementarity to public sector support is not available for FATA.

Source: Budget Books Ministry of Finance, FATA Secretariat and Finance Department, Government of Khyber

Pakhtunkhwa.

Notes: The per capita allocations are shown in nominal rupees and was calculated using population data from

Pakistan Bureau of Statistics in case of FATA and KP and GB Scouts population data for GB

The percentage difference in the per capita allocation (Table 4) shows large differences

particularly in recurrent budget allocations. Per capita recurrent budget allocations for FATA had

the largest variation in comparison with KP and GB with FATA on an average allocated 154

percent less in comparison with GB and 224 percent less in comparison with KP. The last 8 years

average shows a minimum range of 1.2 times to maximum 2.0 times of recurrent budget

allocations in comparison to GB, and in case of KP it ranges between 1.4 to 3.9 times more than

FATA. This anemic financing has remained in place over a long period of time. This variation is

particularly instructive given the security situation in FATA for the past 8 years where KP was

allocated additional resources to offset the fiscal impact of the war on terror. The NFC decided to

allocate 1 per cent of undivided divisible pool taxes to KP. As a result KP received Rs 15 Billion

in 2010-11 that increased to Rs 25 Billion by FY 2014-15. FATA being the frontline and with

deepest bearings of war on terror was not allocated a similar share in the NFC award (2010). Had

FATA been a constituent of the NFC, probability of appreciating the needs of FATA and

allocation of additional resources would have been recognized.

Table 4 shows the percentage differences in per capita allocations and indicates an overall

widening trend between FATA and GB as well as between FATA and KP. Due to this trend,

FATA keeps lagging behind in public investments in services and development.

Table 4: Percentage difference in per capita budget allocations

Recurrent budget Development budget Total budget

Years GB & FATA KP & FATA GB & FATA KP & FATA GB & FATA KP &FATA

2006-07 126% 141% 60% -22% 68% 26%

2007-08 145% 162% 50% -5% 87% 61%

2008-09 118% 263% 60% -13% 93% 91%

2009-10 168% 289% 60% -28% 94% 116%

2010-11 168% 397% 88% 45% 96% 129%

2011-12 132% 155% 79% 54% 87% 102%

2012-13 190% 196% 24% 10% 102% 97%

2013-14 182% 189% 28% 15% 88% 89%

Source: Authors’ calculations based on data of Tables 2 and 3

Notes: The negative figure implies the reduction in the development budget allocations when compared

between FATA for a particular year. The reason for relatively lesser allocation could be low allocation in

that year or as the data is based on revised estimates the utilization of ADP could have been

comparatively lower

It is recognized that FATA does not have a constitutional seat at the NFC. At the same time, it is

instructive to bring out the non-application of NFC mandated equalization to FATA. This non-

application is a key factor resulting in chronic low allocations to FATA. In the current schema,

although the requests for grants originate from the FATA secretariat, the final budgetary

submissions to the legislature are largely based on arbitrary decision of the central government.

To highlight the discrepant nature of this mechanism the hypothetical allocations for FATA have

been derived using the NFC formula. These hypothetical share derived from the NFC formula

demonstrate the failure of equalization for FATA.

Table 5 offers an overall view of the variation in allocations. The hypothetical FATA share has

been derived based on certain assumptions owing to the lack of data on withholding tax on

electricity consumption and poverty figures. For both indictors, the computation relies on NFC

formula and method for the purposes of this demonstration. The poverty rate in the NFC award

(2009) is highest for KP (then NWFP) and the same poverty rate has been imputed for FATA

and was used as the base rate for proportionate adjustment in the rate for all provinces. For

revenue collection and generation indicator, the lowest percentage rate is for Balochistan and that

rate has been assumed for FATA. Based on the aforementioned assumptions Table 5 provides

the derived share for FATA.

Table 5: Impact on budgetary allocations if FATA is a NFC constituent

Years Per capita derived share Per capita budget allocated

2010-11 11,017.26 5,270.91

2011-12 13,346.33 5,057.27

2012-13 13,483.33 6,321.36

2013-14 15,606.98 7,492.73

2014-15 18,995.38 7,855.00

Note: Authors calculations based on NFC formula

The analysis in table 5 relates to the last NFC duration (2010-2015). It depicts that the budget

allocated to FATA under the discretionary and non-equalization scheme is less than half of the

share derived using the equalization formula mandated as fair for the provinces of Pakistan. The

following figure illustrates the variation in percentage terms, which on last 5 years average is 44

per cent less budget allocations.

Figure 1: FATA Allocation Short of Equalization Based Shares

The above analysis shows that the resource allocation to FATA when compared with resource

availability for public sectors programs in KP and GB falls short and when compared with

hypothetical FATA shares derived from the equalization formula fall even further short. The

NFC constitution is a constitutional requirement but equalization is a policy option. There is a

strong case for FATA, a veritable region of Pakistan, to receive resource allocation based on the

equalization formula. All citizens of Pakistan irrespective of their place of residence have the

right to equal access services. Transfers predicated on the NFC formula would allow greater

resource availability for FATA that will allow deeper outreach to the citizens with higher social

sector expenditure in FATA.

D. Geographic Tax Burden across Provinces and FATA

The tax burden analysis is important to know who pay taxes and bear the burden across the

regions. The tool of distributional analysis could enhance the current types of information

available to inform policy decisions and lay out how different regions are contributing to national

tax revenue. Through tax burden analysis, policy makers receive annual or bi-annual updates on

who incurs the burden of paying federal and provincial taxes in relation to household income.

Incidence analysis also allows provinces to estimate and report who will pay more or less by

income as a result of a specific proposed tax change.

Distribution of taxes paid and effective tax rate

The effective tax rate is calculated as tax on the comprehensive income. The rate is therefore a

measure of the percent of income (measured by consumption expenditures or annual income)

Actual allocation as % of derived share,

2010-11, 47.84% Actual allocation as % of derived share,

2011-12, 37.89%

Actual allocation as % of derived share,

2012-13, 46.88%

Actual allocation as % of derived share,

2013-14, 48.01%

that is paid in tax. Here we measure the effective tax rate using both consumption expenditure

base and the annual income base.20

Geographic Burden of Sales Tax

General Sales Tax or GST in Pakistan was originally a provincial tax until 1948, when the tax

was transferred to the central government. Currently, it is levied as a value added tax on

manufacturers and retailers with annual turnover of more than Rs.5 million, and is also levied on

imports, wholesalers, distributors, and some specific service providers. The contribution of GST

at import stage has been over 50 percent of total GST receipts in the country. At present the tax

rate is 17 percent across the board. Moreover it is the leading tax that constitutes over 40 percent

in total revenue collected by FBR. The revenue collected from GST is roughly 4 per cent of

Pakistan‘s GDP. Being a leading tax in Pakistan a number of studies have been conducted to

assess the GST Incidence in Pakistan (see Annex III).

It is generally assumed that consumption taxes like GST and Excise duty are borne by

consumers. Some economist differ with it and argue that producers absorb part of the taxes.

Consumers are less likely to bear the burden of the consumption taxes when there are untaxed

substitutes or when the good is not a necessity. Still most incidence analysis assumes that these

taxes are borne by consumers.

This discussion does not attempt to review the tax policy options available with federal and

provincial governments but to determine the extent of tax burden across provinces and FATA.

FBR is the sole revenue collecting agency in the country while the provinces are collecting

fractional amount of taxes which together come to less than one percent of the GDP. FBR tax

collection mechanism is unable to bifurcate tax collection by provinces the field offices of FBR

are located in the major cities having different territorial jurisdiction from the provinces.

