Pakistan has missed three out of five major fiscal conditions set by the International Monetary Fund (IMF) for the first quarter of fiscal year 2025, including achieving a cash surplus of Rs342 billion by provinces, confirmed an official report of the Ministry of Finance…. The report disclosed that Punjab’s budget was in the red as it ran a deficit of Rs160 billion in three months. All other provinces enjoyed a cash surplus—Govt meets only two fiscal conditions, The Express Tribune, November 1, 2024
The federal government has also overly committed on behalf of the four provincial governments that, too, are struggling to meet their conditions soon after the deal became effective….The official statistics for the first quarter (July-September) revealed that — from the Federal Board of Revenue’s tax collection target to provincial cash surpluses — everything has gone off the mark. Deputy Prime Minister Ishaq Dar has also publicly spoken against the market-determined exchange rate regime, which is another core objective of the $7 billion Extended Fund Facility—$7 billion IMF bailout falters as economy strains, The Express Tribune, October 31, 2024.
Out of current population of Pakistan of 252.60 million, Punjab province is the most populous [127.66 million as per 2023 census], in fact, it is the 12th largest populous country in the world! It has the largest resources and budget size after the Federal Government, and is beneficiary of the lion’s share [this year's estimate is Rs3.695 trillion] from the National Finance Commission (NFC) Award.
For the last many years, the performance of this province in tax collection has been extremely poor. Now it is failing the federation in meeting the conditions of the IMF $7 billion 37-month extended fund facility (EFF) programme by expending Rs1.027 trillion (in the first three months of the current fiscal year [2024-25] against the total revenues of Rs867 billion, whereas Pakistan was bound to show a provincial surplus of Rs342 billion for this period.
According to a news item, “The Ministry of Finance’s report showed that the cumulative target of Rs342 billion in the provincial cash surplus could not be met, thanks to the expansionary fiscal policies of Punjab. The target was missed by Rs182 billion, or 53%, underscoring serious challenges in implementing a $7 billion IMF programme…The provinces…. posted a total cash surplus of Rs160 billion, according to the finance ministry….The four provincial governments released about Rs1.22 trillion for current expenditures, higher by 28% compared to a year ago. Their development spending amounted to Rs257 billion, up only 4%....Chief Minister Maryam Nawaz’s provincial government spent Rs525 billion alone on current expenditures. There was an alarmingly large statistical discrepancy of Rs378 billion in the provincial budget books, according to the finance ministry's report”.
In 2020, following in the footsteps of the Federal Government, the Punjab government decided to borrow $304 million from the World Bank for tax reforms. Earlier, the Federal Government obtained a loan of $400 million for Pakistan Raises Revenue (PRR) Project. Such loans, though not at all required, were taken when our debt-to-GDP ratio reached an alarming level of 87.2% by June 30, 2020—a 15% increase by the government of Pakistan Tehreek-i-Insaf (PTI) in its first two years!
According to a Press report, the then Punjab Government planned “to initiate efforts to increase its tax collection by including the potential untapped areas….” It further revealed, “Out of the $304 million, the provincial government is keen to get $30 million in grant but terms are not final yet”.
According to the report, the Ministry of Planning approved the loan on September 16, 2020. It is still available on the website of the World Bank showing the disclosure date as September 15, 2020.
The report, says: “The Central Development Working Party (CDWP) approved a concept clearance paper for the Punjab Resource Improvement and Digital Effectiveness Programme (PRIDE) worth $304 million (Rs50 billion)”. This huge loan, according to a report, was obtained to “make taxation more progressive, broaden the tax base, reduce interaction between taxpayers and tax collectors and facilitate taxpayers to improve the ease of doing business”. The proposed paper included “business process re-engineering, revision, change of rules and regulations, development of comprehensive automated systems, the introduction of e-services and institutional capacity building, etc”.
The author of the report way back in 2020 raised a valid objection that “all these functions do not need any foreign money, they require political will to enhance the narrow provincial tax base”. Successive federal and provincial governments have failed to reform the tax system. It is an irrefutable fact that all our governments, military and civilian alike, have made no serious effort to broaden the tax base through lowering rates and effective enforcement.
It was a national shame that to improve the integrity and fairness of tax administration, the then government decided to go for such heavy external borrowing
The decision of the PTI Government to take a $400 million loan from the World Bank was criticised by this scribe in 2019 in ‘Fundamental tax reforms’ [Daily Times, March 12, 2019] highlighting that the foreign-funded reforms in the past to fix the country’s ailing tax system miserably failed to achieve the desired results.
It may be recalled that the World Bank in 2004 extended to Pakistan $125.9 million, including IDA credit of $102.9 million and DFID grant of $23 million, for Tax Administration Reform Project (TARP). The objective of TARP was to improve “the integrity and fairness of tax administration by improving organisational efficiency and effectiveness of the revenue administration”. It was a national shame that to improve the integrity and fairness of tax administration, the then government decided to go for such heavy external borrowing.
Shockingly, the tax-to-GDP ratio in 2012, the last year of extended World Bank-funded TARP, dipped to 8.2% from 10.6% in 2005 when the programme started! The World Bank in its report, “Implementation, Completion and Result Report” on TARP confessed that “the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services”.
In all democratic countries, special house committees are formed by elected parliaments to conduct reform exercises. Here in Pakistan, we are doing it through foreign borrowing and execution through bureaucratic structures that are outdated, inefficient, incompetent, and shady. The job of legislators, both in the center and provinces, is given to Revenuecracy (a term borrowed from late Dr Pervez Tahir, who coined it in his article: PTI’s budget—the old normal) that itself is the root cause of the problem. This is like asking the troublemakers to do trouble-shooting.
