Unlike its predecessor, the government led by the Pakistan Democratic Movement (PDM) alliance has never tried to improve tax administration and enhance revenues since assuming power in April 2022. The government of Pakistan Tehreek-i-Insaf (PTI) attempted to introduce fundamental structural reforms in the Federal Board of Revenue (FBR) during its tenure from August 2018 to April 2022, but miserable failed even after induction of a Chairman from the private sector.
Amidst the Covid-19 epidemic, the PTI government faced a tough challenge for economic revival. It desired in 2020 to prepare a budget entailing reliefs, incentives and concessions to all, but the International Monetary Fund (IMF) was adamant for fiscal consolidation, austerity and fixing a target of Rs. 5.1 trillion for FBR when the government projected GDP growth of just 2.3% in 2020-21. History is being repeated again. The PDM government, set to be dissolved on August 12, 2023, has projected GDP growth of just over 3% in the forthcoming fiscal year (2023-24), for which a deficit budget of Rs.7.6 trillion was presented on June 9, 2023 by the Finance Minister, Muhammad Ishaq Dar. However, at the command of the IMF, the FBR’s revenue target is kept at Rs. 9.2 trillion.
FBR has never collected even Rs. 8 trillion in good times. After 75 years and availing 23 IMF programs, Pakistan is still expecting contraction in GDP. Under this bleak scenario, fixing higher tax targets for the FBR is illogical, unless we ensure GDP growth of 7% and above. In such circumstances, what measures do we need to first stabilize and then revive the economy that is under severe distress? This question is baffling all those who look at it, especially when the number of unemployed persons is rising sharply and inflation is at a historic high - according to many experts, it is hyperinflation, especially in common food items used by the people.
FBR has miserably failed to collect due taxes from high-net-worth individuals, powerful industrial giants, tax-defiant traders and the militro-judicial-civil-complex, all of whom enjoy various exemptions and waivers. It was collecting meagre taxes from these powerful segments of society even before the Covid-19 outbreak.
Lawyers, doctors and other professionals, businessmen-turned-politicians, absentee landowners, high-class dress designers, beauticians and stylists, event-arrangers, artists etc as per tax directories published by FBR (abruptly discontinued after tax year 2018 for all taxpayers and tax year 2019 for parliamentarians) declare income that cannot even justify a fraction of the lavish life they enjoy.
Amnesties, immunities, exemptions, waivers still exist for the rich and mighty as tax expenditure last year was Rs. 2.239 trillion as per Pakistan Economic Survey 2022-23. The powerful in the Land of Pure are demanding further budget allocations and tax breaks due to the economic toll caused by stagflation. Multinational companies keep on fleecing us through abusive transfer pricing, but agitate super tax imposition. FBR lacks the capacity to tax them and their political masters do not allow for the deployment of tax audit experts under assistance programs under the auspices of international tax organizations or tax authorities outside Pakistan, though it is provided in section 177(11)(e) of the Income Tax Ordinance, 2001.
The failure of FBR to act as an efficient tax agency, besides capacity and integrity issues, is also due to elite capture and political interference by successive governments. The bulk of the blame goes to legislators for giving frequent asset-whitening schemes, exemptions, amnesties, waivers and immunities. The asset-whitening schemes in 2018 by PML-N, and in 2019 by the PTI caused losses worth billions to the national exchequer. In fact, the impact of amnesties given in 2018 by PML-N and in 2019 by PTI was disastrous. As many as 135 persons, named in the database received under tax information exchange agreements (TIEAs), availed the 2018 tax amnesty scheme of PML-N and declared Rs. 62.4 billion in assets, paying just Rs. 2.9 billion, whereas, actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion. About 56 people, whose data was shared under TIEAs, availed PTI’s amnesty scheme, declared assets of Rs. 31.8 billion, paid only Rs. 1.7 billion, getting relief of Rs. 20.6 billion!