Therefore, for this analysis the shares of provincial populations and FATA population have been

utilized for geographic apportionment of taxes from total sales tax, federal excise and customs

duty collected by FBR during last few years. For example Punjab province share in total

population is 56.23 percent, Sindh 23 percent, Khyber Pakhtunkhwa shared 13.41 percent in total

population, Baluchistan 4.96 percent and FATA 2.4 percent.

During the last five years effective rate of GST in Pakistan, as calculated, ranges between 4.39-

4.78 percent (Table 6). There is a slight increase mainly due to increased tax rates from 16 to 17

percent. The distribution of effective rates is quite obvious. All the effective rates of sales tax

during this period are above 4 percent for the four provinces. The effective tax rate of FATA is

slightly lower than other parts of the country. At the same time, the material point is made that

the people of FATA bear the tax burden of GST like the rest of Pakistan when purchasing

consumer items. This is especially applicable to the GST on goods collected by the Federal

Government, where collection for administrative purposes is mostly concentrated on units of

20

If the effective tax rate increases as income rises, the overall tax system is progressive. If the tax rate fall with

income- it is regressive and finally, if it remain approximately constant, it proportional tax system

production or introduction into the domestic market while the economic incidence is on the

consumers in their place of residence or consumption. As a whole, it is inferred that there is no

glaring difference between the GST on goods imposed tax burden in the different part of the

country. If FATA is contributing to the national revenue, then it should receive shares in the

revenue as well.

Table 6: Effective Rates of Sales Tax (%)

Years Punjab Sindh KPK Baluchistan FATA

09-10 4.39 4.07 4.25 4.19 3.89

10-11 4.21 4.63 4.39 4.82 3.38

11-12 4.83 4.71 4.14 4.36 3.47

12-13 4.37 4.48 4.13 4.46 3.67

13-14 4.61 4.46 4.24 4.30 3.91

Note: Calculation of the above effective tax rates used the available data and imputed values where these are not

available as follows. HIES covers the four provinces of the country, consumption figures for FATA are not available

in any report released by the government agencies. Therefore, to estimate the FATA consumption expenditure,

Baluchistan province has been taken as base. Then a ratio was computed on the basis of population of

FATA/population of Baluchistan and used for apportionment of FATA consumption expenditure. FATA is 23

percent of KPK and 51 percent of Baluchistan. Similarly Pakistan Bureau of Statistics (PBS) website contains HIES

reports for 2013-14 and 11-12 only rest of data has been obtained from the PBS National Account Section.

Consumption expenditure data has been adjusted to exemptions. When the Effective Tax Rates for GST computed

on FBR taxable sales data, the result is almost the same.

Geographic Burden of Customs Duty on Final Goods

Goods imported and exported from Pakistan are liable to Customs duty as prescribed in Pakistan

Customs Tariff. The tariff structure of Customs duty is determined by a large number of socio-

economic factors and the level of protections of industrial sector. However, the general scheme

envisages higher rates on finished items with other Tariff peaks on automobile and liquor. The

import tariff has been given an industrial bias by keeping the duties on industrial plants and

machinery and raw material lower than those on consumer goods.

Federal government receive substantial amount of tax revenue from customs duty, 24.3 billion

rupees during 2013-14. The incidence of customs duty, like others, depends on the final use of

the taxed product. For instance, if the customs duty is levied on tea bags, it is reasonable to

assume that this largely a final consumption good and we allocate the revenue to consumers of

tea. However, some customs duties fall on goods that are likely to be inputs in to various

production process and may affect the net price of a variety of goods. For example customs

duties are charged on petroleum products. Some of the imports of petroleum products may be

final consumption but the imports are also used in a variety of production processes. It is

assumed that 75 percent of customs duty on petroleum products is ultimately borne by the

consumers in the form of higher general prices and 25 percent is exported outside in the country.

In order to calculate effective tax rate of customs duty by geographic distribution the value of

dutiable imports has been used as denominator. In Pakistan customs duty is collected by 17

Model Customs Collectorates ( MCCs) situated in major cities and provincial headquarters of the

country. The jurisdiction of the MCCs are not based on the territorial jurisdiction of the

provinces, therefore, collection of customs duty by the MCCs situated in a particular province

cannot be treated as provincial collection. The government of Pakistan has provided facilitation

to the importers to utilize any MCC for clearance of their consignments. A substantial part i.e.

about 80 percent of customs duty is realized from Karachi Sindh province, at two sea ports

namely; Karachi and Port Qasim. The imports cleared at these ports pertain to whole the country

and not destined only for Karachi, hence, the province wise collection and analysis would be

misleading. Therefore, for this discussion, keeping conformity, the same methodology of

estimating regional level effective tax rates for custom duty and value of import have been

apportioned according to population ratio.

Table 7: Effective Rates of Customs Duty (%)

Years Punjab Sindh KPK Baluchistan FATA

2009-10 12.04 11.25 12. 44 10.14 09.34

2010-11 12.13 12.25 12.05 11.22 09.62

2011-12 13.58 13.88 12.58 11.98 09.58

2012-13 14.51 14.95 13.45 13.11 10.09

2013-14 13.68 13.98 13.26 13.58 12.81

Note: Value of dutiable imports has been used as denominator for computing ETR. FBR data sets for both customs

duty collection and value of imports has been obtained from the FBR data bank. Regional distribution of these

components are based on population share. FBR tax collection mechanism is unable to bifurcate province wise tax

collection.

Years Punjab Sindh KPK Baluchistan FATA Total

2009-10 7.59 7.59 7.59 7.59 7.59 7.59

2010-11 5.82 5.82 5.82 5.82 5.82 5.82

2011-12 5.79 5.85 5.85 5.85 5.85 5.81

2012-13 4.87 4.87 4.87 4.87 4.87 4.87

2013-14 4.40 4.40 4.40 4.40 4.40 4.40 Note: Federal Excise Duty is levied on few items like cement, beverages, POL Products etc. Production data

are not available in printed form, therefore, value of large scale manufacturing has been taken as base for

calculation of effective tax rate. Since both LSM data and tax collection of FED have been bifurcated on the

basis of population ratio therefore, the ETR is identical across the provinces and FATA. FED has little

impact.

Effective tax rates for the country increased gradually and stood at 14.51% during 2012-13 and

come down to 13.7% in 2013-14. The major reason for this decline is the transfer of tariff lines

from higher to lower slabs making the tariff in more escalated position. The ETR for all the

provinces and FATA indicates similarity with minor variation. For instance ETR for FATA was

below 10 percent during the first three years which increased to 12.81 percent in 2013-14 almost

consonant with other parts of the country. It warrants special treatment of FATA as far as tax

burden of custom duty is concerned. The economic incidence of custom duty on FATA should

be recognized.

Unlike customs duty and sales tax, FED rate structure is quite complex i.e. ad-valorem and

specific. Moreover, major items are part of large scale manufacturing sector of the economy like

cigarettes, cement, beverages etc. The tax is fading over the years and as policy of the

government this will be done away with and the few commodities subjected to FED will be

shifted to GST. However, to gauge the geographic tax burden of FED, the large scale

manufacturing (LSM) data have been used for calculation of ETR. The LSM data has been

retrieved from Pakistan Economic Survey 2013-14. However, these data have been distributed

among components of respective provinces and FATA. The effective tax rates are shown in

Table 8.

Table 8: Effective Tax Rate of Federal Excise Duty (%)

Geographic Burden of Federal Excise Duty (FED)

Interestingly, the effective rates of FED reflected gradual decline in this period. The trends seem

identical with total and provinces even with FATA. The results similarly infer that there is equal

distribution of tax burden in case of FED making FATA at par with other provinces. This

situation is untenable when viewed in the context of worn-torn area due to frontline region

against war on terrorism.

