ISLAMABAD: Amid an evolving consensus between the Centre and the provinces on changing the population-based criteria for distributing the major chunk of resources among the provinces in the ongoing 11th National Finance Commission (NFC) Award, Sindh has pointed out that there is a potential of Rs11 trillion through GST collection on goods — whereas the Federal Board of Revenue (FBR) only fetches Rs1.6 trillion on an annual basis.
The representatives of the provinces and the Centre were addressing the concluding session of the Pakistan Governance Forum 2026. Against the FBR’s own estimates of actual collection at Rs3.2 trillion and a leakage of 50 percent, Sindh has estimated that the real potential of GST on goods is phenomenally higher, standing at Rs11 trillion per year. Sindh Secretary Finance Fayaz Jatoi, in his presentation on the National Finance Commission (NFC) during the Pakistan Governance Forum organised by the Ministry of Planning here on Thursday, revealed that the total potential of goods is worth Rs64 trillion, out of which there is a potential of fetching Rs11 trillion through 18 percent GST on goods — while the FBR collects just Rs1.6 trillion.
Sindh is building its case to formally request at the NFC forum that the collection of GST on goods be handed over to the provinces. In the event of a shortfall from the agreed benchmark, deductions could be made from its share, with the understanding that it is capable of generating the desired GST on goods from the main industrial and retail hub based in Karachi. However, the Centre does not appear inclined to hand over the GST on goods to the provinces.
On the other hand, PIDE Vice Chancellor at the Planning Commission Dr Nadeem Javaid argued that services and agriculture account for 70 percent of the country’s GDP, yet provincial tax collection amounts to only 0.8 percent of GDP annually.
KP’s Adviser on Finance Muzammil Aslam stated that the size of the pie needs to be increased, as the tax-to-GDP ratio has remained stagnant at around 10.2 percent over the last 15 years. Without increasing the size of the cake, the fiscal imbalance cannot be overcome. He said the current incentive structure encourages population growth and needs to be reversed. He noted that the second major criterion for resource distribution among the provinces is poverty and backwardness, but poverty increased from 21.9 percent to 29 percent in the six-year period from 2019 to 2025. Foreign direct investment as a percentage of GDP stood at 0.45 percent. He also criticised duplication in social safety spending, stating that the federal government spends Rs714 billion on the Benazir Income Support Programme (BISP) and then allocates another Rs38 billion for Ramazan Relief Package.
Musharraf Rasul from the KP stated that the tax-to-GDP ratio should have risen to 13.5 percent, which would have increased tax collection to Rs63 trillion. He criticised that KP’s share was not revised after the merger of Fata, hindering capacity building for law enforcement agencies in fighting terror. He proposed an equalisation formula and highlighted that if the FBR had realised its revenue potential, collection would have been higher, and the shares of Balochistan, KP, Punjab and Sindh would have increased by 638 percent, 369 percent, 262 percent and 352 percent respectively.
Federal Minister Dr Tariq Fazal Chaudhry called for providing an NFC-based formula for the Islamabad Capital Territory (ICT) instead of allocating PSDP funds.
Marriyum Aurangzeb stated that the NFC is the constitutional backbone of Pakistan’s fiscal federalism and fundamentally a trust compact between the federation and the provinces. She added that the NFC should operate as a true partnership between the federal government and the federating units, ensuring transparency, fairness and cooperation in all fiscal matters. She noted that any future NFC framework must begin with a realistic assessment of national debt servicing obligations, defence financing requirements, climate vulnerability and water security challenges — all of which collectively place significant pressure on the federation’s fiscal space. She also recommended that future NFC allocations incentivise provincial revenue generation, promote export growth, industrial expansion, formalisation of SMEs and human development outcomes, while encouraging Public-Private Partnerships (PPPs) in service delivery frameworks at all levels to ensure efficiency, innovation and broader citizen access.
She underscored the importance of maintaining strong and sustainable defence spending. She observed that strengthening the country’s defence system remains indispensable for national security and stability. She called for a careful reassessment of defence expenditures and data-driven fiscal service financing to ensure sustainability without compromising essential national priorities. Marriyum Aurangzeb further recommended introducing sectoral and periodic review mechanisms to ensure continuous evaluation and reform, alongside a consultative review of the population-based formula involving all stakeholders. Reaffirming her commitment to safeguarding the rights of smaller provinces, she supported the adoption of a performance-based reward and incentive model to promote fiscal responsibility, governance improvements and strengthened service delivery through PPPs. Concluding, she emphasized that a strong, unified and sustainable NFC is essential for national cohesion and called for a coordinated strategy on water conservation and construction of small and large dams to secure Pakistan’s long-term economic resilience.
Ahsan Iqbal called for a comprehensive and forward-looking reform of the NFC Award. He clarified: “The vertical distribution is constitutionally safeguarded because it protects provincial autonomy. Our discussion concerns the horizontal distribution — how resources are reasonably allocated across the federal government.
“Nearly 50 percent of federal expenditure goes toward debt servicing and approximately 25 percent toward defence,” he explained. “After meeting these obligations, the federation must finance pensions, salaries, running expenses, development, grants and social protection largely through borrowing. This equation is not sustainable.”
He further noted that despite social welfare being a provincial subject following the 18th Constitutional Amendment, the federal government continues to fund major national social protection initiatives such as the BISP, currently costing approximately Rs716 billion annually. Additionally, the federation bears financial responsibility for Azad Jammu & Kashmir (AJK), Gilgit-Baltistan (GB) and the Islamabad Capital Territory (ICT), which are entitled to their share from the divisible pool. “There must be better alignment between responsibilities and resources,” he emphasised.
Turning to the NFC formula, the minister raised concerns about unintended incentive distortions. “With 82 percent weightage assigned to population, there is little fiscal incentive for provinces to aggressively pursue population stabilisation,” he observed, noting the rise in population growth from 2.4 percent in 2017 to 2.55 percent in 2023. “Similarly, with 10 percent weightage linked to poverty, provinces may inadvertently benefit from remaining poor rather than being rewarded for reducing poverty.”
He proposed recalibrating the formula to incentivise poverty reduction, human development improvements, climate resilience and environmental sustainability and population stabilisation. “Climate change is no longer a peripheral issue — it is a structural reality for Pakistan and must be reflected in the NFC formula,” he stated. The minister emphasised the need for a structured conversation on equitable fiscal recognition for the AJK, GB and ICT. “The AJK and GB are not provinces due to the constitutional dispute, but that does not mean their citizens should be denied equitable rights,” he said. “The next NFC must examine lawful and constitutional mechanisms to provide due recognition to these regions.” He stressed the need to revitalise the National Economic Council as the apex forum for aligning fiscal allocations with national development priorities.
