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Huzaima Bukhari & Dr. Ikramul Haq
The coalition Government of Pakistan Tehreek-i-Insaf (PTI) is facing grim challenges on the fiscal front as Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released by the Ministry of Finance on February 3, 2021, for the first six months of the current fiscal year, shows that even part of defence spending is now funded by borrowing. It is more than a fiscal fiasco—a serious cause for concern threatening economic viability and national security of the country. The negative impact of mindless and costly borrowing, both external and internal, resulted in 15% increase in debt servicing, with fiscal deficit reaching Rs 1.4 trillion.
Total tax revenue collection by Federal Board of Revenue (FBR) from July to December 2020 was Rs. 2.2 trillion and after transferring the shares to provinces under 7th National Finance Commission (NFC) Award (Rs. 1280 billion), the net available to federal Government from tax and non tax revenue (Rs. 861.6 billion) was Rs. 1.79 trillion that could not even meet the two major heads, debt servicing (Rs. 1475 billion: domesticRs. 1357 billion andforeign Rs. 118 billion) and defence (Rs. 486.5 billion).
Punjab is the most populous [110 million people] province of Pakistan with largest resources and budget size after the Federal Government and beneficiary of lion’s share from NFC Award. From July to December 2020, it received Rs. 621.7 billion fromthe Federal Government and collected only Rs. 117.8 billion of taxes at its own. The total expenditure for this period of Punjab was Rs. 621 billion—almost the entire amount received from share under the NFC Award.
It may be remembered that in fiscal year 2019-20, Punjab received Rs. 1.2 trillion as share under NFC Award. For the last many years, the performance of Punjab in tax collection has been much below its real potential, especially under the long rule of Pakistan Muslim League (Nawaz)—PMLN. The PMLN turned the historically surplus budget into deficit and incurred huge debt, contrary to claims of achieving wonders by its economic wizards (sic) like Ishaq Dar, now a fugitive, in the six federal budgets [2013-2018]. Details are available at the website of Federal Ministry of Finance: http://www.finance.gov.pk/fiscal/July_June_2019_20.pdf.
The performance of Punjab under the coalition government of PTI is equally appalling. Official figures show that in the first half of 2020-21 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. 27 billion. The highest local collection in six months of the current fiscal year came from sales tax on services (regressive tax being indirect) at Rs. 72.6 billion and progressive tax on rich and mighty absentee landlords sitting in the Punjab Assembly—Agricultural Income Tax (AIT)—is not even reported separately in the Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21. After mentioning all tax items [sales tax on services, excise duty (Rs. 1248 million), stamp duty (17.5 billion), motor vehicle tax (Rs. 7076 million)], “others” are mentioned at Rs. 19 billion.
The above shows meagre collection of AIT that was intentionally not shown and clubbed with “others”. This is the same old story repeated by PTI and other governments of the three provinces. First make tall claims and then show no will to tax the rich absentee landlords and owners of posh bungalows and farm houses. In the wake of Eighteenth Constitutional Amendment in 2010, progressive taxes e.g. inheritance tax (called estate duty in Pakistan), wealth tax and capital gain tax on immovable property, and gift tax etc. are with the provinces, but the 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.
The Ministry of Finance when on August 12, 2020 released the consolidated summary of federal and provincial fiscal operations during fiscal year 2019-20, it transpired that public finances of Punjab and Khyber Pakhtunkhwa governments had deteriorated and books of both the governments were in the red.
The figures released by Ministry of Finance show that in FY 2020, the four provinces received Rs. 2.5 trillion from the federal government in the fiscal year 2019-20. The Punjab government suffered a deficit of Rs. 8.4 billion even after receiving Rs. 1.2 trillion as its share under the NFC Award, which was equal to 82% of its total revenues. The situation in first half of the current year has not improved, though there is surplus of around Rs. 146 billion, but at the cost of cutting development expenditure and failing to provide much-needed support to the needy suffering due to covid-19 endemic.
The position of other provinces from July-December 2020 is as under:
- Government of Khyber Pakhtunkhwa’s spending reached Rs. 282 billion against its revenues of Rs. 301 billion, out of which Rs. 205 billion was received under the NFC Award.
- The Sindh government showed a positive budget balance of Rs. 44 billion. Its total revenues stood at Rs. 437.7 billion. Sindh got Rs. 320 billion under NFC Award.
- Balochistan government’s total revenue was at Rs. 151 billion as against total expenditures of Rs. 106 billion, showing a surplus of Rs. 45 billion. Balochistan received Rs. 133 billion under NFC Award.
Meagre collection of agricultural income tax and giving the rich absentee landowners unprecedented relief proves the point that PTI Government coalition governments in Punjab, Khyber Pakhtunkhwa and Balochistan, like their predecessors, are not at all inclined to tax the rich agriculturist lobby.
The PTI coalition governments in three provinces also failed to undertake fundamental reforms to merge three tax departments, namely, Board of Revenues, 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 though during election campaign promises to this effect were made.
The PTI coalition governments in three provinces and that of Pakistan Peoples Party (PPP), while not taxing the rich and mighty, are keen to get more tax from service providers that conveniently pass it on to the end users—this is a regressive tax, whereas we need more from the rich class for bridging the fiscal deficit as well as providing relief to the poor. In FY 2020, debt servicing by federal government was Rs. 2620 billion (domestic Rs. 2313 billion and foreign Rs. 307 billion) against net revenues of Rs. 3278 billion after transfer to the provinces. Debt servicing was 79% of total net revenues of the federal government and 65 % of tax collection of FBR. This is the real dilemma and challenge on the fiscal front faced by Pakistan. All the four provinces are heavily relying 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.
In the wake of Eighteenth Amendment, the 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 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 increasing needs of the ever-growing population. The provinces must participate in national tax policy and collection apparatus as their share in NFC Award is larger than the federal government and Article 156(2) requires federalised and not centralised economic planning. There is a dire need for a new tax model entailing harmonised 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—all participating in retiring debt burden that would eliminate fiscal deficit. The complete blueprint of this model is provided in the following:
- ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)
- Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf
- Two recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economy and Growth inclusive tax policy: A reform proposal
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The writers, lawyers and authors, are Adjunct Faculty Members at Lahore University of Management Sciences (LUMS).