Every year, FBR fails to collect original targets given in the budget, what to speak of harnessing the real tax potential of Rs. 14 trillion. This widens the fiscal deficit, resulting in more borrowing and resultantly a large part of the federal revenue, after distribution under National Finance Commission (NFC) Award, goes into debt servicing. In 2023-24, it will be Rs. 8 trillion plus, when the budget estimate is Rs. 7.3 trillion.
Fiscal consolidation is one of the most daunting challenges faced by Pakistan. Successive governments have failed to end wasteful expenses, rationalise taxes and utilise untapped resources to increase non-tax revenues. No government has made any serious effort to restructure the tax system to help grow businesses and productivity, revatilise agriculture, encourage import-substitution and promote export-led growth.
All elected governments since 2008 gave a free hand to tax officials to block bona fide refunds, take advances that were not due, raise unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, under the PTI government were begging (literally) for bona fide refunds – a return of their own money – which was withheld unlawfully, released partly as “relief package.” What a shame! There is no change in the attitude of FBR under the PDM regime. Had elected governments in power since 2008 concentrated on growth above 6%, as done by China, India and Bangladesh, Pakistan could have avoided the present mess, now accentuated by erratic and imprudent economic, monetary and fiscal policies of the PDM government.
Tax increase comes with growth. Harsh, distortionary or excessive taxation hampers growth and discourages investment in existing and new businesses. Hopefully, the new government, once it comes into power after general elections due within 60 days of the completion of the term by the present National Assembly on August 12, 2023, can reverse tax policy and make it growth-oriented in the coming budgets.
The directions of Prime Minister Shehbaz Sharif to Ishaq Dar were to “give maximum relief” to low paid employees and the poor in the budget of election year. However, there were constraints in the form of demands and conditions by IMF to collect more, and spend less on development. Did Ishaq Dar try to convince the IMF that with lower-rate taxes, withdrawing exemptions and increasing public spending, we could have achieved better numbers, as well as ensured much-needed relief and incentives for businesses and created jobs to help the poor? This was his main challenge. However, contrary to his claims, he could not prove his acumen in these difficult times, by prevailing over IMF—the reason being that we are no more on the “sympathy list” for Uncle Sam. Of course, Shehbaz, Dar et al have been aware of this from the very beginning, but have essentially hoodwinked the people of Pakistan by keeping them in dark!
The FBR collected Rs. 6,200 billion from July 2022 to May 2023. Definitely, it is going to miss even the original target of Rs. 7,480 billion by a huge margin - revised was Rs. 7640 - because of an embargo on imports, the economic slowdown, amnesties, and the disastrous impact of negative growth in almost all the sectors of the economy in the current fiscal year ending on June 30, 2023.
It is pertinent to mention that even prior to the Covid-19 outbreak, FBR has always been far behind the given targets, and has even revised its targets downwards in some years, except meeting the target under the chairmanship of Dr. Muhammad Ashfaq, unceremoniously removed after the PTI government was unseated.
The FBR target was Rs. 5,238 billion after the first review under IMF’s $6 billion Extended Fund Facility (EFF) programme of 2019, presently on tenterhooks. The target was later reduced to Rs. 4,803 billion on the eve of an incomplete second review and after the Coronavirus outbreak to Rs. 3,908 billion. In 2018-19, the target was Rs. 4,435 billion, revised downwards twice, first to Rs. 4,398 billion and then to Rs. 4,150 billion, but FBR collected Rs. 3,828.5 billion, registering negative growth of 0.4 percent.
The sordid story of tax collection through withholdings and advances continued unabated under the PTI government and the present government of PDM is no exception. The main reliance of FBR since 1992 has been on indirect taxes, even under the Income Tax Ordinance, 2001. After Finance Act, 2022 and Finance (Supplementary) Act, 2023 by PDM government, Income Tax Ordinance, 2001 contained about 55 withholding tax provisions, the majority of which constituted minimum tax liability. The Finance Bill 2023, unveiled by Ishaq Dar on June 9, 2023, added more rather than deleting even those yielding negligible amounts. The FBR cannot be blamed entirely, as it is prevented by its political masters from collecting due taxes from the rich and consequently, the emphasis shifts to withholding taxes.
