Huzaima Bukhari & Dr. Ikramul Haq
In the wake of dismal results on the fiscal front for the first quarter of the current financial year, serious debate and action plans are needed for tapping the real tax potential of the country which is not less than Rs. 12 trillion. Unfortunately, the present tax collection by federal and provincial governments is highly unsatisfactory. The real potential at federal level alone is not less than Rs. 8 trillion, whereas FBR is not collecting even half of it. The same is the position of provincial tax authorities that have failed to realise the tax potential of Rs. 4 trillion. At present, all broad-based and buoyant sources of revenue are with the federal government while contribution of provinces in total tax revenues is only seven percent—in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool and/or direct grants.
During July-September 2018 quarter, fiscal deficit was Rs. 541.7 billion (1.4% of GDP), mainly due to “inflexible” and “compulsive” expenditure under the head debt servicing and defence. The colossal deficit was despite massive cut in development spending and securing Rs. 246.6 billion in terms of provincial surpluses. Startlingly, the current expenditure increased by nearly 20%, whereas tax revenues grew only by 7%. The Federal Government showed deficit of Rs.733.3 billion or 2.5% of GDP. The rise of fiscal deficit of 1.4% should be a cause for concern vis-à-vis revised annual target of 5.1% of GDP or Rs1.9 trillion sent for fiscal year 2018-19.
The debt servicing in the first quarter stood at Rs. 507 billion, higher by Rs. 90 billion or 20.2% and defence spending amounted to Rs. 219.4 billion, up Rs. 37 billion or 20.3%. Together, these two consumed Rs. 726 billion or 67.7% of the total expenditure incurred by the federal government. Domestic debt servicing increased to Rs. 461.7 billion, a surge of Rs. 44.2 billion or one-tenth over the same quarter of previous year. Foreign debt servicing of Rs. 45.4 billion was higher by 63%. The Government of Pakistan Tehreek-i-Insaf (PTI) is still optimistic that it would achieve the deficit to 5.1% of GDP announced in the supplementary budget presented in September after assumption of power.
In the Supplementary Budget, the PTI Government reduced the target of Federal Board of Revenue (FBR) from Rs. 4435 billion to Rs. 4398 billion. However, the collection in the first quarter was only of Rs. 886.5 billion or 18.8% of the annual target. The Government also revised upwards the total expenditure estimate to Rs. 5.3 trillion. The results of first quarter show total federal expenditures at Rs.1.07 trillion or 20.2% despite a slowdown in development spending. In terms of the size of national economy, total revenues remained stagnant at the level of last quarter (2.9% of GDP). On the other hand, current expenditures that stood at 3.5% in the first quarter of previous fiscal year shot up to 3.9% of GDP. Provincial governments recorded a cash surplus of Rs. 246.6 billion out of the Rs. 662.6 billion that the federal government transferred as their share under the 7th National Finance Commission (NFC) Award.
The performance of the provinces in collecting revenue is more pathetic than that of the Federal Government. The share of provincial taxes in total revenues has slipped to only 11%. All the federating units, except for Sindh, could not enhance revenues, thus, their reliance on NFC Award would continue unabated. In the first quarter, cumulatively, all the four provinces collected merely Rs. 88.6 billion in taxes, higher by only Rs. 1.7 billion or 2% over the same quarter of previous year (FBR showed growth of 8%). The declining figures of provincial taxes for the July-September quarter have underlined the need for revamping of the provincial tax regimes. The provincial tax collection was 0.22% of gross domestic product (GDP), which was far lower than the potential.
According to a report, “the provincial share in federal revenues has jumped to Rs. 663 billion or 84% of their total revenues in the first quarter, partly due to delayed transfers by the federal government. In July-September 2017, the provincial share in federal revenues was equal to 74.4% of their total revenues. In June this year, the finance ministry blocked the release of the last tranche under the NFC Award to the provinces aimed at restricting the budget deficit to 6.6% of GDP. Had the money been timely transferred to the provinces, the budget deficit could have gone up to 7.1% at the end of last fiscal year. Like the federal government, the provincial current expenditures also registered a double-digit growth. The provincial governments cut their development spending to Rs. 55.7 billion—41.7% less than first quarter of the previous year. The steep decline in the federal and provincial development spending is likely to adversely affect economic growth in the current fiscal year, which is now projected to remain at around 4%”.
In the first quarter, Punjab collected only Rs. 42.6 billion in taxes, which was lower by Rs. 2.4 billion or 5.3%. Due to this, the share of tax collection in total revenues dropped from 16% to only 10.8%. Punjab received Rs. 326 billion from the federal government under the NFC Award, higher by 63%. The provincial government saved Rs.126.4 billion from its budget. The provincial government’s collection on account of sales tax on services dropped 8.7% in the first quarter. However, the total expenditures increased to Rs. 264.4 billion in spite of the fact that development budget was slashed by 54% to only Rs. 30.3 billion during July-September 2018.
