The just ending of 2024 witnessed the pathetic and disappointing performance of the Federal Board of Revenue (FBR) and provincial tax agencies in bridging the huge tax gap. It was mainly due to perpetual structural impediments, lack of infrastructure and trained human resources, incompetence, corruption, inefficiencies, leakages, etc. Making things worse, the federal government could not reduce the burgeoning debt servicing and wasteful expenses in the fiscal year 2023-24 (FY 2024).
The impact of the reduced policy rate by the State Bank of Pakistan (SBP) from 22% to 13% has started showing positive results for the reduction in the government’s debt-related liabilities. During the July-October FY 2025, the markup expenditure declined by 5.3 percent. According to a news story: “The government retired Rs2.03 trillion in debt during the first half of the current fiscal year 2024-25, ending December 31, reflecting improved liquidity in the national exchequer…..The debt retirement occurred despite the FBR falling short of its collection target during the first five months of FY25. The government is expected to resort to borrowing in the second half of the fiscal year to cover the shortfall and maintain fiscal discipline”.
On the one hand, the federal government remained in a deep debt trap, and on the other, provinces—heavily dependent on transfers under the Seventh National Finance Commission (NFC) Award—received less than budgeted amounts in FY 2024. Provinces also miserably failed to collect due agricultural income tax from the rich absentee landowners. The fact remains that the fiscal mismanagement of federal and provincial governments since 2008 has been badly affecting the country’s economic landscape, highlighted in various articles in these columns.
Provinces have been dejectedly unsuccessful in mobilising their resources by collecting due agricultural income tax from the rich absentee landowners and failed in imposing progressive taxes assigned/devolved to them in the wake of the Constitution (Eighteenth Amendment) Act 2010 became effective on April 19, 2010, after receiving the assent of President of Pakistan. Their inaction on this account for over 14 years now is highly lamentable and needs urgent correction in light of the recently signed National Fiscal Pact.
According to the latest figures released by the SBP, total debt and liabilities as of September 30, 2024, were Rs. 72.13 trillion, out of which foreign debts and liabilities were Rs. 37 trillion.
The financial viability of any country is dependent on its revenue generation capacity and prudent spending. Governments collect revenues through various sources such as taxes on incomes and/or assets, consumption, and transfer receipts from natural and artificial persons. However, significant importance is attached to collection of direct taxes as it is linked with ‘ability to pay’ principle. Unfortunately, the successive governments in Pakistan—civilian and military alike—have been meeting tax revenue targets through the imposition of regressive indirect taxes, even in the garb of income taxation. Consequently, Pakistan has witnessed an unabated increase in the cost of doing business and production, high inflation, and the rising tide of wealth/income inequalities.
According to the latest figures released by the SBP, total debt and liabilities as of September 30, 2024, were Rs. 72.13 trillion, out of which foreign debts and liabilities were Rs. 37 trillion.
According to the details of the federal budget for the current fiscal year (FY 2025), the debt servicing alone is estimated at Rs 9.775 trillion (Rs 8.7 trillion domestic and Rs 1 trillion foreign), while the defence at Rs 2.12 trillion and pension at Rs. 1014 billion (military Rs. 662 billion and civil Rs. 220 billion). In this way, all estimated expenses of Rs 18.877 trillion will attract further expansive borrowing. Thus, it hardly matters that through oppressive taxes, oppressive means, and huge undue advances, the FBR manages to meet the tax target of Rs. 12.970 trillion, out of which the share of provinces is 57.5 percent as per the 7th NFC award.
The above proves beyond any doubt that Pakistan’s real fiscal problem is reckless borrowing and ruthless spending, pushing the country deeper and deeper into the deadly debt trap. The budgets for the last many years show grossly understated expenditures and exaggerated income/inflows, deliberately or otherwise, confirming incompetence and/or fraudulent behaviour.
Developing economies like Pakistan have been facing a formidable challenge in establishing an efficient tax policy framework. Instead of devising a rational tax policy by establishing an independent Board, lowering tax rates, bringing the broadest possible base into the tax net through simplification of procedures, and incentivising documentation of the monstrous informal economy, the government on December 18, 2024, tabled in National Assembly the obnoxious anti-people, anti-business and largely unconstitutional Tax Laws (Amendment) Bill, 2024.
The government’s inability to introduce an efficient and just tax system that can cater to the country’s needs often leads to a vicious debt trap where the gap between revenue and expenditures is bridged through borrowings, compromising the ability of the state to spend on the welfare of its citizens
Some of the provisions of the above-cited Bill patently violate the fundamental rights of protection to life and property, privacy, and human dignity, e.g. Article 9, 14, and 23 of the Constitution of the Islamic Republic of Pakistan [“the Constitution”]. As already explained in last week’s column, it would not help harness the real potential of tax, rather going to open new vistas of corruption and highhandedness for the tax administrators, many call them admins (traitors)!
The government’s inability to introduce an efficient and just tax system that can cater to the country’s needs often leads to a vicious debt trap where the gap between revenue and expenditures is bridged through borrowings, compromising the ability of the state to spend on the welfare of its citizens. It also hampers the provision of basic facilities like health, education, and infrastructure. This is exactly the dilemma of Pakistan since its inception, especially after the first military coup of October 7, 1958.