E. Royalties- Hydel Profit from Warsak Dam and Gomal Zam Dam

Natural resource rents are recognized as a source of revenue in the Constitution and the

constitutional principles in essence allow their sharing with the communities and residents of

regions. This is formalized as sharing rights of provinces. Based on these principles, payments

arising from natural resource rents are a substantial source of income for the provincial

governments. In case of FATA, following the spirit of this principle, availability of net hydel

profit from Warsak Dam can augment its resource base for onwards spending on social sectors.

In this section, following the principle and using available data, a computation of rents, namely

the net hydel profits, from Warsak Dam is being presented.

A number of factors need to be accounted for prior to determination of the net hydel profit.

Technically, due to siltation the effectiveness and efficiency levels are low at present. According

to the Ministry of Water and Water (MOW&P), ‗Warsak Dam has now completely silted up and

practically there is no available storage. Power generation is being achieved according to water

inflows in River Kabul like a "Run-of-the-River' project. Lean flow period at Warsak is observed

from October to March during which capability reduces to about 100 MW (Peak)‘.

FATA secretariat does not have a role in administering the hydel power unit nor does it derive

any revenue shares from the profits. The royalty from hydel power generation projects including

Warsak is deeply contested with petitions and intergovernmental contestations. . The royalty

received by the province of KP is a compromised figure further complicating the determination

of net hydel profit particularly due to lack of availability of actual data.

Therefore the revenue data for this paper is determined based on assumptions (explained below)

and by using the current status and performance. However, determination of accurate net hydel

profit being a challenge, efforts were made to tap other published sources to arrive at the revenue

figure. Individuals from KP Government and Ministry of Water and Power were interviewed.

Budget books (memorandum of receipts and provincial receipts) of the Federal and KP

government respectively, publications by research organizations (like PIDE and SPDC),

judgements of the A.G.N Kazi and Justice Ajmal Mian Commissions and petitions decreed by

NEPRA were reviewed to derive a potential royalty share.

In the given scenario, the calculation of revenue data for net hydel projects in Pakistan is not

straightforward. In certain cases like determination of cost of power generation and bulk power

tariff rates, inferences have been drawn and assumptions have been made on the data produced

before various commissions set up from time to time to arbitrate in revenue sharing claims. In

these commission proceedings and their recommendations decreed by them, the royalty

calculations are not only worked out on the basis of transactions related to a specific power unit;

rather these include costs factors like interest on deferred payments, debt servicing and so on.

The lack of availability of data or lack of willingness to share the related information on Warsak

allowed calculation of the net hydel profit on available data and assumptions in line with net

hydel calculations made for other power projects.

As the first step in calculation, Table 9 reports the power generation data for Warsak Dam.

Table 9: Performance of Hydro power stations

Item Warsak Gomal Zam

Installed Capacity 243 MW 17.4 MW

Energy Generation 994.4 GWh 90.9 GWh

Source: Ministry of Water and Power (2015)

Although the energy generation is reported at 994.404 GWh for Warsak Dam, however the last

two years‘ average generation reportedly is 889 GWh. In case of Gomal Zam Dam the energy

generation is assumed at 90.9 GWh, as actual data were not available. For determination of total

revenues, the rate per kWh is calculated using the minimal determination for KP. In this case,

there is a decision to transfer Rs.6 billion annually for the total hydel power generation in KP. It

is worth highlighting that Rs.6 billion annual allocation is a compromise figure and does not

reflect the actual revenue and expenditure position of the hydropower projects.

In case of Warsak Dam and Gomal Zam Dam, based on aggregate data of power generated in the

last two years (889 GWh) and annual average power generation, the revenue share amounts to Rs

372.3 million (Table 10). The calculation comes to Rs.1,077.9 million when the tariff revision

proposed in the ongoing case is used.

Table 10: Estimated Annual Revenue from Power Generation in FATA

Current scenario Tariff revision proposed

Particulars Warsak Gomal Zam Warsak Gomal Zam

Average power generation in kWh 889,000,000 90,900,000 90,900,000.0 977,900,000

Estimated Revenue share 337,820,000 34,542,000 977,900,000 99,990,000

Source: Authors calculations based on data from MoW&P, NEPRA petitions and Justice Ajmal Mian

Commission

The revenue amount is determined based on the standard annual allocation to the Government of

KP (Rs 6 Billion) in relation to the total hydel power generation in the province of KP. It does

not include the Rs 110 Billion agreed in the last NFC award (2009) as additional payment to the

GoKP on account of hydel power royalty. The revised scenario is based on the tariff review

petition filed by WAPDA at NEPRA proposing increase in the rate of purchase of bulk power. If

the Council of Common Interests (CCI) agrees to increase in power rate, then the Warsak Dam

revenue will increase to Rs.977.9 million. Similar calculations are relevant to Gomal Zam Dam.

This is a comparatively recent project and a timely decision on allocation of its revenue will

address the issues faced in determination of NHP royalty. With the given assumptions, and it can

generate revenue of Rs 34.5 million in the current scenario and 99.9 Million if CCI endorses the

tariff rates revision.

In addition to the annual royalty estimates given here, FATA retains a claim on historical shares

of royalty from Warsak Dam and Gomal Zam Dam since their inception. This claim is based on

the fair application of the principle of symmetric fiscal equalization.

F. Conclusions and Recommendations

FATA development and its connected resource allocation must be organized on sound policy

principles and with a long term vision. A fair application of the principle of symmetric fiscal

equalization to FATA should not be postponed any longer. The policy principles that apply to the

rest of the federation for revenue sharing arrangements should apply to FATA as well. The

policy symmetry for equalization should be on the basis of equal access to services to all citizens

of Pakistan, irrespective of place of residence or region. It should not be entangled with legal

status of regions. As mentioned, the rights of the people of FATA as citizen of Pakistan remain

indivisible, inalienable and equal similar to the residents of provinces of Pakistan. Based on this

principle, there should be a ready acceptance of policy symmetry for FATA and there should be

symmetric application of the implicit and explicit equalization to the revenue sharing

arrangements for FATA.

For sustainable development of FATA, revenue sharing for FATA should be organized on a

sustainable basis, in synchronization with the equalization policy adopted for the citizens

residing in the provinces of Pakistan. Revenue sharing for FATA is critical to FATA‘s

development policy and it should not be consigned to institutional oblivion as in the past. The

special status of FATA should translate into an opportunity to address this discrepancy in

revenue assignment and not as a barrier to addressing it.

It should be recognized that like other areas of Pakistan, the residents of FATA have a

comparable claim on the national resources. All citizens of Pakistan have an inherent claim on

equal access to public services irrespective of their region of residence. In recognition of this

principle, fiscal equalization should be carried out for comparable provision of service delivery.

The recommendations in this position paper are equally applicable under different scenarios. In

other words, these recommendations are applicable to the current legal status of FATA as well as

hold for a FATA assuming a different legal status in the future. FATA becoming a member of

the NFC, either through a constitutional amendment or through an application of NFC formula

for revenue assignment through an Executive Order are equally feasible. The legal status of

FATA is not a barrier to addressing the issue and should not be treated as such. The decision to

apply the fair principle of fiscal equalization lies in the policy domain and should not be locked

out on the pretext of the legal status.

The following recommendations should be adopted to ensure equitable revenue allocation to

FATA:

1. FATA‘s share should be computed using the NFC formula through an implicit

application on the basis of the NFC policy of providing equal access to public services

for all citizens through fiscal equalization irrespective of their place of residence; while

the provinces claim this principle for their residents, the federal government should apply

this principle to FATA;

2. FATA should be afforded a non-voting membership through co-option in the Eighth NFC

so that the citizens residing in FATA can be represented, their interests presented same as

those of the residents of provinces and there is no discrimination in treatment of these

citizens of Pakistan;

3. A proposal for constitutional amendment should be considered to allow FATA, and

possibly other regions that are not provinces, to be represented as members in NFC to

ensure that all citizens of Pakistan are represented in this constitutional forum. This

solution does not require settling the legal status of a region as a precondition to

providing equitable access to services to all citizens of Pakistan.