Sindh emerged as the only province that registered a 10.8% growth in provincial taxes in the first quarter. The provincial government collected Rs. 40 billion, constituting nearly one-fifth of the total revenues. It collected Rs. 20.6 billion in sales tax on services alone showing growth of 10%. Sindh received Rs. 163.7 billion as its share under the NFC Award, higher by 53.7%. Out of Rs163.7 billion received from Federal Government, Sindh gave a surplus of Rs. 64 billion.
The government of Khyber Pakhtunkhwa generated a mere Rs. 4.1 billion in taxes through its own efforts which was equal to 3.6% of the total revenues. The Khyber Pakhtunkhwa government received Rs. 107.7 billion from the centre under the NFC Award, higher by 62.6% and gave back cash surplus of Rs. 29.4 billion. The provincial expenditures stood at Rs. 86.6 billion, showing an increase of 30%.
The government of Balochistan generated a meagre sum of Rs. 2 billion in taxes which constituted just 2.8% of the total provincial revenues. The largest province in terms of area received just Rs. 65.6 billion under the NFC Award, which was higher by 18.5%.
The overall picture that emerges from the results of first quarter of the current year, it is clear that the country is confronted with daunting fiscal challenges requiring immediate action and prompt solutions based on rational and bold decision-making. The fiscal crisis faced by Pakistan, in terms of abysmally low tax to GDP ratio and lower revenue collection vis-à-vis the tax potential of the country. These taxes are, therefore, insufficient for the needs of the country such as debt servicing and defense expenditures, poverty alleviation and pro-poor economic growth.
Pakistan, as mentioned in PTI and tax reforms, Business Recorder, August 17, 2018, needs to increase collection at all levels of governments to bridge monstrous fiscal deficit that reached the level of 6.8% of GDP (Rs. 2.3 trillion) for the fiscal year 2017-18. It was suggested in the article that the federal and provincial governments must immediately prepare finance bills to tax the rich and mighty through alternate minimum tax of 2.5% of net worth and property tax according to the size of the house/office. However, no heed was paid to this proposal. It was also suggested that alongwith these two measures, bridging tax gap of nearly 70% in collection of income tax, sales tax, customs and agricultural income tax can wipe out the entire fiscal deficit in 2018-19. As mentioned in the article, for achieving this goal, the federal government, after consultations with provinces, should introduce harmonised sales tax (HST) on goods and services.
It was stressed in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018 that all the tax collection agencies in Pakistan should be dismantled and merged into single National Tax Authority (NTA), which should effectively enforce tax laws at federal, provincial and local levels, besides providing single window facility to taxpayers. A timeframe was also suggested but unfortunately the PTI Government did not bother to consider it. Now, the recommendations of sub-committee on tax of Economic Advisory Council (EAC), approved by Prime Minister on November 25, 2018, show complete apathy on this issue. The report prepared by EAC’s sub-committee is so superficial that it even does not take into account the most vital issue of fragmentation of taxation in Pakistan. One wonders how easily the Prime Minister and his financial team are being hoodwinked by the same officials of FBR who earned notoriety as cronies of Nawaz and Dar.
Before establishing NTA, all the four provinces should be consulted and consensus must be reached for establishing an All Pakistan Unified Tax Service (APUTS) as suggested and elaborated in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018, and ‘Doing business under scattered taxation’, Business Recorder, September 7, 2018.
One major hindrance towards optimizing revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened consequent to the 18th Constitutional Amendment after which the provinces established their own tax collection agencies at the provincial level. However, these provincial tax authorities still lack skilled manpower, tax collection expertise and other necessary human capital and paraphernalia to collect taxes. To meet these objectives, the services of FBR officers were requisitioned by the provincial authorities for their posting at provincial tax collection agencies on deputation basis. Resultantly, many of the FBR officers were sent to provincial tax agencies such as Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA). Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of FBR resulting in further decline in tax collection because tax on services fell in the provincial domains. On one side, the move was hailed by the provinces but, on the other, the taxpayers immediately started raising their eyebrows because they had to now face both federal and provincial tax authorities. All major Chambers of Commerce expressed their concerns and showed reservations on the scattered tax collection in the aftermath of the 18th Amendment. It is important to mention that Excise and Taxation (E&T) departments are already working as a separate entity under the provincial governments. The E&T departments have no formal administration connection with SRB, PRA and other provincial tax collection agencies. Unless, all federal and provincial tax agencies are unified and harmonized, the dream of optimum tax collection cannot be materialized.
The PTI-led coalition government, if really serious in moving towards “New Pakistan” [New and reformed Pakistan] must address the administrative issues of tax collection necessary for optimizing revenue collection as per the country’s potential. In this regard, the formation of APUTS is the first major step towards harmonizing the tax system and culture in Pakistan. The proposed APUTS will function similar to All Pakistan Unified Group (APUG) services such as Pakistan Administrative Service (PAS) and Police Service of Pakistan (PSP).
