In his first public appearance after the IMF removed Pakistan from its August 30th board meeting agenda, the finance minister sought to reassure the public that progress is still on track despite the recent setback. “We are fully engaged with the IMF and moving in the right direction”, said Aurangzeb during the Senate Standing Committee on Finance meeting. He added that the board meeting is anticipated to take place in September but did not announce a specific date—‘IMF approval expected in September’, The Express Tribune, August 22, 2024
At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025— IMF’s Press release No. 24/273, July 12, 2024
The staff level agreement between Pakistan and International Monetary Fund (IMF) concluded on July 12, 2024, subject to the approval of the latter’s Executive Board, for about US$ 7 billion in a 37-month Extended Fund Facility (EFF) will certainly have far-reaching impacts for revenue mobilization at the national level. It will impact the distribution of tax collection duties between the federation and the federating units, as well as seek to revamp the outdated and under-performing national tax system.
It was hoped that approval from the IMF’s Executive Board would be obtained at its proposed meeting on August 30, 2024, following the acceptance of tougher conditions imposed. There is certainly disappointment in official circles because Pakistan’s name was not included in the proposed meeting of the Executive Board of the IMF, but public circles are also interpreting it as yet another failure of the government. Along with the successive governments, our so-called intelligentsia has become so accustomed to loans that they see delays with deep concern and despair. This is another true attribute of doomed nations.
The Federal Finance, Minister Muhammad Aurangzeb, has however, once again consoled everyone and assured that the approval would be obtained in September 2024 meeting of IMF Executive Board. This news has sent a wave of happiness everywhere that even if it is delayed, more loans will ultimately be received!
The IMF is insisting that debt relief and additional financial commitments must be secured from friendly countries and creditors to ensure that Pakistan does not go bankrupt. According to a news report: “Typically, the IMF takes four to six weeks to approve a programme, but Pakistan has been unable to secure the necessary stamp of approval, a critical step to meet its $26.4 billion external debt repayment obligations for this fiscal year. The delay stems from Pakistan’s failure to secure timely commitments from Saudi Arabia, the United Arab Emirates, and China for rollovers of $12 billion in cash deposits and $3.9 billion in Chinese commercial loans. Additionally, Pakistan has yet to obtain $2 billion in additional financing commitments from bilateral or multilateral creditors to satisfy IMF conditions.”
What to speak of repayment of the principal amount of the loans, we now under horrifying debtocracy and are unable to even pay the interest owed. One can only wish that the rulers and the intellectuals who are fomenting economic revolution on WhatsApp all day long would present a pragmatic program to get rid of debtocracy and not continue to shift the entire burden on the poor and middle class by imposing more oppressive taxes on the people as the only solution.
There has been continuous pressure from the IMF for reconsidering the 7th NFC Award. The issue of fiscal consolidation is not because of assumed inequitable distribution between centre and the provinces, but the size of the pie — the divisible pool. Over the period, both the federation and federating units have failed to harness the real tax potential by not taxing the rich and mighty.
We must all work hard to double our GDP. It will reduce the debt burden to half of its existing level, and everyone will also benefit from inclusive growth. For increasing national wealth and rapid economic growth, we urgently need to dismantle and reconstruct our outdated and under-performing tax system for adequate revenue mobilisation and fair distribution of tax collection between the federation and provinces.
The IMF is more interested in ensuring a primary surplus in the federal budget rather than reforms. In this regard, there is constant pressure from the IMF to revise the 7th National Finance Commission (NFC) Award. Everyone knows that reducing the share of provinces is not possible unless we amend the Constitution. Obviously, there is resistance for this from all provinces.
There has been continuous pressure from the IMF for reconsidering the 7th NFC Award. The issue of fiscal consolidation is not because of assumed inequitable distribution between centre and the provinces, but the size of the pie — the divisible pool. Over the period, both the federation and federating units have failed to harness the real tax potential by not taxing the rich and mighty. The IMF has also failed to issue any report after 2016 to indicate the true tax potential of Pakistan.
A 2016 report by IMF, titled, Unlocking Pakistan’s Revenue Potential, while estimating Pakistan’s actual tax potential at Rs. 8 trillion, mentions: “The latest National Finance Commission (NFC) award, signed in 2010, advanced fiscal decentralization and increased the provincial share in federal tax revenues from 45 percent to 57.5 percent, even though provinces have exclusive power to tax agricultural income, property and services and account for only about 35 percent of total general government expenditures. Consequently, while provincial tax revenues increased by about 0.3 percentage points over the past three years to 1 percent of GDP in 2016, provincial governments have limited incentive to boost own source revenues and instead rely on transfers from the federal government. The agriculture sector, for example, generates less than 0.1 percent of total tax revenues under the purview of provincial governments, although it accounts for about 20 percent of GDP and employs 45 percent of the workforce at the national level.”