Annex I: Backgrounder on administrative frameworks in Gilgit Baltistan21

Given the limitations in the constitutional framework, Gilgit Baltistan has been extended limited self governance over the years from 1947 till date and offers an instructive analysis of a princely state graduating to controlled but representative form of government for functions stipulated in the Empowerment and Self governance Order (ESGO) 2009. The review of historical context of GB’s legal and administrative framework is beneficial to construct the resource allocation thesis, owing to similarities with GB’s form of governance. Although the comparison is relevant to a specific period i.e. 1947 to 1950 however review of the historical context demonstrates that the form of governance can be amended to align with changing times and contemporary needs. The following table provides a snapshot of developments in the administrative framework from the pre-partition to the last presidential order promulgated in 2009. Pre 1947-1949 The Princely State and the uprising

Gilgit Baltistan (GB), called Northern Areas till 2009 was the frontier Province of Jammu and

Kashmir State after its occupation by Dogra Kashmiris (ruling family) in the 19th century. In 1935,

British government took possession of Gilgit Agency from the then Government of the State of

Kashmir through a lease agreement for 60 years. Prior to the decision of declaring India and Pakistan

as two sovereign states (reportedly 01 August 1947) the area comprising Jammu and Kashmir was

returned back to the State Government. An uprising by the local groups followed in November 1947

that led to its liberation from the State Government in November 1947. The local leaders decided to

seek support from the Government of Pakistan in running the affairs of the region.

1947-1949

Temporary assignment of control of Northern Areas to the Government of

Pakistan

An agreement was signed between the Government of Pakistan and Government of Azad Jammu

and Kashmir (AJ&K) in April 1949 in which the administrative control of Gilgit and Baltistan was

temporarily assigned to Government of Pakistan.

1950-2007 Administrative frameworks

21

Government of Pakistan, Asian Development Bank and World Bank (2009) ‘Gilgit -Balistan Economic Report’; International Crisis Group (2007) ‘Discord in Pakistan’s Northern Areas’ ; Hussain, A. (2009) ‘The Gilgit-Baltistan Reforms’ Forum of Federation www.forumfed.org

The Northern Areas (NA) was governed under the Frontier Crimes regulations (1901) with political

agent as the representative of the Government of Pakistan administering the NA and was placed

under the Political Resident for the North West Frontier Province. Subsequently the following

changes took place in the governance framework from 1950 to 2007:

Ministry of Kashmir Affairs and Northern Areas (KANA) created in 1950. ‘Resident’ appointed

with all administrative and judicial authorities. In 1967, KANA introduced further reforms by

transferring powers of High Court and Revenue Commissioner to the Resident and appointed two

Political Agents for Gilgit and Baltistan. District level powers were delegated to the Political Agent to

act as District and Session Judge, Revenue Collector, Commissioner for FCR, Chief of Police and

Controlling Officer of Cooperative Society.

Representative Body of Northern Areas established in 1970. Elections of 16 members of

Northern Areas Advisory Council (NAAC) were held for the first time however NAAC had the

power to sanction development schemes only. In 1972, a Presidential order was promulgated re-

designating the post of Resident as Resident Commissioner, transforming Gilgit and Baltistan

Agencies into districts and appointment of Deputy Commissioners along with creating an additional

district of Diamer.

In 1974, the government announced a package of administrative and judicial reforms by abolishing

the State of Hunza, revoking Frontier Crimes Regulation (FCR) and creating two additional districts

Ghizer and Ganche.

Martial Law period (1977-1985), Northern Areas was declared as Zone E.

The process of reforms restarted with formation of a committee comprising of federal secretaries. On

recommendations of the Committee a representative of Northern Areas was appointed as Advisor

KANA. In 1994, the Federal Cabinet approved Reforms Package was introduced called the ‘Legal

Framework Order (LFO)’. Northern Area’s Rules of Business were framed, the positions of Chief

Secretary and Civil Secretariats were created and judicial reforms were introduced. The post of Judicial

Commissioner was abolished, and a 3-member Chief Court was constituted under the chairmanship

of a retired Judge. Any senior judicial officer belonging to federation or the provincial High Court was

eligible to be deputed as member of the Chief Court, whereas a District Session Judge from the

Northern Areas was eligible to be its member.

In 1999, the LFO was amended and the Legislative Powers were delegated to the Northern

Areas Legislative Council (NALC) allowing the Council to legislate on 49 subjects as envisaged in

schedule –II of the LFO.

From 2005 to 2007 further reforms were introduced. In 2005, Northern Areas Court of appeals

was established as an Apex Court in addition to increasing number of six (6) reserved seats for

technocrats and one additional seat for women in Northern Areas Legislative Council (NALC). In

2006, NALC was further empowered with appointment of Six (06) Advisors from the NALC, while in

2007 Northern Areas Legal Framework Order 1994 was amended and renamed as Northern Areas

Governance Order 1994 and NALC was renamed as Northern Areas Legislative Assembly.

2009 onwards Limited local self governance

In order to further devolve the political authority to the citizens of GB, the President of Pakistan

promulgated the Empowerment and Self Governance Order (2009) allowing limited local self-

governance reforms. GB now has a directly elected Legislative Assembly with 61 subjects to legislate

on (Schedule III, ESGO 2009), while the GB Council indirectly elected and also represented by

nominees of the Prime Minister (Federal Cabinet or Parliamentarians of Pakistan) has been assigned

55 subjects. ESGO prescribes the rights of the citizens, provides for the executive authority of the

Government and the judicature.