The proposed APUTS will initially harmonize three main tax agencies: (1) FBR, (2) provincial tax authorities such as SRB & PRA, and (3) provincial Excise and Taxation departments. The officers will be posted anywhere in Pakistan, both at federal and provincial levels, directly from the FBR Headquarters. An officer of the rank of Joint Secretary from Establishment Division may also be posted in FBR who would keep liaison with FBR over administrative issues of posting and transfers of officers. Officers performing better may be given station of their choice while the corrupt and inefficient may be posted outside the province as punishment. The provinces will continue to enjoy the benefits and power under the 18th Amendment as is the case of working of the PAS and PSP officers. The formation of APUTS will be a win-win situation for the federal government, the provincial governments and taxpayers. The proposed APUTS will have following advantages towards maximizing revenue collection at the federal and provincial levels:
- The officers will be posted anywhere in Pakistan, both at federal and provincial levels, through centralized postings/transfers.
- The taxpayers will feel better that they are in fact dealing with only one organization, the IRS, for paying taxes and redressal of their grievances.
- The formulation of APUTS will better handle tax matters all over Pakistan as a unified service just as PAS and PSP. There will be better coordination among federal and provincial tax authorities that will eventually increase badly needed revenue.
- Inland Revenue Service (IRS) will emerge as a strong but accountable government service spreading over the federal government, all four provinces, Gilgit-Baltistan and Azad Jammu & Kashmir.
- APUTS will better help the PTI government achieve its tax vision and targets.
NTA, having officers from APUTS, will be a competent and effective body, representing all constituents of the federation of Pakistan. NTA having nation-wide data at one place and centralised processing will certainly be able to compel all taxable persons to fulfill tax obligations and pay due taxes under various tax codes. NTA must replace Federal Board of Revenue (FBR) and all provincial revenue authorities that have miserably failed to collect revenues according to their actual potential. For example, provincial Revenue Boards have not been collecting agricultural income tax, imposed since 2000—less than Rs.2 billion collection by all provinces together on this account in fiscal year 2017-18 was highly lamentable. In the same manner, provincial excise and taxation departments are not collecting taxes they are entrusted to administer. Same is the story of Punjab Revenue Authority (PRA), Sind Revenue Board (SRB) and Khyber Pakhtunkhaw Revenue Authority (KPRA) in respect of sales tax on services—their capacity to tax all taxable services is quite inadequate.
FBR mercilessly wasted borrowed funds of millions of dollars given by the World Bank and other donors for implementation of a comprehensive five-year-long Tax Administration Reform Project (TARP) that was extended for another year on the request of Pakistan. During and after TARP, FBR has failed on all fronts—in meeting revenue targets, broadening of tax base, countering corruption and leakages, implementing sales tax, increasing share of direct taxes and improving tax-to-GDP ratio. At the end of TARP, tax-to-GDP ratio nosedived to 8.8% from 9.4% in the year when the programme started! Despite having both money and expertise, FBR could not introduce an effective automated tax intelligence system to bridge the huge tax gap of over 200%. The World Bank in its report, “Implementation, Completion and Result Report” issued on the completion of TARP, observed: “The current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services.”
The solution for tax reforms is NTA that would have innovative structure: an independent Board of Management, accountable to Parliament through the Minister of Finance and Revenue. The Minister would have the authority to ensure that the NTA operates within the overall government framework and treats its clients with fairness, integrity, and consistency. The Board of Management would consist of 15, three each to be nominated by the provinces and rest by the central government. The Board would have the responsibility of overseeing the organisation and management of the NTA. Chief Executive Officer of the NTA, being a member of the Board, elected by majority of members, would be responsible for the NTA’s day-to-day operations. The NTA Board would have no role in the legislation, which under the Constitution of Pakistan is the exclusive domain of the national and provincial assemblies.
NTA would contribute to the well-being of Pakistanis and the efficiency of government by delivering world-class tax and benefit administration that is responsive, effective, and trusted. It would provide unparalleled service and value to its clients, offering its employees outstanding career opportunities.
The guiding principles of NTA would be:
Integrity: foundation of administration. It means treating people fairly and applying the law fairly.
Professionalism: key to success in achieving the mission. It means being committed to the highest standards of achievement.
Respect: the basis for dealings with employees, colleagues, and clients. It means being sensitive and responsive to the rights of individuals.
Co-operation: the foundation for meeting the challenges of the future. It means building partnerships and working together toward common goals.
At present, both the centre and provinces are not collecting taxes diligently. Our tax potential at federal level alone is Rs. 8 trillion— Flat-rate taxation: Alternate solution, Business Recorder, November 20 and 22, 2015. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure at national level would be Rs. 12 trillion. For harnessing the full tax potential at federal, provincial and local government levels, NTA is a prerequisite as we highlighted way back in 2015. This idea was later borrowed by Tax Reforms Commission and many others without acknowledging and citing the above article and other writings on this subject in these columns. Many writers are posing as if NTA is their brainchild. This is the height of intellectual dishonesty that even the academicians and professionals do not cite the work of others and take credit of ideas not perceived by them.
Through consensus and democratic process, all the parliaments can enact laws for establishing an autonomous National Tax Agency that can facilitate people to deal with a single Revenue Authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
____________________________________________________
The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Professors at Lahore University of Management Sciences (LUMS)