I. BACKGROUND

1. We also refer to the related Important  KQU 3728 of 6.1.26 Do not unnecessary issues as to New Provinces to create disputes; but first see whether delegations of powers properly implemented to the Grass Root Level as per Constitution Article 140A as per Alrounder Hafiz ur Naeem, having experts from all Sectors 

2. We also refer to TLQCs in trail, blue, italic and double Line (a) 3398 of 19.12.25 about Officials Assets, Public Disclosure, NFC, Salary Tax, TPO, etc (b) 3375 of 5.12.25 about Salaried class to get tax relief in budget - Myth or Reality? & Actions for Reality

3. Also refer to several Other TLQC including (a) 3102 of 2.5.25 about Salaried Class Tax in 3 Years - mostly by your Goodself Category (b) 3084 of 14.4.25 about JI, PAFO, KC & SCA efforts continue to reduce Salary tax and Action (c) 3076 of 5.4.25 about Salaried class Tax 1350% more than Retailer and Overall 515B Shortfall (d) 3088 of 20.4.25 about No Salaried Class Tax reduction shortly & your Urgent Action

II. EXECUTIVE SUMMARY

1.  The Article argues that Pakistan’s fiscal crisis is wrongly being blamed on the NFC Award, whereas the real problem lies in weak tax collection, poor governance, and failure to implement constitutional reforms. Despite the 18th Amendment (2010) devolving powers and taxes to provinces, they remain overly dependent on NFC transfers and have failed to levy progressive taxes (e.g., agricultural income and property taxes) or strengthen local governments under Article 140A.

2.  The 11th NFC (notified August 2025) is a positive step, introducing broader criteria beyond population—such as deprivation, backwardness, and merged districts—but it ignores the core issue of post-18th Amendment fiscal responsibility. Both federal and provincial tax administrations are outdated, inefficient, and under-digitized, resulting in failure to tap an estimated tax potential of Rs 34 trillion.

3.  The Federation faces unsustainable deficits and debt due to poor revenue mobilization, while provinces engage in unproductive spending. Encroachments by both federal and provincial governments into each other’s tax domains further distort fiscal federalism. The conclusion: meaningful tax and administrative reforms—not merely a new NFC Award—are essential to restore fiscal balance and sustain the federation. 

4.  Sindh Government got the Lowest share from NFC as compared to High Revenue. (Even a major revenue share is from Karachi, however, Karachi is in the worst conditions than Islamabad, Lahore & several big Punjab cities due to the reasons Karachites know and take up at all the levels to get due share and the same is applied in Karachiites favour without corruption).

III. UPDATED COMMENTARY

A.    General

We would inform you about Ms Huzaima Bukhari, Dr Ikramul Haq & Mr Abdul Rauf Shakoori Article of OPINION: 11th NFC: challenges, hopes & solutions — I (Attachment 3410.1) in ensuing paragraph, with emphasis ours in bold & Underline for quick reading.

2. Historically, the country has been dogged by two intractable problems: civil-military imbalance and unfair distribution of resources between the federation and provinces. The former has bedevilled democracy, the latter federalism. Yet, no lessons have been learnt from this odyssey of failures. With the induction of the new government, a vociferous campaign has ensued in official circles and the media to review the seventh National Finance Commission (NFC) award — It’s not the NFC Award, Shahab Usto, Dawn, 6.4.24

3. The NFC Award has always been central to Pakistan’s federal structure, reflecting the delicate balance of responsibilities, rights, and resources among the federation and its constituent units as envisaged under Article 160 of the Constitution of Islamic Republic of Pakistan. It is unfortunate that in 2025 we kept on following the Seventh NFC Award notified on 10.5.10! Hopefully, 2026 will bring a new NFC award.

4. All earlier articles contributed by these scribes covering various facets of NFC consistently emphasized that distribution must be fair, evidence-based, and aligned strictly with constitutional principles to sustain the federation.

5. As Pakistan now enters the critical phase of parleys under the 11th NFC—formally notified on 22.8.25 by the President of Pakistan after the expiry of 10th NFC on 21.7.24 — this is an opportune moment to revisit earlier arguments and update them in light of new fiscal realities.

B. What is New in the 11th NFC?

1. The notification and inaugural meeting of 11th NFC marks an important milestone after the dissolution of the 10th, 9th and 8th NFCs without proposing any award.

2. The inaugural meeting of 11th NFC on 4.12.25—headed by the Federal Finance Minister Mr Muhammad Aurangzeb—established multiple thematic working groups mandated to examine broader needs than population alone.

For the first time, there was a structured conversation on:

(i) integrating the economic needs of the merged tribal districts into the national fiscal framework;

(ii) addressing long-standing grievances of underfunded provinces; and

(iii) reconsidering the outdated formula that overwhelmingly emphasizes population rather than needs, deprivation, backwardness, or fiscal effort.

3. The last one, indeed, represents a promising shift from earlier NFC cycles where the debate remained restricted to one or two variables and overemphasis on population.

4. On 15.12.25, according to a Press report, the Federal Government notified eight committees that “will shape the 11th NFC award”. The report further revealed: “A working group, headed by Punjab’s finance minister, was also constituted to make recommendations on sharing financial expenses incurred by the federation in areas under provincial jurisdiction”.

5. The group’s formation, as per report, followed a legal opinion from the Attorney General for Pakistan, in the wake of an objection from Sindh “arguing that expenditure-sharing falls outside the NFC’s mandate”. The report quoting some sources informed, “Sindh may seek its own legal opinion as the federal government continues spending in areas under provincial control”.