Annex II: Revenue Dimensions of FATA

Calculation of Geographic Tax Burden of Indirect Taxes

Sales Tax collection in real term- province wise

Rs million

Years Punjab Sindh KPK Baloch FATA Total

04-05 1006.28 411.56 239.90 88.77 42.94 1789.47

05-06 1125.58 460.35 268.34 99.29 48.03 2001.62

06-07 1097.00 448.66 261.53 96.77 46.81 1950.79

07-08 1151.42 470.92 274.50 101.57 49.13 2047.58

08-09 1737.80 710.74 414.30 153.30 74.16 3090.33

09-10 1793.57 733.55 427.59 158.22 76.54 3189.50

10-11 1832.24 757.02 441.27 163.28 78.99 3272.82

11-12 2210.14 903.93 526.91 194.97 94.32 3930.30

12-13 2153.20 880.64 513.33 189.954 91.89 3829.02

13-14 2378.32 972.71 567.00 209.81 101.50 4229.36

Federal Excise Duty collection in real term- province wise

Rs million

Years Punjab Sindh KPK Baloch FATA Total

04-05 224.03 91.62 53.41 19.76 9.56 398.38

05-06 211.04 86.31 50.31 18.62 9.01 375.29

06-07 254.59 104.13 60.70 22.46 10.87 452.74

07-08 281.09 114.96 67.01 24.80 12.00 499.85

08-09 451.84 184.80 107.72 39.86 19.28 803.50

09-10 433.45 177.28 103.34 38.24 18.50 770.79

10-11 397.40 164.19 95.71 35.42 17.13 709.85

11-12 336.86 137.77 80.31 29.72 14.38 599.04

12-13 309.16 126.45 73.71 27.27 13.19 549.79

13-14 329.71 134.85 78.60 29.09 14.07 586.32

Customs Duty collection in real term- province wise

Rs million

Years Punjab Sindh KPK Baloch FATA Total

04-05 487.20 199.26 116.15 42.98 20.79 866.39

05-06 528.95 216.34 126.10 46.66 22.57 940.62

06-07 469.55 192.04 111.94 41.42 20.04 835.00

07-08 460.53 188.35 109.79 40.63 19.65 818.96

08-09 572.29 234.06 136.44 50.49 24.42 1017.70

09-10 557.76 228.12 132.97 49.21 23.80 991.86

10-11 536.19 221.54 129.14 47.79 23.12 957.77

11-12 597.69 244.45 142.49 52.73 25.51 1062.86

12-13 612.85 250.65 146.11 54.07 26.15 1089.83

13-14 580.74 237.52 138.45 51.23 24.78 1032.72

Indirect taxes total- collection in real term- province wise

Rs million

Years Punjab Sindh KPK Baloch FATA Total

04-05 1717.52 702.45 409.46 151.52 73.30 3054.25

05-06 1865.57 763.00 444.76 164.58 79.62 3317.52

06-07 1821.14 744.83 434.17 160.66 77.72 3238.53

07-08 1893.05 774.24 451.31 167.00 80.79 3366.39

08-09 2761.93 1129.61 658.46 243.66 117.87 4911.53

09-10 2784.78 1138.95 663.90 245.67 118.85 4952.15

10-11 2765.84 1142.75 666.12 246.49 119.24 4940.45

11-12 3144.70 1286.16 749.71 277.42 134.21 5592.20

12-13 3075.22 1257.74 733.15 271.29 131.24 5468.64

13-14 3288.77 1345.08 784.06 290.13 140.36 5848.40

Previous Studies on Tax Incidence

These studies used detailed Household Income and Expenditure Survey (HIES) data for the years 2000-01

and 2004-05 and analysed the trends in the distribution of GST burden across the tiers of income

distribution. In the methodological perspective, the results of these studies in terms of tax progressivity

are based on the average rate of progression by comparing the Effective Tax Rate (ETR) for each income

group. For example, Wahid and Wallace (2008) updated the incidence analysis using HIES data for the

year 2004-05. Their work, however, was broad-based and they estimated incidence distribution of all

major taxes (direct and indirect) in Pakistan. With respect to GST incidence they deduced that the

effective tax rate is proportional to slightly progressive. Interestingly, they found that the distribution of

the overall tax burden in Pakistan is progressive. However, this progressivity, according to their study

comes about almost exclusively because of the burden of the income tax falling on the top income group.

Refaqat‘s work (2003, 2005 and 2008) on social incidence in Pakistan. She concluded that a move from

dependence on trade tax revenues to GST/VAT revenues has made the overall indirect tax system of

Pakistan a little more progressive. Regarding GST incidence specifically, she asserts that ―Results have

revealed that progressivity of GST pre-reform (1990-91) incidence was mainly due to the limited scope of

GST/VAT at that time and due to the patterns of exemptions that clearly favoured the poor. However,

post-reform (2000-01) GST/VAT incidence, despite focus on ‗equity‘ and ‗distributional‘ considerations

in the reform agenda, appears at best to be proportional‖.

Methodology:

The analysis covers last seven years from FY: 2008-09 to 2014-15. However, in some cases current data

has been used and somewhere last three financial years have been covered. Actual figures have been

utilised as long as they are available. In some cases estimates have been used based on author‘s

calculations and that too estimated by the relevant organization.

The source of the tax revenue is FBR reconciled figures with the Accounting General of Pakistan

Revenues (AGPR) both at field and national levels. Somewhere tax collection figures were obtained from

the National Bank of Pakistan by the Pakistan Revenue Automation Limited (PRAL) a subsidiary of the

FBR, particularly in respect of GB and AJK. Population data estimates are obtained from the National

Institute of Population Studies (NIPS), Economic Surveys of Pakistan and Compendium on Gender

Statistics of Pakistan 2014, Pakistan Bureau of Statistics. Divisible pool data has been taken from the

Finance Division, Islamabad.

The flow of this document has been organized in a manner to make it more informative. It commences by

explaining the historical background of FATA, and then hones the details of the economy, tax structure

and budget allocation to FATA by the federal government. It also analyses the per capita tax incidence of

the four provinces of Pakistan and FATA and GB & AJK separately. In order to provide clarity and good

understanding of reader the report has been divided into following sections:

Section-1: This section lays down brief introduction highlighting historical background of FATA, its

demographic pattern and social & economic conditions. This portion highlights the economy of FATA,

agriculture and industrial setup in the area, employment opportunities and per capita income earned in

FATA. It also includes cost of damages due to war on terror.

Section-2: Attempts to analyse the federal taxation structure existed in FATA i.e. which federal taxes are

levied in the jurisdiction of FATA and what type of exemptions have been given under different taxes. It

also includes Trade through Torkham Border.

Section-3: The federal government tax revenue position has been included for the readers to understand

the resources availability with Federal Government for distribution amongst the provinces.

Section-4: This section deals with the background of NFC awards over the years, highlights resource

allocation formula fixed by successive National Finance Commissions and the mechanism of distribution

amongst federating units.

Section-5: This section attempts to analyses budgetary allocation to FATA. The allocation has been

analyzed with respect to economic and financial perspective.

Section 6: This section includes conclusion and policy recommendations.

During the course of this assignment, the consultant met with range of learned people of the government

sector both federal and provincial level to extract information for the study and also discussed the issues

arising in FATA and its remedial measures.

Section-1 Economy of FATA:

The economy of FATA is in dilapidated state due to negligible economic activities in the region. Majority

of the people have no permanent source of income, while others have small businesses like shops etc. The

local economy is chiefly pastoral, with agriculture practiced in a few fertile valleys. Others are involved

in trade within the tribal belt or with down-country markets. Women take an active part in agricultural

activities, collect fuel wood and fetch water.

With few industries and limited unorganized mining sector in some areas, therefore, having negligible

absorption capacity, so many people seek employment as short-term unskilled labourers, or join in local

security and paramilitary forces. Those who work in major cities of Pakistan and abroad especially

Middle East, support their families. Moreover, highly qualified among them have, in many cases,

migrated permanently along with their families to urban centres outside the tribal areas.

FATA is the most underdeveloped region in the country, with 60% of its population living below the

poverty line and an unemployment rate ranging between 60-80%. Similarly, only 62% of the FATA

population has access to electricity, on average the road density is 0.17 as compared to the national

average of 0.26.22

Its total irrigated land is roughly 1,000 square kilometres. There is no system of

banking. However, FATA contain reserves of marble, copper, limestone and coal which are mostly

untapped.

Out of 2,722,00023

hectares geographic area in FATA, only 8% is cultivated. Irrigated area is 86,000

hectares and forest consists of 49,000 hectares. The land supports an average of 18 persons per cultivated

hectare, and more than 40 persons per irrigated hectare. Some 39% of farmland is under irrigation, with

the remaining cultivated area relies entirely on rainfall.

Cost of Damages

According to Pakistan Economic Survey, 2013-14, the cost of war on terror from 2001-2014 is to the tune

of Rs. 102.51 billion dollars which speaks volume for the destruction of infrastructure and disruption of

economic activity in Pakistan. Accordingly, being a frontline area in the war on terror and FATA in its

geo-strategic position, it suffered to a great extent as said above. There is no reliable estimate available to

22 Mainstreaming FATA through Legal and Political Reforms by Asmatullah Khan Wazir and Muhammad Zaheer Khanfrc.com.pk/wp-

content/uploads/2014/01/Research-Paper-2.pdf 23

www.fata.gov.pk

gauge the destruction and harm caused by war on terror in FATA. Since FATA is economically backward

with almost dilapidated industrial base, therefore, negligible damages occurred as far as export, foreign

investment, privatization, tax collection etc are concerned.