The FBR has issues of competence, resources and training, but the main fault lies with the politicians and legislators who have given unprecedented exemptions to the powerful classes and amnesties to tax evaders, even after having information about their foreign undeclared accounts and assets under Tax Information Exchange Agreements (TIEAs), signed under initiative of Organisation for Economic Cooperation and Development (OECD). The most recent example is proposed amendment in section 111(4) of Income Tax Ordinance, 2001 by Ishaq Dar that no questions will be asked if US$ 100,000 are remitted to Pakistan in a year by any person. If this amendment is approved by the National Assembly, there will be backlash from IMF and Financial Action Task Force (FATF).
For reducing the fiscal deficit, countering high inflation, negative impact of policies of successive governments and reviving economy, the following measures are required in amending the budget 2023-24 presently under the consideration of National Assembly:
There should be a substantial reduction - at least 40% - in non-development expenditures. Non-tax avenues should be tapped by leasing out state land situated in the heart of big cities and palatial official bungalows through public auctions for commercial ventures, giving space to small and medium size enterprises (SMEs) and others to boost economic activities and generate jobs. Affordable finance should be provided to all by lowering the discount rate to a single digit.
Taxes at all levels—federal, provincial and local—should be simple, low rate, broad-based, and payable with ease—model is available. For the next two years, non-corporate entities may be taxed on gross receipt basis, after determining a fair rate for each class of business and profession. Tax incentives and credits for creating new jobs (50% for women), training human resource and investing in innovation and research.
Informal businesses, especially the retail sector, should be brought into the tax net. This alone will yield tax revenues of US$5 billion. All facilitations and incentives should be given to exporters and train the country’s youth for IT-related services according to international standards. Receipts of big absentee landlords should be taxed as business income, and all taxes on small farmers engaged in self-cultivation should be waived, and they ought to be given training and finance to boost productivity.
Amidst the Covid-19 epidemic, the PTI government faced a tough challenge for economic revival. It desired in 2020 to prepare a budget entailing reliefs, incentives and concessions to all, but the International Monetary Fund (IMF) was adamant for fiscal consolidation, austerity and fixing a target of Rs. 5.1 trillion for FBR when the government projected GDP growth of just 2.3% in 2020-21. History is being repeated again. The PDM government, set to be dissolved on August 12, 2023, has projected GDP growth of just over 3% in the forthcoming fiscal year (2023-24), for which a deficit budget of Rs.7.6 trillion was presented on June 9, 2023 by the Finance Minister, Muhammad Ishaq Dar. However, at the command of the IMF, the FBR’s revenue target is kept at Rs. 9.2 trillion.
FBR has never collected even Rs. 8 trillion in good times. After 75 years and availing 23 IMF programs, Pakistan is still expecting contraction in GDP. Under this bleak scenario, fixing higher tax targets for the FBR is illogical, unless we ensure GDP growth of 7% and above. In such circumstances, what measures do we need to first stabilize and then revive the economy that is under severe distress? This question is baffling all those who look at it, especially when the number of unemployed persons is rising sharply and inflation is at a historic high - according to many experts, it is hyperinflation, especially in common food items used by the people.
FBR has miserably failed to collect due taxes from high-net-worth individuals, powerful industrial giants, tax-defiant traders and the militro-judicial-civil-complex, all of whom enjoy various exemptions and waivers. It was collecting meagre taxes from these powerful segments of society even before the Covid-19 outbreak.