6. It is further reported that according to Dr. Asad Sayeed, Sindh’s technical member on the NFC, “the federal government retains ministries linked to devolved subjects and spent Rs. 328 billion on them, as highlighted in a 2023 World Bank report”.

C. Most Crucial Question remains Untouched

1. The most crucial point, however, remains untouched/undebated. It is why the provinces remain heavily dependent on the NFC transfers in the wake of Constitution (Eighteenth Amendment) Act, 2010, [18th Amendment], became effective on 19.4.10, only 20 days before 7th NFC Award. Do not unnecessary issues as to New Provinces to create disputes; but first see whether delegations of powers properly implemented to the Grass Root Level as per Constitution Article 140A

2. No committee is formed/notified under 11th NFC to examine this vital question and impact of 18th Amendment causing a paradigm shift in Pakistan’s fiscal and administrative architecture.

3. With principal objective of granting greater autonomy to provinces by devolving critical functions, the 18th Amendment substantially transformed federal-provincial relationship, with re-sharing of taxation powers conforming to fiscal federalism and decentralized governance model.

4. However, even after a lapse of more than 15 years, the provinces have failed to introduce progressive taxes, transferred from the centre to them through the 18th Amendment.

5. The provinces have also miserably failed to implement Article 140A(1) of the Constitution to “devolve political, administrative and financial responsibility and authority to the elected representatives of the local governments”.

6. One of the many maladies in Pakistan’s tax system is cumbersome withholding tax system contained in the ITO, 2001, STA, 1990 and all provincial laws relating to sales tax on services.

7. This kind of irrational system of withholding of tax at source is operationally inefficient, anti-business, complex, time-consuming and costly. The withholding tax regime must be abolished, except for payroll, dividends, interest income from banks, and taxable payments to non-residents.

8. The implementation of agenda of simplification of tax codes and rationalization of tax system can improve tax compliance. Provided this agenda is also accompanied by substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools.

9. The present weak and fragmented structures of the federal and provincial tax agencies have failed to achieve these objectives.

10. Therefore, the fundamental challenge is providing a simple tax but efficient system that is manned by a competent, proficient and service-oriented administration, which is presently non-existent.

11. Tax administrations, both at federal and provincial levels are outdated and outmoded, besides suffering from inefficiencies, lack of trained manpower and requisite infrastructure and facilities.

12. The absence of requisite level of digitization, professionalism and human skills is their major malady. Tax reforms certainly do not mean mere alteration of tax laws or just making cosmetic changes. There is no effort till today to first restructure the entire tax administration on modern lines.

13. The failure to tap real tax potential of Rs. 34 trillion is the real dilemma of both the federal and provincial governments and not the mere NFC Award. Poor performance of FBR adversely affects provinces as they are overwhelmingly dependent on the transfers under the NFC Award—commonly called Divisible Pool. Provinces are not ready to collect taxes wherever due e.g. agricultural income tax from rich absentee landowners and rationalized property tax from occupant of palatial houses/bungalows/farm houses etc.

D. Structural causes of fiscal imbalances

1. To illustrate the present structural imbalance in Pakistan’s fiscal federalism, below is a summary of federal and provincial revenues and expenditures for FY 2025:

Table – I

Federal Fiscal Profile – FY 2024 – 25

Table – II

Provincial Fiscal Profile – FY 2024 – 25

Kasbati & Co: Added Column G whereby it is evident that the Sindh Government got the Lowest share from NFC as compared to High Revenue. Even a major Revenue share is from Karachi, however, Karachi is in the Worst conditions than Islamabad, Lahore & several big Punjab cities; due to the reasons Karachites know and have to take up at all the levels to get due share. Moreover, the share should be applied in Karachiites' favour, without Corruption.

Source: Summary of Consolidated Federal & Provincial Fiscal Operations 2024-25

2. Look at the figures contained in Table I and Table II. How little provinces collect in taxes at their own and the quantum of fiscal deficit suffered by the federation due to the small size of cake (overall national resource mobilization versus monstrous expenditures)! While the federal government is accumulating unmanageable debts, the provinces, heavily dependent on transfers under NFC Award, are engaged in unproductive spending spree.

3. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by federal government through levy of presumptive/minimum taxes on services under the ITO, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services. In 2025, the provinces also encroached upon the right of Parliament by imposing sales tax on rent!

4. The federal government after imposing all kinds of oppressive taxes has miserably failed to reduce the burgeoning fiscal deficit. The reason being that FBR has been persistently failing to achieve the assigned targets, what to speak of tapping the actual tax potential that at federal level is not less than Rs. 30 trillion and Rs 4 trillion at provincial levels.

III. FURTHER DETAILS & SERVICES

Should you require any clarification or explanations in respect of the above or otherwise, or require Income Tax, Federal & Provincial Sales Tax or Withholding Tax Statement, Advisory, Return Filing or Review services, please feel free to email Mr Amsal at amsal@kasbati.co with CC to info.kasbati@professional-excellence.com, asif.s.kasbati@professional-excellence.com.

Best regards for Here & Hereafter

Asif S Kasbati (FCA, FCMA & LLB)

Managing Partner 

Kasbati & Co (1400+ Tax, Levies, Companies, Economy, Inflation, HR, Banking, Finance, etc

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