Our tax-to-GDP ratio in recent years has gone down due to multiple reasons but major factors remain slow growth and the ever-increasing size of the informal economy. In their inability to broaden the tax base, tax policy design for FBR has been relying mainly on transactional changes like revision of tax rates or further extorting from the existing taxpayers, increasing rates of withholding taxes, resorting to confiscatory taxation by levying super tax and deemed tax under section 7E of the Income Tax Ordinance, 2001, and even using draconian measures to freeze bank accounts while litigation is still pending, yet seeking from Parliament more destructive powers to deny fundamental rights of free business, trade and hold property, even right to life by cutting mobile, electricity, and gas connectivity.
Another impeding factor is the nexus between legislature and the powerful elite of the country which has stunted the executive’s ability to grow financially. Taxing the rich and facilitating lower/fixed income earners or greenfield industries is always resisted by the powerful elites—militaro-judicial-civil complex and unscrupulous traders—as it would eventually increase their tax burdens.
As usual, FBR is facing a huge shortfall in its half-yearly target as per media reports. The overwhelming quantum of taxes collected by FBR is from withholding taxes. According to a news report:
“The government is set to face a major revenue shortfall this month [December 2024] as the collection has so far reached Rs450 billion. Only 10 days are left during which the FBR is required to generate another Rs920 billion to achieve the monthly target. The FBR has already missed its five-month tax receipt target by Rs341 billion and the shortfall is expected to widen further by the end of December. The IMF will assess December's tax collection before deciding on bringing a new tax-loaded budget. According to the FBR’s assessment, the sales tax policy measures generated an amount that was Rs85 billion less than the estimate. It was mainly because of weak enforcement and economic slowdown”.
Many writers, institutes, and think-tanks like the Pakistan Institute of Development Economics (PIDE) and Prime Institute have been highlighting the vices of oppressive and narrow-based taxation in various reports/articles/research papers/books. Viable solutions have also been offered to make it fair and broad-based, but the Ministry of Finance, FBR, and foreign lenders and donors have never paid any heed. The following needs consideration on a macro level:
- Corporate tax rate should not be more than 20% including super tax etc.
- Income tax rate should be lowered to a maximum of 10% with an alternate tax of 2% on net wealth exceeding Rs. 100 million, whichever is higher.
- All individuals should be facilitated to file simple income tax returns [no wealth statement]—those earning below taxable limit should be paid income support [negative tax].
- Single-page return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create a data bank at the national level of all households. Their earning levels will determine who needs to pay who should be entitled to social benefits and how to improve social/economic mobility ending the poverty trap.
- The State must end the culture of appeasement—no more amnesties/immunities giving incentives to the dishonest and penalising the honest. Those who filed but underpaid be offered to make up the deficiency by paying due tax with no penal action/audit. It will yield much more than the target fixed for FBR at Rs. 12.970 trillion.
- For reducing the fiscal deficit to the level of 4% of GDP, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. palatial government houses, etc. through public auction and for specific activities to generate employment and boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based and payable with ease.
- Instead of being overburdened with advance/heavy taxes/duties/other charges businesses should be facilitated by improving all indexes of ‘Ease of Doing Business’ and reducing ‘Cost of Doing Business’. Tax credits/incentives for investing in human resource development (HDR) and research & development (R&D) to have a qualified workforce in all areas—providing employment to all and paying them as ordained in Article 3 of the Constitution.
- All possible facilities and incentives to all kinds of entrepreneurs/innovators, especially Small & Medium Enterprises (SMEs) to concentrate on innovations, growth, and productivity. The banking sector must be proactive in lending to SMEs and big businesses. Banks are overwhelmingly extending loans to the government considering it as a safe bet. Banking laws need to be amended for quick disposal of disputes as done in many countries.
- Facilities to foreign investors including grant of long-term visas and/or nationality. Many Afghans and Iranians are keen to invest.
- Central data creation/management of all citizens to determine their economic status. There should be universal pensions, and social security/food stamps for the needy, at the same time empowering them to unshackle themselves from the trap of poverty.
- Establishment of National Tax Agency (NTA) and All Pakistan Unified Tax Services having professional expertise in all related fields. NTA would communicate to all citizens what their income/expenditure levels are—it would determine correct tax obligations and bona fide entitlement of social support from the State.
- National/provincial legislators should impose simple, predictable, and low-rate taxes—income tax on all incomes including agricultural income should be under the exclusive domain of the federal government, and harmonised sales tax on goods/ services exclusively to the provinces on the basis of goods produced/supplied and services rendered/performed within their territories—it would ensure fiscal consolidation making the country self-reliant.
- We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes, etc. to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, recreation, etc.
- Allocation of a minimum of 4% of GDP for education and an additional 2% for R&D by federal and provincial governments.
- All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine, and/or imprisonment.
Shockingly, both IMF and FBR have ignored proposals given in Tax reforms: Agenda for Self-Sustainability for collecting Rs. 30 trillion at the federal alone enabling Pakistan to overcome the monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens.
Failure to undertake fundamental reforms as suggested above is the real problem. The federation can easily collect taxes of Rs. 30 trillion (15% of GDP if the informal economy is also included) to create adequate fiscal space to come out of the present economic mess and provide the much-needed and long-delayed benefits/entitlements to all citizens and reliefs to trade and industry.
For achieving the above levels of taxes, our focus should be on rapid/sustainable higher growth that will increase taxes as a byproduct—harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will politicians in power care to take corrective measures? Let us pray that 2025 brings prosperity for Pakistan and equal opportunities and universal entitlements for all citizens as guaranteed in the Constitution.