The lion’s share of huge funding to the tax reforms programmes of the Federal and Punjab governments, as expected, went into the pockets of so-called foreign experts who had no idea of our mundane realities. The inefficient and incompetent workforce in tax agencies at all levels mercilessly wasted the rest of the funds.
It is worth mentioning that the total cost of Pakistan Raises Revenue (PRR) Project was $1.6 billion, of which counterpart contributions stood at $1.2 billion and the IDA financed $400 million. In the past as well, World Bank, UK’s Department for International Development (DFID), now replaced with the Foreign, Commonwealth and Development Office (FCDO) and others gave a lot of money to Pakistan for reforms, yet things have changed for the worse on tax mobilisation front.
The lion’s share of huge funding to the tax reforms programmes of the Federal and Punjab Governments, as expected, went into the pockets of so-called foreign experts who had no idea of our mundane realities. The inefficient and incompetent workforce in tax agencies at all levels mercilessly wasted the rest of the funds.
Before the approval of the loan by the Planning Ministry, sought by the Government of Punjab, there should have been input from local experts in the field. Even no debate was conducted in the Punjab Assembly, let alone seeking approval from the House for incurring a huge liability of about Rs50 billion.
After taking the foreign loan, according to a report, the Punjab government in 2020 “seems to be faltering in its effort to boost the provincial tax receipts, raising concern over its ability to achieve the budgeted tax revenue target of Rs294.9 billion for the current fiscal year”. Punjab managed to collect only Rs104.6 billion in the first half of fiscal year (FY) 2020 which was barely 35.5% of the full-year target. Collection as compared to the corresponding period of FY 2018-19 was over 11.8%, marginally less than the average inflation rate of 12% for the period. It exposed the tall claims of the government of the coalition government of PTI in Punjab since assuming power in August 2018 that it would substantially increase tax receipts.
It is worth mentioning that during the last two fiscal years before the PTI-led Punjab government, the average collection in the first half usually constituted 40-42% of the annual targets. At the end of FY 2020, the total tax collection of Punjab was just Rs189.7 billion against the target of Rs294.9 billion. After four years, in FY 2024, it merely reached Rs326 billion, for a province having a population of not less than 128 million in 2024.
Revenue mobilisation measures suggested in every year's budget of Punjab include a proposal for revision in the rates of land-based Agricultural Income Tax (AIT) but it never happened. There has been no will to tax the rich absentee landowners and owners of posh bungalows and farmhouses. In the wake of the Eighteenth Constitutional Amendment effective from April 19, 2010, progressive taxes e.g. wealth tax and capital gain tax on immovable property, estate duty (known as inheritance tax in the West), and gift tax are with the provinces but Punjab like other provinces have shown no interest in levying these taxes.
Meagre collection of agricultural income tax proves this point—even in fiscal year 2023-24, it did not reach Rs3 billion. Targets set every year for it are never met. The actual collection in FY 2022 was just 2.1 billion whereas in FY 2021 it was Rs2.4 billion. The current year target of Rs3.2 billion is much below the actual potential, but the rich agriculturist lobby sitting in the Punjab Assembly is not ready to pay the due taxes. Now the IMF wants the collection of AIT by provinces at the same rates as prevailing under federal personal and corporate income tax rates with effect from July 1, 2025. IMF’s Country Report No. 24/310 says:
Provincial tax reforms will include the (i) full alignment of their Agriculture Income Tax (AIT) regimes with the federal personal and corporate income taxes by October 2024 (end-October SB) with implementation from January 1, 2025, and collection in July 2025….
Nothing was done till October 31, 2024, and the new deadline is now December 31, 2024. It appears that Punjab and the other three provinces have not yet constituted task committees to meet the new deadline! For years, the successive Punjab government even did not bother to study Reforming the Urban Property Tax in Pakistan’s Punjab, done by the Development Policy Research Centre (DPRC) of Lahore University of Management Sciences (LUMS) to move towards equitable property tax and enhance the collection many times.
The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential and 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 sufficient resources for the needs of the ever-growing population
The present Punjab government, like its predecessors, has not undertaken fundamental reforms to merge three tax departments, namely, the Punjab Board of Revenue, the Excise and Taxation Department, and the Punjab Revenue Authority. These could have been merged into one to provide a one-window facility to the citizens, avoid duplication of expenses, and ensure efficient and better collection, but no such effort has been made till today.
Like its predecessors, the government headed by Maryam Nawaz, while not taxing the rich and mighty, is keen to get more tax from service providers that they conveniently pass on the same to the end users—this is a regressive tax. We need more from the rich class for the economic growth of Punjab which is essential for the entire country due to its size and share from NFC Award.
In the wake of the Eighteenth Amendment, fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential and 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 sufficient resources for the needs of the ever-growing population.
In the given circumstances, we need to through the democratic process, establish an autonomous tax collection agency, National Revenue Authority (NTA), manned by All Pakistan Unified Tax Services. The working of the NTA can be discussed and finalised under the Council of Common Interests [Article 153] and its control can be under National Economic Council [Article 156]. The provinces must participate in national tax policy and collection apparatus as their share in the NFC Award is larger than the federal government. This new model with simplified and low-rate taxes can ensure economic growth as well as the much-needed ease-of-doing business climate to existing and future investors.