Lawyers, doctors and other professionals, businessmen-turned-politicians, absentee landowners, high-class dress designers, beauticians and stylists, event-arrangers, artists etc as per tax directories published by FBR (abruptly discontinued after tax year 2018 for all taxpayers and tax year 2019 for parliamentarians) declare income that cannot even justify a fraction of the lavish life they enjoy.
Amnesties, immunities, exemptions, waivers still exist for the rich and mighty as tax expenditure last year was Rs. 2.239 trillion as per Pakistan Economic Survey 2022-23. The powerful in the Land of Pure are demanding further budget allocations and tax breaks due to the economic toll caused by stagflation. Multinational companies keep on fleecing us through abusive transfer pricing, but agitate super tax imposition. FBR lacks the capacity to tax them and their political masters do not allow for the deployment of tax audit experts under assistance programs under the auspices of international tax organizations or tax authorities outside Pakistan, though it is provided in section 177(11)(e) of the Income Tax Ordinance, 2001.
The failure of FBR to act as an efficient tax agency, besides capacity and integrity issues, is also due to elite capture and political interference by successive governments. The bulk of the blame goes to legislators for giving frequent asset-whitening schemes, exemptions, amnesties, waivers and immunities. The asset-whitening schemes in 2018 by PML-N, and in 2019 by the PTI caused losses worth billions to the national exchequer. In fact, the impact of amnesties given in 2018 by PML-N and in 2019 by PTI was disastrous. As many as 135 persons, named in the database received under tax information exchange agreements (TIEAs), availed the 2018 tax amnesty scheme of PML-N and declared Rs. 62.4 billion in assets, paying just Rs. 2.9 billion, whereas, actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion. About 56 people, whose data was shared under TIEAs, availed PTI’s amnesty scheme, declared assets of Rs. 31.8 billion, paid only Rs. 1.7 billion, getting relief of Rs. 20.6 billion!
Every year, FBR fails to collect original targets given in the budget, what to speak of harnessing the real tax potential of Rs. 14 trillion. This widens the fiscal deficit, resulting in more borrowing and resultantly a large part of the federal revenue, after distribution under National Finance Commission (NFC) Award, goes into debt servicing. In 2023-24, it will be Rs. 8 trillion plus, when the budget estimate is Rs. 7.3 trillion.
Fiscal consolidation is one of the most daunting challenges faced by Pakistan. Successive governments have failed to end wasteful expenses, rationalise taxes and utilise untapped resources to increase non-tax revenues. No government has made any serious effort to restructure the tax system to help grow businesses and productivity, revatilise agriculture, encourage import-substitution and promote export-led growth.
All elected governments since 2008 gave a free hand to tax officials to block bona fide refunds, take advances that were not due, raise unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, under the PTI government were begging (literally) for bona fide refunds – a return of their own money – which was withheld unlawfully, released partly as “relief package.” What a shame! There is no change in the attitude of FBR under the PDM regime. Had elected governments in power since 2008 concentrated on growth above 6%, as done by China, India and Bangladesh, Pakistan could have avoided the present mess, now accentuated by erratic and imprudent economic, monetary and fiscal policies of the PDM government.
Tax increase comes with growth. Harsh, distortionary or excessive taxation hampers growth and discourages investment in existing and new businesses. Hopefully, the new government, once it comes into power after general elections due within 60 days of the completion of the term by the present National Assembly on August 12, 2023, can reverse tax policy and make it growth-oriented in the coming budgets.
The directions of Prime Minister Shehbaz Sharif to Ishaq Dar were to “give maximum relief” to low paid employees and the poor in the budget of election year. However, there were constraints in the form of demands and conditions by IMF to collect more, and spend less on development. Did Ishaq Dar try to convince the IMF that with lower-rate taxes, withdrawing exemptions and increasing public spending, we could have achieved better numbers, as well as ensured much-needed relief and incentives for businesses and created jobs to help the poor? This was his main challenge. However, contrary to his claims, he could not prove his acumen in these difficult times, by prevailing over IMF—the reason being that we are no more on the “sympathy list” for Uncle Sam. Of course, Shehbaz, Dar et al have been aware of this from the very beginning, but have essentially hoodwinked the people of Pakistan by keeping them in dark!
