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Tuesday June 18, 2024

Revenue gap

By Mansoor Ahmad
May 22, 2024
A foreign currency dealer counts US dollar notes at a currency market in Karachi on July 19, 2022. — AFP
A foreign currency dealer counts US dollar notes at a currency market in Karachi on July 19, 2022. — AFP

LAHORE: Experts think the proposed revenue target of over 12 trillion rupees is a tall order; and with current policies, however, the target is achievable if one-third of tax evaders are documented and three large loss-making companies are privatized in 2024-25.

Pakistan’s current fiscal position is precarious. To balance the annual budget for 2024-25, as proposed by the IMF, the country would need loans worth over nine trillion rupees. This amount is almost equivalent to the tax revenues the Federal Board of Revenue is supposed to collect by the end of this fiscal year on June 30, 2024. The government of Pakistan has reportedly been asked by the IMF to increase the revenue by 30 percent next fiscal year.

With the economy still on an extremely low growth path, achieving this additional revenue target from existing taxpayers at current tax rates would be impossible. The government might introduce new taxes and enhance some rates, but three trillion rupees is a tall order.

With a policy rate of 22 percent and a loan premium of a minimum of 3 percent, businesses are finding it hard to carry on. Many would be forced to close or slow down production.As the cost of petrol and gas is also expected to rise, it will further jack up the cost of production. At current interest rates, the cost of debt servicing is expected to shoot up to over 9.7 trillion rupees next year, which is higher than the total tax revenues that the government expects to collect this fiscal year. These are the stark fiscal realities of our economy.

We have to finance the defense budget, current running expenditures, and the development programs. Loans would be hard to obtain. The interest on domestic loans would be very high. Foreign loans would only come from global financial institutions like the IMF, World Bank, or Asian Development Bank. The government expects the provinces to come up with a cumulative surplus of Rs 1,100 billion, which is far from reality. No provincial government would end the year with a surplus. In fact, KP might show some deficit.

The way the Punjab Chief Minister is providing goodies to the electorate, the usual savings from Punjab would not be there.From the above, it is clear that despite the best revenue efforts of the government, there would be a huge revenue gap which would have to be plugged with further loans above the already targeted financing of over nine trillion rupees. Some hectic efforts would be required to pull along. Much would depend on how the government tackles those that remain outside the tax net.

Those out of the tax net evade taxes that are at least two times the taxes that the state collects. If serious efforts are made, the state could bridge the resource gap substantially, but only if it succeeds in bringing one-third of the businesses or individuals out of the tax net into the tax net. This is possible through sincere efforts, but the way FBR adds taxpayers annually, it would merely add a few billion to the kitty.

Similarly, by getting rid of PIA, Pakistan Steel, and the train operations of Railways, the government would be able to reduce its expenses that it incurs annually on the losses of these three entities.