The alliance government of the Pakistan Democratic Movement (PDM), during the 16 months of its rule, after assuming power on April 10, 2022, pushed the country towards a fiscal fiasco. This is patently evident from the Summary of Consolidated Federal and Provincial Fiscal Operations, 2022-23, released by the Ministry of Finance (MoF) for the period July 1, 2022 to June 30, 2023, i.e. FY 2023]. The most startling fact revealed is that the total federal and provincial revenues (tax and non-tax) totaled Rs. 9.63 trillion, against a total expenditure of Rs. 16.15 trillion. Net revenues available with the federal government after transfers to provinces were short by Rs. 1.18 trillion to fulfill debt servicing of Rs. 5.83 trillion, which meant that the entire defence spending of Rs. 1.59 trillion was met through expensive borrowed funds. It portrays more than a fiscal fiasco— this is an alarming distress signal, posing a threat to economic viability and national security of the state.
The disastrous outcome of mindless and costly borrowing, both external and internal, has resulted in a 45% increase in debt servicing in just one year. According to the Summary, in FY 2023, total expenditure on debt servicing was Rs. 5831 billion against Rs. 3,182 billion in FY 2022. Resultantly, the fiscal deficit, mother of all ills, reached Rs 6.5 trillion or 7.7% of the nation’s GDP of Rs. 84.658 trillion.
The Federal Board of Revenue (FBR), the apex revenue authority, collected Rs. 7.16 trillion in FY 2023. After transferring Rs. 4.22 trillion to the provinces under the 7th National Finance Commission (NFC) Award, the net available to the federal government, from tax collection of Rs 7.169 trillion and non-tax revenue of Rs. 1.710 trillion, was Rs. 4.65 trillion, whereas domestic debt servicing was Rs. 5.07 trillion, with another Rs. 760 billion spent in foreign debt servicing. In FY 2023, all provinces together collected only Rs. 649.56 billion of taxes and Rs. 165.88 as non-tax revenues.
The provinces are not included in framing national tax policy and collection apparatus though their share (57.5%) in the 7th NFC Award and Article 156(2) of the Constitution of Islamic Republic of Pakistan requires federalized, not centralized economic planning.
Punjab is the most populous province of Pakistan, with a headcount of 127.688 million as per the 2023 census, with the largest cache of resources and budget size after the Federal Government and is the beneficiary of the lion’s share from the NFC Award.
The disastrous outcome of mindless and costly borrowing, both external and internal, has resulted in a 45% increase in debt servicing in just one year.
From July 2022 to June 2023, it received Rs. 2,076 billion from the Federal Government and collected only Rs. 297 billion of taxes at its own. Its total expenditure for this period (FY 2023) was Rs. 2,336 billion—Rs. 260 billion more than its share under the NFC Award, whereas its total non-tax revenues were just Rs. 81.78 billion. It had a meagre surplus of Rs. 90 billion.
It is worth mention that in FY 2020, Punjab received Rs. 1.2 trillion as its share under NFC Award. For the last many years, Punjab’s performance in tax collection has been much below its real potential, especially under the long rule of the Pakistan Muslim League (Nawaz)—PML-N. The PML-N turned the historically surplus budgets of the Punjab into deficits during 2013-18 and incurred huge debts, contrary to claims of achieving wonders by its stalwarts and wizards like, Muhammad Shehbaz Sharif and Muhammad Ishaq Dar.
Punjab’s performance under the coalition government of PTI was equally appalling. Official figures show that in the first half of FY 2023, 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. 37 billion. The highest local collection in six months of FY 2023 came from sales tax on services (regressive tax being indirect) at Rs. 100 billion. After the dissolution of Punjab Assembly prematurely in January 2023, the extended tenure of caretakers beyond the constitutional command has further deteriorated the fiscal landscape.
In the Summary for FY 2023, progressive tax on rich and mighty absentee landlords sitting in the Punjab Assembly—Agricultural Income Tax (AIT)—is not even reported separately. After mentioning all tax items, sales tax on services (Rs. 197 billion), excise duty (Rs. 2620 million), stamp duty (Rs. 47 billion), motor vehicle tax (Rs. 18 billion), “others” are mentioned at Rs. 32 billion.
