Challenges on the fiscal front

In the wake of the 18th Amendment, fiscal management needs fresh thinking

The Pakistan Tehreek-i-Insaf government is facing grim challenges on the fiscal front as the Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released by the Ministry of Finance on February 3, 2021 for the first six months of the current fiscal year shows. It indicates that a part of defence spending is now funded by borrowing.

This is more than a fiscal fiasco — a serious cause of concern threatening economic viability and national security of the country. The negative impact of mindless and costly borrowing, both external and internal, resulted in a 15 percent increase in debt-servicing, with fiscal deficit reaching Rs 1.4 trillion.

The total tax revenue collection by the Federal Board of Revenue (FBR) from July to December 2020 was Rs 2.2 trillion. After transferring their shares to provinces under the 7th National Finance Commission (NFC) Award (Rs 1,280 billion), the net available to federal government from tax and non-tax revenue (Rs 861.6 billion) was Rs 1.79 trillion that could not even meet the two major heads — debt-servicing (Rs 1,475 billion: domestic Rs 1,357 billion and foreign Rs 118 billion) and defence (Rs 486.5 billion).

The Punjab is the most populous [110 million people] province of Pakistan with the largest resources and budget size after the federal government and beneficiary of a lion’s share from the NFC Award. From July to December 2020, it received Rs 621.7 billion from the federal government and collected only Rs 117.8 billion in taxes on its own. The total expenditure for this period was Rs 621 billion — almost the entire amount received from its share under the NFC Award.

It may be remembered that in the fiscal year 2019-20, the Punjab had received Rs 1.2 trillion as its share under the NFC Award. For many years, its performance in terms of tax collection has been much below its real potential. This has been particularly true under PML-N governments. Under PML-N governments the historical budgetary surplus became a deficit and a huge debt was incurred.

The province’s performance under the coalition government led by the PTI has been equally appalling. According to official figures, in the first half of 2020-21 the Punjab failed to mobilise its tax and non-tax revenue according to its actual potential — the total collection of non-tax items was only Rs 27 billion. The highest local collection in six months of the current fiscal year came from sales tax on services (being indirect, a regressive tax) at Rs 72.6 billion. Proceeds from Agricultural Income Tax (AIT), a progressive tax on rich and mighty absentee landlords sitting in the Punjab Assembly, were not even reported separately in the Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21.

After mentioning all tax items [sales tax on services, excise duty (Rs 1,248 million), stamp duty (Rs 17.5 billion), motor vehicle tax (Rs 7,076 million)], “others” are mentioned at Rs 19 billion.

This shows a meagre collection of AIT that was intentionally not shown separately and clubbed with “others”. The same old story has been repeated by the PTI and governments of the other three provinces. In the wake of the 18th Constitutional Amendment in 2010, progressive taxes, e.g., inheritance tax (called estate duty in Pakistan), wealth tax and capital gain tax on immovable property, and gift tax, etc, are with the provinces but the Punjab has shown no interest in levying these taxes to reduce the overall fiscal deficit so that our reliance on domestic and foreign debts should decrease.

When the Ministry of Finance released the consolidated summary of federal and provincial fiscal operations during fiscal year 2019-20 on August 12, it transpired that public finances of the Punjab and Khyber Pakhtunkhwa governments had deteriorated.

The figures released by the Ministry of Finance show that in FY 2020, the four provinces received Rs 2.5 trillion from the federal government. The Punjab government suffered a deficit of Rs 8.4 billion after receiving Rs 1.2 trillion as its share under the NFC Award, which amounted to 82 percent of its revenues. The situation has not improved in the first half of the current year. There is a surplus of around Rs 146 billion, but at the cost of cutting development expenditure and failing to provide the much-needed support to the needy suffering due to Covid-19 endemic.

The position of other provinces from July-December 2020 is as under:

Spending by the government of Khyber Pakhtunkhwa reached Rs 282 billion against its revenues of Rs 301 billion, out of which Rs 205 billion was received under the NFC Award.

The Sindh government showed a positive budget balance of Rs 44 billion. Its total revenues stood at Rs 437.7 billion. Sindh got Rs 320 billion under the NFC Award.

Balochistan government’s total revenue was at Rs 151 billion as against total expenditures of Rs 106 billion, showing a surplus of Rs 45 billion. Balochistan received Rs 133 billion under the NFC Award.

A meagre collection of agricultural income tax and giving the rich absentee landowners unprecedented relief proves the point that the PTI-led governments in the Punjab, the Khyber Pakhtunkhwa and Balochistan are not inclined to tax the rich agriculturist lobby.

The PTI governments in three provinces also failed to undertake fundamental reforms to merge three tax departments, namely the Boards of Revenue, the Excise and Taxation Departments and the Revenue Authority collecting sales tax on services. These could have been merged into a single tax agency in each province to provide a one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection. No effort has been made in this direction despite promises to this effect made during the election campaign.

The PTI governments in three provinces and that of Pakistan Peoples Party (PPP) are keen to receive more tax from service providers that conveniently pass it on to the end users—this is a regressive tax whereas we need more taxes from the rich to bridge the fiscal deficit as well as providing relief to the poor. In FY 2020, debt-servicing by federal government was Rs 2,620 billion (domestic Rs 2,313 billion and foreign Rs 307 billion) against net revenues of Rs 3,278 billion after transfer to the provinces. Debt servicing was 79 percent of the total net revenues of the federal government and 65 percent of tax collection by the FBR.

All the four provinces are heavily relying on transfers from the federal government under the NFC Award and other grants, rather than achieving growth and collecting enough to be self-reliant.

In the wake of the 18th Amendment, the fiscal management, both at the federal and provincial levels, needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential even though the country is heavily indebted.

On the other hand, provinces, which are almost entirely dependent on the NFC Award, have failed to raise their own resources for the increasing needs of the ever-growing population. The provinces must participate in national tax policy and collection apparatus as their share in the NFC Award is larger than the federal government and Article 156(2) requires federalised and 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 as well as low tax rates on a broader base, though distribution would be strictly through Article 160—all participating in retiring debt burden that would eliminate fiscal deficit.

The writers, lawyers and authors, are Adjunct Faculty Members at Lahore University of Management Sciences (LUMS)

Challenges on the fiscal front