The NFC Award and How Federations Share Revenue

Every federation has to decide who raises money and who spends it. The healthiest federations give each level of government taxes of its own. Pakistan does something different. The Centre collects the big taxes, and an executive commission decides how the proceeds are shared out. That share-out is the NFC Award in Pakistan, and each new round brings disputes, deadlocks and delays.

In How Constitutions Flourish or Fail, Mian Ashiq Hussain argues that the problem is not the formula but the design. A federation that hands out a central pool, rather than dividing taxing powers, breeds dependence, quarrels and delay. This essay sets the NFC Award beside the paths taken by Australia, Canada and India and outlines the reform he proposes.

What is the NFC Award?

The NFC Award is the division of centrally collected federal revenue between the federation and the provinces, recommended by Pakistan's National Finance Commission, which Article 160 of the 1973 constitution creates. The author stresses that the commission is an executive body: legislatures receive its recommendations but never vote on them.

NFC stands for National Finance Commission. Under Article 160(5), its recommendations are laid before Parliament and the provincial assemblies, yet neither has any say in how revenue is divided between the federation and the provinces. In the author's account, Pakistan's constitution-makers turned this executive commission into the sole distributor of the revenue the federation collects.

He sees this as a step backwards even from the 1935 Government of India Act, which Pakistan's constitutions otherwise followed closely. Under section 137, duties on succession and stamps, terminal taxes and levies on fares and freights went to the provinces on principles that the federal legislature fixed by statute. Section 140 treated salt, excise and export duties the same way, and at least half of the export duty on jute went to the provinces where jute was grown. The legislature, in other words, had a real role. Pakistan's constitutions of 1956, 1962 and 1973 instead kept returning to centralised distribution by the executive.

The NFC award is also easily confused with the National Economic Council. The author treats the two separately. Article 156(5) makes the NEC answerable to Parliament, yet in practice it plays a key role in economic decisions. In a real democracy, he argues, the authority to spend public money should rest on legislative sanction, not on policies set by a dominant executive body.

How is the money divided today?

Today the federation collects the major taxes and places them in a divisible pool, which the NFC Award then splits between the Centre and the provinces. Because the provinces lack adequate taxes of their own, they depend mostly on that share and on federal grants. The author calls this arrangement a perpetual bone of contention.

The weakness runs all the way down. Local governments have neither real taxing powers nor any constitutional share of provincial revenue, so basic local projects depend on the political priorities of provincial governments. The author notes that no arrangement has ever been made to secure the revenue needs of local governments in Pakistan.

He also identifies distortions inside the pool itself. Entry 52 of the Federal Legislative List, upheld by the Supreme Court in 1997, allows presumptive and minimum tax measures that can recover an indirect tax as if it were a direct one. Collecting one tax under the label of another, he argues, distorts the very distribution the National Finance Commission is meant to make. Sales tax is split too, with the federation taxing goods and the provinces taxing services, at steep rates that overlap, which he counts among the major causes of Pakistan's economic crises.

Article 161 offers a contrast. It gives the province where gas or oil is extracted the net proceeds of the federal excise duty on gas at the well-head, the royalty on gas, and the excise duty on oil. The author warns that if that excise were replaced by a sales tax, the money would flow into the divisible pool for distribution under Article 160, sapping the spirit of the constitutional promise and fuelling divisive tendencies.

How do Australia, Canada and India share revenue?

The author reads Australia and Canada as opposite journeys. Australia began almost as a confederation but became highly centralised once the Commonwealth gained control of the major taxes. Canada began highly centralised but decentralised as its provinces' own taxes grew. India's Finance Commission, unlike Pakistan's, works under parliamentary law.

In 1901 Australia's states were expected to keep most domestic responsibilities. Its framers, however, left fiscal autonomy unprotected. The Commonwealth received exclusive power over customs and excise, which raised far more than it needed in peacetime, and broad readings by the High Court let it take over sales tax and personal and corporate income tax. The states became dependent, and tied grants turned into a powerful lever of centralisation. A 1933 referendum in Western Australia, driven by Depression-era grievances, even voted for secession, though separation was averted.

Canada travelled the other way. Its 1867 constitution contained strong unitary elements, but the direct taxes it gave the provinces, such as income tax and succession duties, grew with the economy. By the 1930s, about 90 per cent of provincial revenue came from the provinces' own sources, up from under 60 per cent in the early decades. Federal grants never became decisive, and fiscal self-reliance, together with the country's two cultures, made Canada a more decentralised federation. How these two federations diverged is told more fully in The Historical Role of Financial Governance in Federal Evolution.