However, as far damages to physical infrastructure, IDPs compensation, trade, cost of uncertainty is

concerned, FATA has suffered the most. The cost of war against terror has been estimated by the Finance

Division stood at Rs 865 million dollars in the year 2013-14. Since specific estimates of damages caused

to FATA is not available, therefore, this issue was discussed with number of fiscal experts and various

senior functionaries of the Government sector particularly the Finance Division, the estimated cost of

damage to FATA has roughly been worked out at 25% of the total cost of damages, which comes to

US$206 million or Rs 21 billion per year. Cumulative figures from 2001-2014 come to Rs.250 billion,

which is huge amount.

Section-2 Existing Taxation Structure in FATA

Keeping in view the backwardness of FATA, the region enjoys exemption from income tax. However,

Federal Excise Duty is applicable in FATA and Customs duty is collected at Torkham customs station,

apart from bulk of imports takes place to Afghanistan under APTTA. Therefore, main source of revenue

is Customs duty. An amount of Rs. 179.1 million has been collected during FY 2013-14 which is mainly

from customs duty. Federal Excise has contributed Rs 2,799 million only during the same period.

As per 18th amendment in the constitution of Pakistan, the taxation of services has been transferred to the

provinces, consequently Sindh, Punjab and Khyber Pakhtunkhwa provinces have started collection from

various services, the share of FATA in telecommunication sector yet to be ascertained.

According to the Sales Tax Act 1990 section- 1 sales tax has not been extended to the tribal areas as yet,

the benefits of non-application are restricted and confined only to the production in FATA/PATA and its

subsequent sales/consumption also in the FATA/PATA. The registered persons in Pakistan, making

taxable supplies (other than the zero rated exports, has to charge sales tax even on its supplies to

FATA/PATA and issue tax invoices accordingly to the person located in FATA/PATA.

Trade through Torkham Border:

Significant amount of international trade is being carried out at Torkham Border (Table 1). The total

volume of import and export is 0.62 % and 0.11 % in total trade respectively. Peace and stability in

FATA is definitely the key factor to boost volume of trade by reaping benefits from the trade corridors

agreement with international community.

Table 1: Import and Exports at Torkham Border

Rs. in Million

Years Import

As % of

National

Imports

Export

As % of

National

Exports

2012-13 23,714.4 0.55 2,123.1 0.09

2013-14 27,591.0 0.60 3,708.7 0.14

2014-15 24,060.3 0.62 2,123.1 0.11

Pakistan has recently signed TIR convention with international community which provides a legal

framework for traffic-in-transit of goods across borders among the contracting parties. TIR would

facilitate trade with ECO countries and China through land routes also facilitate access by land/sea

through Pakistan from/to China, Central Asian States and beyond, thus opening a vertical corridor that

would benefit regional and global trade and economies.

Pakistan has also become a member of Central Asian Regional Economic Coordination (CAREC). With

the advent of these International agreements for trade development Torkham route has become more

important. Safe and speedy transportation of goods to Afghanistan and CARs is linked with the

infrastructural development of FATA together with peace in the region. Government of Pakistan needs to

provide more resources for FATA development to get advantages from these agreements.

Section-3 Federal Government Tax Revenues for distribution

Table 2 highlights the year wise federal taxes collected during the past few years. The federal

Government after deduction of collection charges two % in-case of income tax, one % in-respect of

federal excise duty & Customs and one % on account of war against terrorism to Khyber Pakhtunkhwa,

rest of the amount is distributed amongst the four provinces according to the NFC agreed formula.

Table 2: Year-wise Federal Net Tax collection

Rs.Million

Years IT ST FED Customs Total taxes

2008-09 443,548 451,744 117,455 148,403 1,161,150

2009-10 525,977 516,348 124,784 160,273 1,327,382

2010-11 602,451 633,357 137,353 184,853 1,558,014

2011-12 738,424 804,899 122,464 216,906 1,882,693

2012-13 743,409 842,528 120,964 239,459 1,946,360

2013-14 877,255 996,382 138,084 242,811 2,254,532

Source: FBR data bank

Section-4: Resource Sharing Through National Finance Commission (NFC)

The resource sharing between federation and provinces is governed by Part-VI Chapter-1 of 1973

Constitution of Pakistan. Under Article 160 of the Constitution National Finance Commission (NFC) is

set up to make recommendations periodically to the President of Pakistan. Accordingly the first NFC

Award was mandated in 1973. In year 1974 first NFC Award was approved and the ratio between federal

and provincial governments was fixed at 80:20 with Punjab's share at 60.25%, Sindh's 22.5%, NWFP's

(now KPK) 13.39% and Baluchistan‘s 3.86%. Population was the sole criteria for revenue distribution

amongst provinces and customs duties, the main revenue earner at the time, was kept out of the divisible

pool and sales tax was federalized.

This arrangement of distribution continued till 1990 along with population as the major criteria for

allocation. However, in 1979 the population data reported on the basis of sample surveys revealed that

patterns of population have changed. Punjab's population declined by 2.28 % from 60.25% to 57.97 %,

Sindh's rose to 23.34 %, NWFP's (KPK) remained the same while Baluchistan‘s rose to 5.3 %.

Another change in the formula of distribution of resources was noticed in 1996, where the share of the

federal government was reduced to 62.5 % and provinces' share was raised to 37.5 %. In 2006, the

estimated federal provincial allocation was 55:40 with provincial share expected to be improved by one %

each year till the ratio was 50:50 with Punjab estimated to receive 56.07 %, Sindh 25.67 %, KPK 13.14 %

and Balochistan 5.134 %.

The 7th NFC Award (2009) has been considered to be a major achievement of the government for three

reasons. First, after the gap of almost 14 years, the federation and the federating units evolved a

consensus. Second, the unique design of the NFC Award was acceptable for the federating units. In the

wake of financial demands of the provinces, the vertical share of provinces has been enhanced. Moreover,

the design of the revenue sharing formula has been changed and for the first time fiscal equalisation

achieved. Third, special needs of provinces have been recognised with reference to the context of Khyber

Pakhtunkhwa being the frontline province in the "war against terror". Likewise, special recognition was

given for the development needs of Balochistan and its share was enhanced. Table 3 highlights resource

allocation under NFC award 2009 and the preceding years.

Table 3: Province -Wise Share(%) Under Various NFC Awards

Years

Federation:

Provinces Punjab Sindh KPK Baloch

1974 20:80 60.25 22.50 13.39 3.86

1979 20:80 57.97 23.34 13.39 5.30

1990 20:80 57.87 23.29 13.54 5.30

1996 62.5:37.5 57.37 23.29 13.54 5.30

2006 45:55 57.37 25.67 13.14 5.13

2009 44:56 51.74 24.55 14.62 9.09

Source: NFC Awards documents M/O Finance

Table 3A: NFC Award 2009 Formula

Indicators & Respective Weights

Population 82.0%

Poverty/Backwardness 10.3%

Revenue Collection/Generation 5.0%

Inverse Population Density 2.7%

Province-wise Share(%)

Punjab 51.74%

Sindh 24.55%

Khyber Pakhtunkhwa 14.62%

Balochistan 9.09%

100.00%

Section-5 Resource Allocation to Provinces and FATA

The resource distribution amongst the provincial governments mainly takes place in two ways. Firstly,

revenues are distributed between federal and provincial governments, it is called vertical distribution. As

far as horizontal distribution is concerned, it is the percentage allocation among different provinces

according to some specified criteria.

Systematic revenue sharing has four stages and the details are presented below:

Revenues are transferred from federal to provincial governments through NFC.

Revenue distribution takes place from provincial governments to local governments and is further

executed through Provincial Finance Commission (PFC).