There is meagre collection of AIT by the Punjab and three other provinces. This tax has not been imposed even today in Islamabad Capital Territory (ICT). This proves that the federal government is not serious at all in taxing rich agriculturists. The amount of AIT collection for federation is not available in the Summary for FY 2023 separately. It is intentionally clubbed with “others” so that the low collection quantum is not revealed or exposed. This is the same old story repeated by the caretakers in Punjab and other governments of the three provinces. First make tall claims, and then show no will to tax rich absentee landlords and owners of posh bungalows and farmhouses.
As a consequence to Constitution (Eighteenth Amendment) Act, 2010, commonly known as the 18th Amendment, that received the President’s assent on April 19, 2010, progressive taxes e.g. inheritance tax (called estate duty in Pakistan), wealth tax and capital gains tax on immovable property, and gift tax etc. are with the provinces. However, Punjab, like other provinces, has shown no interest in levying these taxes to reduce overall fiscal deficit so that our reliance on domestic and foreign debts could decrease.
All the governments in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan since 2010 have failed to undertake fundamental reforms to merge three tax departments, namely, Board of Revenue, Excise & Taxation Departments and revenue authority collecting sales tax on services. These could have been merged into one single tax agency in each province to provide one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection, but no such effort has been made, despite making promises to this effect during election campaigns.
On August 19, 2022 the MoF released a consolidated summary of federal and provincial fiscal operations for FY 2022. It showed that the public finances of Punjab and Khyber Pakhtunkhwa governments had deteriorated and the books of both the governments were in the red. The data released by the MoF shows that in FY 2022, the four provinces received Rs. 3.589 trillion from the federal government. The Punjab government suffered a deficit of Rs. 352 billion even after receiving Rs. 1.8 trillion as its share under the NFC Award, which was equal to 82% of its total revenues. The situation worsened in FY 2023 and the same is the situation in the current fiscal year.
The fiscal position of other provinces from July 1, 2022 to June 30, 2022 is that the Sindh government showed surplus of Rs. 30 billion. Out of total spending of Rs. 1451 billion, total revenues stood at Rs. 1501 billion. It received Rs. 1046 billion under NFC Award. The government of Khyber Pakhtunkhwa’s spending reached Rs. 893 billion against its revenues of Rs. 909 billion, out of which Rs. 699 billion was received under the NFC Award. The Balochistan government’s total revenue was at Rs. 463 billion, against total expenditures of Rs. 466 billion. Balochistan received Rs. 402 billion under the NFC Award.
All the governments in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan since 2010 have failed to undertake fundamental reforms to merge three tax departments, namely, Board of Revenue, Excise & Taxation Departments and revenue authority collecting sales tax on services. These could have been merged into one single tax agency in each province to provide one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection, but no such effort has been made, despite making promises to this effect during election campaigns.
The PTI-led governments in Punjab and Khyber Pakhtunkhwa and that of Pakistan Peoples’ Party (PPP) in Sindh, while not taxing the rich and mighty, were keen to get more tax from service providers, who conveniently passed it on to end users. This is a regressive tax at a very high rate, whereas we need more from the rich classes for bridging the fiscal deficit as well as providing relief to the poor.
In FY 2022, debt servicing by federal government was Rs. 3,182 billion (domestic Rs. 2829 billion and foreign Rs. 354 billion) against net revenues of Rs. 4774 billion after transfers to the provinces. Debt servicing was 67% of total net revenues of the federal government and 52% of tax collection of FBR. In FY 2023, it increased to Rs. 5.8 trillion, exceeding total net income of the federal government of Rs. 4,656 billion. This is the real dilemma and challenge on the fiscal front faced by Pakistan. All four provinces are heavily reliant on transfers from the Federal Government under the NFC Award and other grants, rather than achieving growth and resultantly collecting enough to be self-reliant.
There is a dire need for a new tax model entailing harmonized sales tax on goods and services and its collection through a single national agency as well as low tax rates on broader base, though distribution would be strictly through Article 160 of the Constitution—all participating in retiring debt burden that would eliminate fiscal deficit. The complete blueprint of this model is provided in many policy documents.
In the wake of the 18th 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 country’s 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 sufficient resources for the increasing needs of their ever-growing population.