India is the closest relative of Pakistan's design, and the author's comparison is pointed. Article 280 of India's constitution created a Finance Commission to recommend how revenue is shared between the Union and the states, but its composition and powers are governed by law, which keeps it under parliamentary control. In his view, Pakistan seems to have borrowed the idea of executive distribution from India while stretching it much further. India also went a step down the ladder. Its 73rd and 74th Amendments of 1992 made some provision for the finances of panchayats and municipalities, and Article 243-I provides for State Finance Commissions to share state revenue with local bodies. Pakistan has no equivalent. Article 140A, added by the 18th Amendment, requires local government, but without revenue of its own it has remained, in the author's words, a nonstarter.

Why is revenue sharing not the same as fiscal autonomy?

Revenue sharing hands a province money; fiscal autonomy gives it the power to raise that money and answer for it. The author argues that every workable federal democracy rests on financial autonomy for the federation, the provinces and local government, and that it comes from dividing tax subjects, not from dividing a central pool.

He identifies several costs of the pooled model. The first is dependence: when federal collection agencies underperform, provincial development suffers whatever a province's own effort. The second is lost competition. Distribution through the NFC pre-empts healthy rivalry between provinces, and a monolithic fiscal hierarchy shrinks each tier's capacity to collect revenue. The third is blurred accountability. Underperforming provinces always have the excuse of inadequate resources, and without a system that fixes responsibility, every tier underperforms. The fourth is permanent conflict. Each constitution and reconstitution of the commission sets off fresh disputes, deadlocks and delays, while financial stability is the backbone of economic growth. Lack of fiscal innovation, he adds, breeds prejudice and harms national cohesion rather than helping it.

He is also sceptical of the claim that the 18th Amendment settled the question. In his reading, it increased the provinces' share of the divisible pool but further curtailed provincial autonomy overall, because the Federal Legislative List was expanded even as the Concurrent List was deleted. More money flowed down; the power to raise it stayed at the top. The argument is developed in The Six Points Formula and Provincial Autonomy, which traces how an earlier generation's fiscal grievances helped break the country in 1971.

What would tax assignment look like for Pakistan?

Tax assignment means dividing tax subjects, not proceeds. The author would amend the constitution to distribute revenue subjects fairly among the federation, the provinces and local governments, so that each tier builds its own collection capacity and meets its own budget, instead of relying on divisive NFC awards.

His proposal, set out here only in outline, has several parts. First, replace the pooled share-out under Article 160 with a redistribution of tax subjects among the three tiers. Second, bring whatever federal surplus remains under parliamentary control, so that any transfer to the provinces follows appropriation laws passed by Parliament on expert advice, rather than closed bargaining among executives. Third, give local governments a real fiscal base, so that Article 140A can finally work. Fourth, protect revenue tied to its place of origin: the Article 161 guarantee should cover any indirect tax on gas, not only excise, and the proceeds of a modern value-added tax should largely go to the province where they are collected.

Behind all of this sits a simple principle drawn from the Canadian story. Where a tier of government raises its own revenue, it can innovate, compete and be held to account. Where it lives on transfers, it waits, bargains and blames. In the author's view, rivalry between federal, provincial and local governments, each budgeting from its own resources, is a proven spur to capacity and progress. The fuller history of how Pakistan inherited centralised finance is in The Financial Procedures of the United Kingdom and Colonial Governance, and the case for funded local government in From Bureaucratic Rule to Self-Governance.

Frequently asked questions

What does NFC award stand for, and which article of the Constitution deals with it?

NFC stands for National Finance Commission. The NFC award is made under Article 160 of Pakistan's 1973 constitution. Under Article 160(5), the commission's recommendations are laid before Parliament and the provincial assemblies, but neither votes on how revenue is divided.

How often is the NFC Award announced?

The commission is constituted again for each new award. The author argues that these repeated rounds of constitution and reconstitution give rise to disputes, deadlocks and delays in delivering awards, because a single central pool makes every province's gain look like another's loss.

Is the NFC the same as the National Economic Council?

No. The National Finance Commission recommends how federal revenue is divided under Article 160. The National Economic Council, under Article 156, is made answerable to Parliament but in practice plays a key role in economic decision-making. The author wants spending authority to rest on Parliament's sanction.

How are the NFC award and the 18th Amendment linked?

The 18th Amendment increased the provinces' share of the NFC divisible pool. In the author's view, it did not deliver real provincial autonomy: it expanded the Federal Legislative List, left taxing power at the Centre, and added Article 140A without giving local governments revenue of their own.

Read the full argument

The NFC Award is one chapter in a longer story about how money shapes the fate of federations, from colonial Bengal to the break-up of 1971 and the devolution of 2010. The book follows that story and sets out the author's complete fiscal reform agenda. Read it in How Constitutions Flourish or Fail.