The FBR collected Rs. 6,200 billion from July 2022 to May 2023. Definitely, it is going to miss even the original target of Rs. 7,480 billion by a huge margin - revised was Rs. 7640 - because of an embargo on imports, the economic slowdown, amnesties, and the disastrous impact of negative growth in almost all the sectors of the economy in the current fiscal year ending on June 30, 2023.
It is pertinent to mention that even prior to the Covid-19 outbreak, FBR has always been far behind the given targets, and has even revised its targets downwards in some years, except meeting the target under the chairmanship of Dr. Muhammad Ashfaq, unceremoniously removed after the PTI government was unseated.
The FBR target was Rs. 5,238 billion after the first review under IMF’s $6 billion Extended Fund Facility (EFF) programme of 2019, presently on tenterhooks. The target was later reduced to Rs. 4,803 billion on the eve of an incomplete second review and after the Coronavirus outbreak to Rs. 3,908 billion. In 2018-19, the target was Rs. 4,435 billion, revised downwards twice, first to Rs. 4,398 billion and then to Rs. 4,150 billion, but FBR collected Rs. 3,828.5 billion, registering negative growth of 0.4 percent.
The sordid story of tax collection through withholdings and advances continued unabated under the PTI government and the present government of PDM is no exception. The main reliance of FBR since 1992 has been on indirect taxes, even under the Income Tax Ordinance, 2001. After Finance Act, 2022 and Finance (Supplementary) Act, 2023 by PDM government, Income Tax Ordinance, 2001 contained about 55 withholding tax provisions, the majority of which constituted minimum tax liability. The Finance Bill 2023, unveiled by Ishaq Dar on June 9, 2023, added more rather than deleting even those yielding negligible amounts. The FBR cannot be blamed entirely, as it is prevented by its political masters from collecting due taxes from the rich and consequently, the emphasis shifts to withholding taxes.
The FBR has issues of competence, resources and training, but the main fault lies with the politicians and legislators who have given unprecedented exemptions to the powerful classes and amnesties to tax evaders, even after having information about their foreign undeclared accounts and assets under Tax Information Exchange Agreements (TIEAs), signed under initiative of Organisation for Economic Cooperation and Development (OECD). The most recent example is proposed amendment in section 111(4) of Income Tax Ordinance, 2001 by Ishaq Dar that no questions will be asked if US$ 100,000 are remitted to Pakistan in a year by any person. If this amendment is approved by the National Assembly, there will be backlash from IMF and Financial Action Task Force (FATF).
For reducing the fiscal deficit, countering high inflation, negative impact of policies of successive governments and reviving economy, the following measures are required in amending the budget 2023-24 presently under the consideration of National Assembly:
There should be a substantial reduction - at least 40% - in non-development expenditures. Non-tax avenues should be tapped by leasing out state land situated in the heart of big cities and palatial official bungalows through public auctions for commercial ventures, giving space to small and medium size enterprises (SMEs) and others to boost economic activities and generate jobs. Affordable finance should be provided to all by lowering the discount rate to a single digit.
Taxes at all levels—federal, provincial and local—should be simple, low rate, broad-based, and payable with ease—model is available. For the next two years, non-corporate entities may be taxed on gross receipt basis, after determining a fair rate for each class of business and profession. Tax incentives and credits for creating new jobs (50% for women), training human resource and investing in innovation and research.
Informal businesses, especially the retail sector, should be brought into the tax net. This alone will yield tax revenues of US$5 billion. All facilitations and incentives should be given to exporters and train the country’s youth for IT-related services according to international standards. Receipts of big absentee landlords should be taxed as business income, and all taxes on small farmers engaged in self-cultivation should be waived, and they ought to be given training and finance to boost productivity.