Federalism at risk — Part I

This is Part I of a two-part article. Here I trace the historical and constitutional arc of how Pakistan distributes resources between the federation and the provinces — and why attempts to roll back the 7th NFC and the 18th Amendment would be a mistake.

In Part II, I will tackle the myths and the math around "who gets how much", assess performance on both sides and provide recommendations on practical reforms to the distribution framework.

Pakistan's federal compact was born from a simple insight: unity requires autonomy. The 1940 Lahore Resolution envisioned autonomous, self-governing units in Muslim-majority regions rather than a highly centralised state. In 1943, Sindh's Legislative Assembly became the first elected body to pass a resolution demanding one country.

Others followed, showing that Pakistan was willed into existence by provincial legislatures working with the All-India Muslim League under Jinnah’s leadership. Those origins matter. They remind us that the federation was formed by provinces seeking partnership within a federal structure.

Yet the new state inherited the highly centralised Government of India Act, 1935, framed by rulers sitting thousands of miles away in London. With no early general elections and Jinnah’s death within a year, constitutional development stalled.

The 1956 constitution was crafted by unelected representatives; martial law soon followed. Centralisation hardened into habit. East Pakistan’s repeated demands for autonomy, crystallised in Sheikh Mujib’s Six Points, were dismissed. The outcome was the calamity of 1971, a searing lesson that over-centralisation can fracture national unity.

Scarred by that experience, the 1973 constitution set a new direction: a federation in which provinces would exercise real authority. The intention was clear — align responsibility with resources and bring decisions closer to citizens — but the project remained incomplete for decades. Two later milestones finally gave that intention institutional form.

The first was the 7th National Finance Commission (NFC) Award of 2009, which rebalanced revenues between the federation and the provinces commensurate with their responsibilities. The second was the 18th Amendment of 2010, which eliminated the Concurrent Legislative List and clarified the roles of the federation and the provinces.

The 18th Amendment added a crucial guardrail: Article 160(3A) states that the provinces’ share in an NFC Award “shall not be less than” their share in the previous Award. This is not a rhetorical flourish — it is a firewall against rolling back devolution by fiat or by stealth. The clause was inserted with a living memory of the 6th NFC (1997), settled by unelected caretakers on unrealistic revenue projections, which reversed gains made under the 5th NFC (1990). Precisely to prevent such reversals, the constitution now blocks any attempt to reduce provincial shares.

Critics claim the 7th NFC "gave away too much" to the provinces. That assertion evaporates when history and arithmetic are put side by side. The 5th NFC gave provinces 80% of the shareable pool but kept customs duty outside that pool.

The 6th NFC clawed back provincial space. The 7th NFC moderated the arrangement to make it more pragmatic: provinces receive 57.5% of a broader divisible pool and, for the first time, the horizontal formula recognises poverty/backwardness, revenue effort and inverse population density – not population alone. Far from an "excess", the 7th NFC was a belated correction and a better-designed formula.

A frequent rejoinder is that provinces "don't raise revenue" and therefore shouldn't receive a large share. Two things can be true at once: provinces' own-source revenues are indeed modest, and that reality largely reflects the limited tax bases they actually control. Yes, provincial administration of Urban Immovable Property Tax is weak and must improve; there is meaningful money on the table in better valuation, coverage, automation and enforcement.

But even a well-run property tax cannot substitute for access to elastic, high-yield bases like a general sales tax on goods. Historically, sales tax on goods was a provincial tax at Pakistan’s inception; it was federalised in 1948 as a temporary measure to finance the war effort — and never returned. By contrast, India retained sales tax on goods as a state tax until combining it into Goods and Services Tax (GST) in 2017; under today's dual-GST design, states receive a substantial share of GST (SGST and IGST settlements) in addition to their Finance Commission devolution from union taxes.

The popular claim that "provinces get 60% of everything" also elides reality. Provinces receive 57.5% of the divisible pool, not 60% of total federal inflows; some large federal receipts — like the petroleum levy – sit outside that pool and are fully retained by the centre, alongside substantial non-tax revenues such as the State Bank's profit.

Meanwhile, under the recent IMF programme, provinces have been asked to run large fiscal surpluses to help reduce the consolidated deficit, cutting their effective spending space even further. Once you account for these exclusions and required surpluses, the story of ‘excessive provincial resources’ becomes much less convincing.

Federalism is also about clarity of functions. The removal of the Concurrent List under the 18th Amendment was not a power grab; it was intended to eliminate duplication and confusion. Citizens do not care which tier of government is constitutionally responsible when services fail.

They ask a simpler question: who will fix schools, clinics, water, policing and local infrastructure? By placing these closer to the people, and by giving provinces the constitutional standing and resources to deliver, the amendment aimed to align responsibility with accountability. That alignment is incomplete without empowered local governments and functioning Provincial Finance Commissions (PFCs), but the direction is correct.

Why does the urge to recentralise keep resurfacing? Partly a reflex for central control, partly real fiscal stress at the centre. When debt service — built up by decades of unproductive spending — dominates outlays, it is convenient to blame provincial transfers. But a major driver of that stress is the centre's non-implementation of the 18th Amendment, which required winding up federal ministries and agencies duplicating the devolved subjects.

Pakistan’s weak growth, bleeding SOEs, chronic energy mismanagement and a narrow, distortionary tax mix are not caused by provincial shares. They stem from over-centralisation and policy choices: punitive, effective tax rates on the compliant, discretionary enforcement that erodes trust and investment and repelling utility costs. Reclaiming provincial resources won’t fix federal finances; it will only shift blame and further weaken service delivery in critical areas, such as education and health.

A final, uncomfortable truth completes the picture: the smaller provinces — Sindh, Balochistan and Khyber Pakhtunkhwa — have carried deep grievances since 1947 about centralised control of resources and decision-making. 

The 7th NFC and 18th Amendment were hard-won attempts to address those grievances. Weakening them would violate the constitution and also reopen old wounds and invite political instability that Pakistan can least afford. If anything, the inordinate delays in new NFC Awards — often stretched to a decade instead of the constitutional five-year cadence – have already eroded confidence.

The constitutional and historical case, then, is unambiguous. The 7th NFC and 18th Amendment are not indulgences. They are safeguards built on bitter experience and on an original promise of provincial autonomy that stretches back to 1940.

Rolling them back would be unconstitutional, economically misguided and politically dangerous. The task before us is not to weaken devolution but to make it work, by giving provinces meaningful tax bases over time, insisting on high-quality administration of the taxes they already control and binding both tiers to measurable outcomes.

In Part II of this series, I will address the numbers directly, separate the myths from the facts about "too much to provinces", examine performance failures at both levels and propose a smarter NFC: performance-linked transfers, functional PFCs and local governments and simpler, lower tax rates with a broader base to rebuild trust — so growth rises, the tax base deepens, and the federation and the provinces get stronger.

To be continued.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors. He posts @Asad_Ashah

Originally published in The News