The federal government has scheduled the maiden meeting of the National Finance Commission for December 4 in Islamabad, setting the stage for deliberations on a new revenue-sharing formula between the Centre and the provinces. The meeting, which will be chaired by Finance Minister Muhammad Aurangzeb, is expected to open discussions on the 11th NFC Award and outline the strategic framework for future negotiations, including the formation of sub-groups to address thematic areas such as revenue distribution, expenditure responsibilities, and fiscal sustainability.
Khyber-Pakhtunkhwa Chief Minister Sohail Afridi confirmed that he will participate in the meeting, emphasizing that the NFC process is crucial for protecting provincial fiscal rights. Speaking to journalists in Islamabad, Afridi reiterated his demand that the federal government clear outstanding liabilities exceeding Rs3 trillion and honor its commitment to finance an irrigation canal project of critical importance to his province. He stated that the Centre owes K-P Rs2.2 trillion in net hydel profit dues and an additional Rs800 billion under the previous NFC arrangements. Afridi also highlighted that despite increased population following the merger of former tribal districts, K-P’s revenue share has not been adequately adjusted.
The financing issue extends to development commitments made for the merged districts. Muzammil Aslam, the finance adviser to the K-P chief minister, stated that the federal government had pledged Rs700 billion over seven years to support reintegration and development. However, only Rs165 billion has been released so far, leaving a significant funding gap. He added that for the current fiscal year, the federal government had committed Rs65 billion for the merged districts, yet the province has not received any funds during the first five months.
The NFC meeting arrives at a time when the Centre is pushing for changes that could potentially reduce the provincial share in the divisible pool, currently set at 57.5 percent. The federal government argues that increasing expenditures and fiscal pressures require either revisiting revenue shares or transferring additional expenditure responsibilities to the provinces. Prime Minister Shehbaz Sharif recently suggested that customs duties should be excluded from the NFC pool and treated as federal revenue. However, the 7th NFC Award, finalized in 2009-10, includes customs duties along with income tax, capital value tax, wealth tax, sales tax, and federal excise duty as part of the federal divisible pool.
Provinces remain concerned that any attempt to reduce their share without a constitutional amendment would be legally untenable. For the current fiscal year, provincial shares from federal taxes are estimated at Rs8.2 trillion based on the Federal Board of Revenue’s projected collection of Rs14.13 trillion. Of this amount, Rs892 billion, or 10.8 percent, comes from customs duty, making it a substantial revenue component for the provinces.
The broader NFC debate is unfolding alongside chronic tax challenges facing the country. Pakistan’s tax-to-GDP ratio remains stagnant at around 10 percent, far below the levels targeted when the 7th NFC Award was implemented. According to a recent report by the IMF, the absence of a harmonized tax system, overlapping federal and provincial tax jurisdictions, and a lack of long-term tax reform strategy contribute to persistent inefficiencies. The IMF also highlighted that the complexity of Pakistan’s tax structure encourages disputes, fosters corruption risks, and undermines consistent policymaking. The National Tax Council has been working with assistance from the World Bank to harmonize taxes, but progress remains limited.
As the December 4 NFC meeting approaches, all federating units—Punjab, Sindh, Balochistan, and Khyber-Pakhtunkhwa—are preparing presentations on their fiscal positions. With tensions between the Centre and the provinces resurfacing, the discussions are expected to be critical in determining the financial architecture for the coming years. The outcome will not only shape revenue flows but also influence development priorities and resource allocation across federating units.
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