Fiscal challenges and reforms

The prevalent tax is unduly harsh on the poor and middle-class people

Fiscal challenges and reforms


aretaker Prime Minister Anwar-ul Haq Kakar said last week that he was looking for a new chairman for the Federal Board of Revenue. There have been reports that the previous government borrowed Rs 970 billion in one month. News reports suggest that the FBR will have to collect Rs 770 billion in September to meet the IMF target of Rs 1,977 billion for the first quarter of the current fiscal year.

The caretaker government, having a limited mandate to hold general elections, is clearly worried about the daunting fiscal challenges faced by the country. Economic woes of the citizens will persist unless the state effectively manages the twin menaces of ever-widening fiscal deficit and a monstrous debt burden.

Having assumed charge for a second time as a caretaker finance minister, Dr Shamshad Akhtar, expressed concern in her maiden meeting with the FBR chairman on August 18 over the pathetic tax-to-GDP ratio of 8.5 percent. She asked for urgent preparation of a roadmap to enhance it to 13 percent.

On September 5, Dr Akhtar briefed the country director of the World Bank about the steps taken to raise tax revenues in the hope of getting $350 million under Resilient Institutions for Sustainable Economy (RISE-II) programme in the second quarter (October-December) of the current fiscal year.

According to a report, under the RISE-II programme, the WB is expected to approve $350 million and the AIIB $250 million. The policy reform programme underpinning RISE-II aims to achieve its objectives through two pillars—enhancing the policy and institutional framework to improve fiscal management and improving the regulatory framework to foster growth and competitiveness.

During its 16-month rule (April 2022 to August 2023), the PDM failed to improve the situation on the fiscal front. This is evident from the Summary of Consolidated Federal and Provincial Fiscal Operations, 2022-23, released by the Ministry of Finance for July 1, 2022 to June 30, 2023.

The most startling fact revealed in the report is the extent of fiscal imbalance: total federal and provincial revenues came to Rs 9.63 trillion and total expenditure to Rs 16.15 trillion. Net revenues available with the federal government were short by Rs 1.18 trillion. Debt servicing alone required Rs 5.83 trillion. The entire defence spending - Rs 1.59 trillion - was made using borrowed funds. This represents a fiscal fiasco—a serious cause for concern threatening economic viability and national security.

The FBR collected Rs 7.16 trillion in FY 2023. After transferring Rs 4.22 trillion to provinces under the National Finance Commission Award, the net available to federal government from tax and non-tax revenue (Rs 1.71 trillion) was Rs 4.65 trillion. However, servicing of domestic debt alone required Rs 5.07 trillion and foreign debt another Rs 760 billion.

In the wake of the Constitution (Eighteenth Amendment) Act, 2010, fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all the buoyant and broad-based taxes, has not tapped the real tax potential even though the country is heavily indebted. On the other hand, provinces, which are almost entirely dependent on NFC Award, have failed to raise their own resources for the increasing needs of their growing population.

Decades of appeasement of tax evaders and plunderers of national wealth have left the nation in a virtual debt prison. We need radical reforms on all fronts to liberate ourselves and transform Pakistan into a true social democracy.  

In FY 2023 all provinces together collected only Rs 649.56 billion in taxes and Rs 165.88 billion in non-tax revenues. The provinces must be included in the national tax policy and collection apparatus as their share (57.5 percent) in the NFC Award is larger than the federal government’s. Article 156(2) of the constitution requires federalised, not centralised, economic planning.

There is a dire need for a new tax model entailing harmonised sales tax on goods and services and its collection through a single national agency along with low tax rates on the broader base. The distribution would be strictly through Article 160 of the constitution—all participating in retiring debt burden would eliminate fiscal deficit. A complete blueprint for this model is provided here:

With a lukewarm attitude, lack of resources and incompetence, the FBR will never be able to achieve the desirable tax-to-GDP ratio of 15 percent. The FBR’s failure can be measured from the fact that since 2018, there have been six tax amnesties. However, it has still failed to improve the number of return filers. Out of the 120 million unique mobile phone users (total subscribers as on June 30, 2023, were 191 million), there are about five million that expend Rs 30,000 or more per annum and have average income of Rs 2 million plus, but have never filed tax returns.

The real tax potential of Pakistan is not less than Rs 16 trillion. In the past billions of rupees were forgone under various amnesty schemes facilitating the tax evaders. The International Monetary Fund is not bothered about the real tax potential. It has always been encouraging the government to introduce harsh indirect taxes that do not hurt the rich but strip the salaried class and the poor of whatever little incomes they have.

The perpetual failure to crack down on untaxed assets and ill-gotten wealth and generous amnesty schemes for the rich have turned Pakistan into a ‘soft-state’ — a term introduced by Swedish Nobel-winning economist Gunnar Myrdal in his book, Asian Drama. Decades of appeasement of tax evaders and plunderers of national wealth have left the nation in a virtual debt prison. We need radical reforms on all fronts to liberate ourselves and transform Pakistan into a true social democracy.

The prevalent tax system is unduly harsh on the poor and middle-class people. The rich are paying meagre or no tax on their agricultural and other incomes.

Adding insult to injury, taxes collected from the citizens are wasted on privileges and perquisites meant only for the elites.

Pakistan faces the herculean task of providing jobs to millions of young people every year. To achieve this target, the economy must grow at the rate of 8 percent to 10 percent annually. For this, we need the investment of 25 percent of the GDP. This challenge is also our great opportunity for economic progress. A majority of job seekers are the youth. Imparting IT/ AI skills to them is the real challenge.

This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth.

The writers are lawyers, adjunct faculty at Lahore University of Management Sciences and members of the advisory board of Pakistan Institute of Development Economics

Fiscal challenges and reforms