The federal government allocates specific amount of money to local governments

Revenues are distributed among the local governments i.e. from district government to tehsil municipal

administration.

The transfer made between federal and provincial government includes revenue shares out of the divisible

pool, grants, straight transfers (royalties) and loans. Divisible pool consists of all taxes collected by the

federal government e,g, sales tax, income tax, excise duty and customs duty.

Table 4 highlights the allocated amount to the provinces from 2008-09 to 2014-15 (budgeted24

), which

reflects considerable increase in the resources of the provinces over the years. Share of Punjab in resource

allocation is almost 46 % during the last seven years with slight variation. The share of Sindh province

has reflected somewhat decline during these years. During FY: 2008-09 the province was getting 29.4%

from the government resources started declining in the next years. The share of Sindh has further declined

to 26.3% during 2014-15. On the other hand, KPK province is better off as allocation to province has

increasing trend. The province was getting 11.6% share from the centre that steadily increased to 16.1 %

during FY: 2014-15, mainly due to additional amount of 1% under ―war against terrorism‖. The province

of Balochistan is being provided substantial amount to meet its needs of development and non-

development expenditures.

24

The revenue figures from 2008-09 to 2013-14 are actual and reconciled with AGPR both at local and national level. The revenue figures for FY: 2014-15 are budgeted.

Table 4: Federal Transfers and Provincial Governments

Rs. Billion

Province-wise

Share

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

1. Punjab 277,513 331,588 463,594 585,948 578,061 658,993 812,786

2. Sindh 174,598 199,283 277,878 313,476 325,777 380,342 464,007

3. KPK 69,031 88,894 156,921 197,504 204,072 235,048 283,675

4. Balochistan 38,722 35,512 99,307 111,688 113,112 138,952 159,714

Provinces

(Total) 559,864 655,277 997,700 1,208,616 1,221,022 1,413,335 1,720,182

5. FATA 16,176 17,887 23,192 23,410 29,394 32,968 34,562

6. GB&AJK 17,082 19,554 31,659 13,140 9,294 10,228 10,584

Grand Total 593,123 692,718 1,052,551 1,245,166 1,259,710 1,456,532 1,765,328

Source: Budget Documents (www.finance.gov.pk)

Federal Government Allocations for FATA

According to FATA Sustainable Development Plan 2007–2015, each year, the Federal Government sets

aside a block allocation, known as the Annual Development Programme (ADP), intended exclusively for

development expenditure. This allocation, disbursed according to province, region, sector or project, is

part of the federally funded Pubic Sector Development Programme (PSDP). FATA receives an annual

share of ADP funding. In addition to the ADP, the PSDP provides separate funds for programmes and

projects in various agencies and FRs, and contributes to donor-assisted initiatives.This arrangement is

made on adhoc basis due unavailablilty of proper distribution mechanism . The government also

provides funds to each member of the National Assembly and Senate from the Khushhal Pakistan

Programme, to be disbursed in their own constituencies. These resources are all part of the ‗development

budget‘. The ‗regular‘ budget provides for non-development expenditure and recurring costs. Salaries and

office management costs of the Civil Secretariat FATA, its Directorates and their field staff are met by the

federal government, through the Ministry of Finance, and reflected as ‗non-ADP‘ expenditure in the

federal budget. It is clarified that FATA is allocated funds on two accounts i.e. current and

development by the Finance Division. The actual expenditure incurred under various

components are assessed and also adjusted for inflationary impact and fund is allocated.

However, the release of funds is on quarterly basis. The Additional Chief Secretary FATA is the

Principal Accounting Officer and the fund is utilized accordingly. So far development

expenditure is concerned the allocations on the basis of projects. AGPR Peshawar maintains the

FATA accounts. Moreover, the federal government provides these allocations from its own

resources. The allocation to FATA is on adhoc basis, no established formula is applied like in the

case of NFC award. Expenses of the political administration in each agency are also part of the regular

budget. The regular budget for salaries and office management costs is prepared by each Directorate, unit

or entity in FATA, and sent to the Ministry for approval. Sector-specific allocations from the ADP are

made at the Civil Secretariat FATA, based on priorities and needs. The grants transferred to FATA during

last few years are shown in Table 6. The grants to FATA from Federal Government are well below 3% of

federal grants during last 7 years.

As evident from Graph 2, the year-wise growth in funds allocation to FATA is less than provinces.

Ironically, grants to FATA have recorded growth of only 4.8% as compared to huge growth of 21.7% to

the provinces. It is clarified that yearly growth has been worked out on the basis of yearly allocations to

FATA and other provinces.

Prima facie, it is a case of negligence at the part of Federal Government, despite providing them more

resources to build its damaged infrastructure caused due to war against terrorism. The share of resources

allocated to FATA by central government continuously declining over the years. In 2008-09 and 2009-10,

FATA was provided 2.7% and 2.6% of federal grants respectively (Table 6). The allocation sharply

declined from 2010-11 and onwards and reached to 2% in the current financial year. Since FATA is not

part of the NFC therefore, the resource allocation is adhoc based. On the contrary under the NFC awards,

maximum share goes to Punjab being the larger province followed by Sindh, Khyber Pakhtunkhwa and

Balochistan.

FATA, 2009-10,

10.6

FATA, 2010-11,

29.7

FATA, 2011-12,

0.9

FATA, 2012-13,

25.6 FATA,

2013-14, 12.2

FATA, 2014-15,

4.8

Provinces, 2009-10,

17.0

Provinces, 2010-11,

52.3

Provinces, 2011-12,

21.1 Provinces, 2012-13,

1.0

Provinces, 2013-14,

15.8

Provinces, 2014-15,

21.7

FATA Provinces

Graph 1: Year-wise Growth(%) FATA Grants Vs. Provinces

Table 5: FATA COMPARISON: FEDERAL TRANSFERS AND PROVINCIAL SHARE (%)

Province-wise

Share

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

1. Punjab 46.8 47.9 44.0 47.1 45.9 45.2 46.0

2. Sindh 29.4 28.8 26.4 25.2 25.9 26.1 26.3

3. KPK 11.6 12.8 14.9 15.9 16.2 16.1 16.1

4. Balochistan 6.5 5.1 9.4 9.0 9.0 9.5 9.0

Sub-total 94.4 94.6 94.8 97.1 96.9 97.0 97.4

5. FATA 2.7 2.6 2.2 1.9 2.3 2.3 2.0

6. GBT 2.9 2.8 3.0 1.1 0.7 0.7 0.6

Grand Total 100 100 100 100 100 100 100

Table 6: Percentage difference in per capita budget allocations

Recurrent budget Development budget Total budget

Years GB & FATA KP & FATA GB & FATA KP & FATA GB & FATA KP &FATA

2006-07 126% 141% 60% -22% 68% 26%

2007-08 145% 162% 50% -5% 87% 61%

2008-09 118% 263% 60% -13% 93% 91%

2009-10 168% 289% 60% -28% 94% 116%

2010-11 168% 397% 88% 45% 96% 129%

2011-12 132% 155% 79% 54% 87% 102%

2012-13 190% 196% 24% 10% 102% 97%

2013-14 182% 189% 28% 15% 88% 89%

Source: Authors’ calculations based on data of Tables 3 and 4

If we compare FATA with AJK & GB, these backward areas get less than 1% from the federal grants.

With allocation of this meager amount providing basic amenities to the people of these neglected areas

seem impossible leaving aside development activities.

Table 6 presents comparison of Federal Government allocations to FATA, GB & AJK.