The crux of objection of IMF on 7th NFC Award in 2016 was “poor performance of provinces” in tax collection, especially in respect of the agricultural income tax. The anti-agritax-lobby says that overwhelming majority of farmers live on subsistence level and are not liable to this provincial tax. According to respected economist, Dr. Hafiz A Pasha, in 2022, the net income of one percent landowners, possessing 22 percent of the land in entire Pakistan, was Rs. 2,800 billion, but they paid only Rs. 2 billion in tax. The issue, is, thus of non-taxation of the rich and mighty in Pakistan.
The IMF’s Mission Chief to Pakistan, Nathan Porter, has linked the success of the 24th EEF programme with full harmonization of provincial “Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes” and “this must become effective from January 1, 2025.”
In 2024, our economic managers are still relying on the 7th NFC Award, signed on December 30, 2009, before the 18th Amendment. Article 160(3A) of the Constitution, added by the 18th Amendment, categorically says: “The share of the provinces, in each Award of National Finance Commission shall not be less than the share given to the provinces in the previous Award.” However, outside the ambit of Article 160 of the Constitution, the Centre can impose taxes to meet budgetary gap as it did in 2013 by enacting Income Support levy Act, 2013, but repealed it the very next year.
When the federal government can impose any tax or levy to meet its needs without sharing proceeds with the provinces, as is the case with the petroleum levy, then what is the need for debate over the 7th NFC Award and the 18th Amendment. The real issue is of poor collection of taxes by the federal government and the provinces—both are guilty of not collecting taxes from the rich and mighty. This is the real dilemma of Pakistan.
The history of negotiating NFC Awards after the 7th NFC Award is intriguing. As 8th and 9th NFC remained inconclusive, the 10th NFC was constituted on May 12, 2020 to take effect from April 23, 2020. Nobody knows of its current status.
The inaugural meeting of 10th NFC was held on February 18, 2021, many months after its constitution. Presided over by the then Finance Minister, Dr. Abdul Hafeez Shaikh, it constituted six sub-groups to prepare sectoral recommendations. In the maiden meeting, Khyber Pakhtunkhwa and Balochistan demanded for higher resources “to address their peculiar deprivations.” Hafeez Shaikh was removed from the chairmanship of 10th NFC, after opposition from provinces and Balochistan High Court’s verdict against the composition of the NFC. It was reconstituted on July 21, 2020, so going to expire on July 20, 2025.
Sindh Chief Minister, Murad Ali Shah, after the meeting, told newsmen that “the story of insufficient capacity for utilization of additional resources under the 7th NFC award was no more relevant, but disbursement of funds under the provincial shares by the federal government was such that his province had to invariably face a situation on 30th of each month as to how much overdraft was required to pay salaries.” He also pointed out that “the actual problem was that FBR’s collections in last two three years had been lower than fiscal year 2017.”
During the Decade of Democracy from 2008 to 2018, neither the Pakistan Peoples’ Party nor Pakistan Muslim League (Nawaz) made efforts to ensure adequate collection of revenues by Federal Board of Revenue (FBR) so that distribution of their net proceeds could bring fiscal consolidation for the federation.
Though a few meetings were held during the tenure of Pakistan Tehreek-e-Insaf (PTI), no award was announced till the end of its rule in April 2022. During the 16-month tenure of the Pakistan Democratic Movement (PDM), two budgets were presented, but not a single meeting of the NFC was held.
Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is hardly 6%—in the overall national revenue base (tax and non-tax revenue) it is around 8%.
During the Decade of Democracy from 2008 to 2018, neither the Pakistan Peoples’ Party nor Pakistan Muslim League (Nawaz) made efforts to ensure adequate collection of revenues by Federal Board of Revenue (FBR) so that distribution of their net proceeds could bring fiscal consolidation for the federation. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per the command of Article 140A of the Constitution.
On assumption of power in August 2018, the coalition governments of PTI in the centre, Punjab and Balochistan and having two-third majority in Khyber Pakhtunkhwa also miserably failed in improving tax collection and devolution under Article 140A of the Constitution. It proves their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower them. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008.
The center is unwilling to federalize tax policy and administration. Resultantly, the size of the pie is so small that it cannot help the country escape the debt trap and spend adequately for the welfare of the masses. The way forward is a harmonized sales tax on goods and services to be collected through a National Tax Council.
It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign the right to levy tax on all kinds of income, including agricultural income, to the federal government to tax the rich and mighty to improve infrastructure, retire debts and bridge the fiscal deficit. This alone can achieve sustainable fiscal stabilization in Pakistan.