Provincial Grants: Centre Deducts Rs35bn in Historic First
The federal government has, for the first time in the country’s history, deducted Rs35 billion from provincial grants, using a revenue-sharing arrangement that the provinces agreed to before the budget.
The Centre deducted Rs34.839 billion as grant receipts from the provinces under Article 164 of the Constitution as non-tax revenue during the first two months of the current financial year 2026-27. The total projected amount for the year is Rs1.035 trillion.
Provincial grants: a first-of-its-kind deduction
The News reported, citing top official sources in the Finance Division, that the deduction was made from the provinces’ grant receipts under Article 164. The Centre and the four provinces had agreed ahead of the budget 2026-27 announcement that the provinces would provide Rs1,035 billion as grants to the federal government from their National Finance Commission (NFC) share.
The purpose was to help the Centre meet its obligations under the $7 billion IMF programme for FY27. Finance Minister Muhammad Aurangzeb had stated that this arrangement of sharing grants with the Centre would continue for the medium term, but he did not specify the exact timeframe in the absence of a new NFC Award.
The federal government has decided in principle to use these resources, collected as non-tax revenue, on water resources. The first instalment had been approved by the Economic Coordination Committee as a Technical Supplementary Grant for use on funds for the Bhasha and Dasu hydropower projects and K-IV in Karachi.
The Economic Coordination Committee approved a Rs275 billion technical supplementary grant for water sector projects on November 4. Further deductions will depend on Federal Board of Revenue collections and the formula agreed between the Centre and the provinces under Article 164 of the 1973 Constitution.
The money argument runs both ways
The deduction lands in the middle of a wider argument over federal and provincial money. Feature Pakistan reported that the Centre spent Rs5 trillion on devolved subjects, according to a Senate panel head, who said the spending violated the Constitution. The provinces say the Centre keeps spending on subjects that belong to them. The Centre says the provinces agreed to share their grants to keep the IMF programme on track.
That tension is not new. In August, the Khyber Pakhtunkhwa government rejected the Centre’s proposal to deduct Rs6.4 billion at source from federal transfers payable to the province. Chief Minister Sohail Afridi said his government had not signed a memorandum of understanding on the additional amount, and that Article 164 did not give the federal government the authority to make unilateral deductions from funds constitutionally payable to a province.
The contrast matters. The Rs34.84 billion deduction was made under an arrangement the provinces agreed to before the budget. The Rs6.4 billion cut in KP was rejected because the province said it had never agreed to it. Consent, not the amount, is the dividing line.
The deduction also sits alongside the government’s other revenue efforts. Petrol and diesel prices were cut again from November 12, even as the government collects heavy fuel levies, and FBR income tax returns now face computerised checks to catch errors and raise compliance. The provinces’ grants are one more stream feeding the same fiscal effort.
What it means for the provinces
For the provinces, the deduction means less fiscal room in a year when they already face tight budgets. The Rs1.035 trillion target for the full year is large, and if deductions continue at the current pace, the provinces will feel the loss in their development spending.
For the Centre, the money goes to water projects that the country needs. Diamer-Bhasha and Dasu are long-delayed hydropower projects, and K-IV is Karachi’s main hope for extra water supply. Funding them from provincial grants is a political choice as much as a fiscal one, and it will be judged on whether the projects actually move faster.
The arrangement will also be tested by the FBR’s collections. If revenue falls short, the formula for further deductions will come under pressure, and the provinces may push back. For now, the first deduction has gone through without a public protest from the provinces, which suggests the pre-budget agreement is holding.
Frequently asked questions
How much has the Centre deducted from the provinces?
The Centre deducted Rs34.839 billion as grant receipts from all four provinces under Article 164 during the first two months of FY27. The total projected amount for the year is Rs1.035 trillion.
Why are the provinces giving grants to the Centre?
The Centre and the four provinces agreed before the budget that the provinces would provide Rs1,035 billion from their NFC share to help the federal government meet its obligations under the $7 billion IMF programme.
What will the money be spent on?
The federal government has decided in principle to use the receipts on water resources, including the Diamer-Bhasha and Dasu hydropower projects and Karachi’s K-IV water supply scheme.
Is this deduction legal?
The deduction was made under Article 164 of the Constitution, under an arrangement the provinces agreed to. Khyber Pakhtunkhwa has separately rejected a Rs6.4 billion cut, saying Article 164 does not authorise unilateral deductions without provincial consent.
How long will this arrangement continue?
Finance Minister Muhammad Aurangzeb has said the arrangement will continue for the medium term, but he has not specified an exact timeframe in the absence of a new NFC Award.
