Prudent fiscal management

February 12, 2023

Once fiscal space is created by good governance, the government can focus on providing basic amenities

Prudent fiscal  management


akistan is currently facing the worst multi-dimensional economic crisis of its history. From a serious dollar crunch to monstrous debt burden, historic high inflation to exorbitant discount rate, widening fiscal deficit to unsustainable debt, vulnerabilities on external payment front to unjust import restrictions, rising unemployment and poverty to growth retardation — all micro and macro indicators are in red. There is an urgent need for crisis management to come out of the prevailing mess. The key area for salvation remains prudent fiscal management.

For several years, Pakistan has been a target of severe criticism at home and abroad, by donors and lenders, for not collecting taxes, especially from the rich. Both the Centre and the provinces have not been collecting taxes diligently. The contribution of the provinces in the overall tax collection is pathetically low.

In the first seven months of the current fiscal year (2022-23), the Federal Board of Revenue has collected Rs 3,965 billion against the assigned annual target of Rs 7,470 billion. A shortfall of at least Rs 250 billion is feared.

The FBR is under pressure from the International Monetary Fund to levy more oppressive, indirect taxes to meet the agreed ratio after GDP inflation due to the massive devaluation of rupee. This could further accentuate stagflation.

Pakistan’s tax potential at the federal level is no less than Rs 12 trillion and at national level Rs 16 trillion. There are 10 million individuals having an annual taxable income of Rs 1.5 million ( Income tax collection from them alone at the prevalent tax rates comes to Rs 3,750 billion. Income tax collection can be Rs 7 trillion provided all exemptions are withdrawn and the entire undocumented economy is brought into the tax net.

Harmonised sales tax at 10 percent has a potential of Rs 6 trillion provided all kinds of taxes on goods and services, presently levied through federal and provincial assemblies, are merged and collected through an efficient national tax agency.

Customs and federal excise have a potential of Rs 3 trillion. The provinces can collect Rs 4 trillion if agricultural income tax alone is properly collected.

The existing tax system encourages a parallel economy. Patchwork reform is an exercise in futility no matter how many tax reform commissions or committees are formed. The remedy lies in a paradigm shift in tax policy and dismantling of the current tax apparatus and its replacement with a lean and automated agency manned by professionals.

The following measures at the federal and provincial levels can increase the tax-to-GDP ratio from the present 9.5 percent to 16 percent:

Bridging of tax gap through effective enforcement and voluntary compliance

Withdrawal of all concessionary Statutory Regulatory Orders

Substantial property tax on the rich

Presumptive agricultural income tax of Rs 25,000 per acre on irrigated agricultural holdings above 25 acres and Rs 12,000 per acre on unirrigated holdings above 50 acres

A capital gains tax at normal rate on the transfer of all moveable and immovable assets.

Imposition of sales tax on all kinds of goods and services.

Prudent and effective fiscal management and accountability alone can help Pakistan overcome fiscal deficit. Once fiscal space is created by good governance, the government can focus on providing basic amenities like clean and safe drinking water, health and education, transport and housing to the people.

Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium-sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process.

At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This can set the stage for a structural change that could help achieve economic growth for the people, by the people. Currently it is confined to the elite.

Amending of tax codes each year through Finance Acts and in between by way of statutory regulation orders is not serving any useful purpose — these are no solutions for improving tax administration. In fact, taxation through executive orders is unconstitutional in view of Article 77 read with Article 162 of the constitution.

These SROs, help the government bypass the parliament and violate the dictum of the Supreme Court in the case of Engr Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (SC Pak) that says, It is a well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-i-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. v. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]

Effective fiscal management requires converting the FBR into an autonomous body run by an independent board of directors comprising professionals not answerable to the headquarters of the ruling party.

The FBR must be insulated from all kinds of political influence. Enforcement of tax laws without any fear or favour should be the first priority of the government if it wants to rescue the country from the present economic mess. It should also expand the taxes for the benefit of the masses and desist from wasting the revenue on white elephants — the monstrous public sector enterprises sleazing with inefficiency and corruption — so that the public can see that the elected government is a responsible one and cares for them.

This will promote a tax culture and restore people’s faith in the tax system. Voluntary tax compliance can be improved only through a strong deterrent system where the compliant taxpayers are respected and rewarded while evaders are exposed and punished under the law.

The writer is an advocate of the Supreme Court and adjunct faculty at Lahore University of Management Sciences 

Prudent fiscal management