Table 6: Federal Government Grants to FATA and GB & AJK ( Total

amount under the heads of development and non development allocated

from the federal government budget)

Years FATA

(Rs. Million)

%of Total

Allocations

GB & AJK

(Rs. million)

%of Total

Allocations

2008-09 16,176 2.7 17,082 2.9

2009-10 17,887 2.6 19,554 2.8

2010-11 23,192 2.2 31,659 3.0

2011-12 23,410 1.9 13,140 1.1

2012-13 29,394 2.3 9,294 0.7

2013-14 32,968 2.3 10,228 0.7

2014-15 34,562 2.0 10,584 0.6

Source: Budget Documents (www.finance.gov.pk)

Graph 2 depicts how sharply shares of grants to FATA and GB/AJK declined in the recent years in the

overall grants by the Federal Government.

FATA % of Total, 2008-

09, 2.7

FATA % of Total, 2009-

10, 2.6 FATA % of

Total, 2010-11, 2.2

FATA % of Total, 2011-

12, 1.9

FATA % of Total, 2012-

13, 2.3

FATA % of Total, 2013-

14, 2.3

FATA % of Total, 2014-

15, 2.0

GB/AJK % of Total, 2008-

09, 2.9

GB/AJK % of Total, 2009-

10, 2.8

GB/AJK % of Total, 2010-

11, 3.0

GB/AJK % of Total, 2011-

12, 1.1

GB/AJK % of Total, 2012-

13, 0.7

GB/AJK % of Total, 2013-

14, 0.7

GB/AJK % of Total, 2014-

15, 0.6

FATA % of Total GB/AJK % of Total

Graph 2: FATA Grants Vs. GB & AJK as % age Share of Total Allocations

Section-6 Conclusion

FATA has served as a trade corridor between Pakistan and Afghanistan and between India and central

Asia. Geo-strategically this region occupies the most important link in the entire sub-continent. The

distress in Afghanistan in the aftermath of the 9/11 attack has cast horrible repercussion for Pakistan in

general and FATA in particular. The Pakistan economy was badly affected due to continuous war on

terror. Accordingly, FATA has suffered in every sphere of life in terms of economic activities,

employment, collateral damages, and loss of lives, loss of properties and above all, the human dilemma.

The situation disrupted FATA‘s normal economic and trading activities which have not only resulted in

higher cost of business The dilemma of internally displaced people of FATA has disrupted the socio-

economic fabric and contributed to the miseries of the people.

Being a frontline area in the war on terror and its geo-strategic position, it suffered to a great extent as

said above. There is no reliable estimate available to gauge the cost of destruction and harm caused by

war on terror in FATA. It is estimated that cost of war on terror roughly comes to 206 million dollars or

Rs 21 billion per year. However, more than Rs 250 billion is estimated damage cost of FATA from the

year 2001 to 2014. With the advent of International agreements for trade development like TIR and

CAREC, Torkham route has become more important. Safe and speedy transportation of goods to

Afghanistan and CARs is linked with the infrastructural development of FATA together with peace in the

region. Government of Pakistan needs to provide more resources for FATA development to get

advantages from these agreements.

Policy Recommendations

Constitutional Amendment- Royalty Rights: According to the Constitution of Pakistan, royalty and

excise duty on natural resources shall be paid to the provinces where the resources are located. After the

promulgation of 18th Amendment, resources generated through oil and gas is to be shared by the federal

and provincial governments at the ratio of 50:50. However, FATA is not included in the resource sharing

formula. It is therefore, recommended that special provisions should be incorporated in the constitution of

Pakistan so that the royalty rights as applicable to the provinces may also be applied to FATA, so that the

benefits of dividends of natural resources could be given to them.

Special grant to FATA: FATA has suffered to a great extent caused by war against terror. The region is

economically backward with almost dilapidated industrial base and poverty ridden therefore, special grant

of 1% from the divisible pool be awarded to FATA in line with Khyber Pakhtunkhwa. In fact FATA is a

frontline area in the war against terror as compared to Khyber Pakhtunkhwa. Roughly, Rs.21 billion

additional amount would be available to match the cost of damage caused to physical infrastructure.

Levy of Special Duty on Import at Torkham Border: Value of imports of around Rs. 25 billion is

carried out annually at Torkham border. Initially a levy@5% on import at Torkham border be imposed.

Depending on the flow of imports more than Rs. 1 billion will be collected and the amount so realized

could be utilized for education and health sectors.

Claim for FED in (VAT mode) on Telecom Sector Revenue: After the 18th amendments, the provinces

are empowered to collect GST on services in their jurisdictions. Major revenue source is

telecommunication which constitutes around 80 % of the total services, the provinces of Khyber

Pakhtunkhwa, Punjab and Sindh are collecting GST on services. Due to security concerns, the telecom

boosters controlling FATA are located in the jurisdiction of KPK, therefore, the amount of GST

originating from telecom services pertaining to FATA may be worked out by Pakistan

Telecommunication Authority like in the case of other provinces and the amount be transferred to the

FATA.

Local Taxes: The situation and location of FATA is such that credible statistics on local taxes are not

available. According to FATA authorities, there is no mechanism of tax collection in the region. If certain

local taxes do exists, the outcome is zero due to obvious reasons. However, there is a dire need to devise a

mechanism to collect local taxes required for the local needs in the line with Khyber Pakhtunkhwa and

other provinces.

Annexure- 3; Indirect Tax Collection from Gilgit Baltistan and AJK

Rs in Million

Heads/Areas 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00

Gilgit Baltistan

ST 374.7 338.5 547.7 303.7 277.6 235.2 156.2 155.9 13.3 11 21.7 29.7 19 10 7.6 7.2

FED - - 0.1 0.1 0.8 - - - - - - - - - 1.1 0.4

CD 509.0 464.8 525.0 767.5 561.3 309.1 285.1 401.0 13.0 4.3 16.1 20.3 14.4 11.8 11.3 9.1

Total GB

Collection 883.7 803.3 1,072.8 1,071.3 839.7 544.3 441.3 556.9 26.3 15.3 37.8 50.0 33.4 21.8 20.0 16.7

AJK

ST 477 1,120 1,058 189 163 263 125 108 116 24 25 28 14 43 18 13

FED - 0.3 - - 2.3 - - 0.1 0.1 0.1 - - - - 0.1 0.1

CD 211.4 433.6 767.5 96.5 62.5 168.9 42.1 47.8 51.8 19.6 25.0 24.6 12.4 11.0 19.5 15.5

AJK total

Collection 688.0 1,554.3 1,825.1 285.0 227.6 431.5 167.0 155.8 168.1 43.9 50.0 52.4 25.9 53.5 37.6 29.0

Grand Total 1,571.7 2,357.6 2,897.9 1,356.3 1,067.3 975.8 608.3 712.7 194.4 59.2 87.8 102.4 59.3 75.3 57.6 45.7

Source: Pakistan Revenue Automation Limited a subsidiary of Federal Board of Revenue

Annex III: Province -wise share distribution in NFC awards 1974-2009

Years Federation: Provinces Punjab Sindh KPK Balochistan

1974 20:80 60.25 22.50 13.39 3.86

1979 20:80 57.97 23.34 13.39 5.30

1990 20:80 57.87 23.29 13.54 5.30

1996 62.5:37.5 57.37 23.29 13.54 5.30

2006 45:55 57.37 25.67 13.14 5.13

2009 44:56 51.74 24.55 14.62 9.09

Note: Provinces share to increase to 57.5 Percent after 2010-11

Annex IV: NFC Award 2009 Formula

NFC Award 2009 formula and provinces shares

Population 82.00%

Poverty/Backwardness 10.30%

Revenue Collection/Generation 5.00%

Inverse Population Density 2.70%

Province-wise % age Share

Punjab 51.74%

Sindh 24.55%

Khyber Pakhtunkhwa 14.62%

Balochistan 9.09%

100.00%

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Ahmad. I et al (2007) National Finance Commission Awards in Pakistan- A historical

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