During 2023, due to structural impediments, lack of infrastructure and trained human resource, incompetence, inefficiencies etc, the Federal Board of Revenue (FBR) and provincial tax agencies have failed to bridge the huge tax gap faced by the country. Making the things worse, the federal government could not reduce the burgeoning debt servicing and wasteful expenses. 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 by this scribe.
One of the results of perpetual political instability since April 9, 2022, in the wake of first-ever successful vote of no confidence in the history of Pakistan, is the worst economic crisis in our 76-year of existence. On the one hand, the federal government is trapped in further debt enslavement, and on the other, provinces—heavily dependent on transfers under 7th National Finance Commission (NFC) Award—are getting less than budgeted amounts.
Provinces have also miserably failed to mobilize their own resources by not collecting due agricultural income tax from the rich absentee landlords and failure in imposing progressive taxes assigned and devolved to them in the wake of Constitution (Eighteenth Amendment) Act 2010 became effective on April 19, 2010 after receiving assent of President of Pakistan. Their inaction on this account for over 13 years now is highly lamentable.
In the existing scenario, for the new government, coming into power after general elections scheduled for February 8, 2024, the most daunting challenge on the fiscal front, will be rebuilding of the ruined economy due to unabated political instability. This process of reviving the economy will only be possible by public debate aimed at eliciting consensus amongst all stakeholders for determining the right path for economic restoration and stabilization, then moving towards an accelerated and higher as well as sustainable growth, and inclusive development, ultimately leading to much-desired and long-awaited goal of self-reliance.
The materialization of the dream of a self-reliant economy needs national consensus and concentrated efforts, coupled with the right thinking. The new elected government will have to complete the ongoing US$ 3 billion standby arrangement with International Monetary Fund (IMF) with tough conditions and to negotiate yet another long-term Extended Fund Facility (EFF) harsher program. It will be a very tough call for the new government to manage huge foreign liabilities by improving forex reserves with own resources, not by further loans.
According to the latest figures released by the State Bank of Pakistan (SBP), total debt and liabilities as on September 30, 2023 were Rs. 64.5 trillion, out of which foreign debts and liabilities were Rs. 22.5 trillion.
The real test of new economic team in March 2024 will be handling of burgeoning fiscal deficit, historic high inflation, discount rate of 22 percent, stagflation, rising unemployment, huge circular debt in electricity and gas sectors, continuous funding from taxpayers’ money of inefficient and loss-bearing state-owned enterprises (SOEs). In addition, most importantly, how to manage the mounting debt burden and meeting revenue (tax and non-tax) targets fixed for the fiscal year 2023-24.
According to the latest figures released by the State Bank of Pakistan (SBP), total debt and liabilities as on September 30, 2023 were Rs. 64.5 trillion, out of which foreign debts and liabilities were Rs. 22.5 trillion.
According to the details of the federal budget for the current fiscal year (FY 2024), the debt servicing alone was estimated at Rs 7.3 trillion (Rs 6.4 trillion internal and Rs 872.2 billion external), while the defence at Rs 1.8 trillion. Now, the revised estimate for debt servicing is Rs 8.5 trillion plus. In this way, all estimated expenses (Rs 17.95 trillion current and Rs 1.6 trillion development) will attract further expansive borrowing. Thus, it hardly matters that through oppressive taxes, the FBR manages to bypass the half-yearly IMF’s target of Rs. 4.425 trillion by collecting Rs. 4.44 trillion, out of which share of provinces is 57.5 percent as per 7th NFC award.
In the first five months of the current fiscal year (July-October 2023), according to Monthly Economic Update & Outlook (December 2023) issued by the Finance Division, “Total expenditures grew by 35 percent to stand at Rs.3706.7 billion during Jul-Oct FY2024 against Rs.2737.2 billion last year. Within total, current spending grew by 44 percent mainly due to a significant rise in markup payments that increased by 63 percent during the first four months of the current fiscal year…” This confirms the real dilemma faced by the federation, already highlighted.
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 last many years show grossly understated expenditures and exaggerated income and inflows, deliberately or otherwise, confirming incompetence and fraudulent behavior.
Many writers and institutes like Pakistan Institute of Development Economics (PIDE) have been highlighting the vices of oppressive and narrow-based taxation in various reports/articles/research papers. Viable solutions have also been offered to make it fair and broad-based, but FBR stalwarts have never paid any heed. The following need consideration on a macro level. The corporate tax rate should not be more than 20% including super tax etc. The income tax rate should be lowered to maximum 10% with alternate tax of 2% on net wealth exceeding Rs. 100 million, whichever is higher. All individuals should be facilitated to file a simple income tax return, without a wealth statement, and those earning below taxable limit should be paid income support in the form of negative tax.
A single-page return form should be available in both English, Urdu and all regional languages that can even be submitted through a simple mobile app. Reporting of real income by all will help create data bank at national level of all households. Their earning levels will determine who needs to pay and who should be entitled to social benefits and how to improve social and economic mobility ending poverty trap.
The State must end the culture of appeasement by withdrawing all exemptions and concessions to retrieve monstrous tax expenditure of trillions of rupee and in future there should be no immunities and amnesties.
For reducing fiscal deficit to the level of 4% of GDP, it is imperative to curtail unproductive and wasteful expenses by 30%, 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 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 and other charges, businesses should be facilitated by improving all indexes of ‘Ease of Doing Business’ and reducing ‘Cost of Doing Business’. Tax credits and incentives should be provided for investing in human resource development (HDR) and research & development (R&D) - to have 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 need to be extended to all kinds of entrepreneurs and innovators, especially Small & Medium Enterprises (SMEs) to concentrate on innovations, growth and productivity. 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.
Central data creation and management of all citizens is a necessity to determine their economic status. There should be universal pension, social security and food stamps for the needy, at the same time empowering them to unshackle themselves from the trap of poverty.
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, and recreation etc.
The establishment of the National Tax Agency (NTA) and All Pakistan Unified Tax Services having professional expertise in all related fields can accomplish this. NTA would communicate to all citizens what their income and expenditure levels are—it would determine correct tax obligations and bona fide entitlement of social support from the State.
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, and recreation etc.
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. 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 for collecting Rs. 16 trillion at federal and Rs. 4 trillion at provincial level, which would have enabled Pakistan to overcome the monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens.
For achieving the above levels of taxes, our focus should be on rapid and 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 coming in power after general elections in February 2024 will care to take corrective measures? Let us pray 2024 brings prosperity for Pakistan and equal opportunities and universal entitlements for all citizens as guaranteed in the Constitution of Islamic Republic of Pakistan.