Dr. Ikramul Haq
“…for Pakistan, the fiscal deficit is projected to increase by 9.2 percent of GDP in 2020”—Economic Survey 1999-20quotingFiscal Monitor—April 2020, IMF
The federal budget for fiscal year (FY) 2020-21, the second one of coalition Government of Pakistan Tehreek-i-Insaf (PTI), announced on June 12, 2020, amid Covid-19 massive economic toll, says that assessment of the full impact of COVID-19 on tax collection of Federal Board of Revenue (FBR) “merits analysis of the various expected and projected revenue figures prior to the time of crisis emergence. FBR’s target which stood at Rs 4,807 billion was revised downwards to Rs 3,908 billion keeping in view the economic slowdown consequent to the pandemic. The aforementioned revision had thus forecasted a revenue loss of Rs 899 billion. Nevertheless, the actual shortfall is expected to be higher than what has been projected”.
Prior to announcement of budget, Economic Survey 1999-20 noted: “FBR tax collection has witnessed a remarkable turnaround during the current fiscal year after posting negative growth of 0.4 percent in FY2019. The overall FBR tax collection grew by 10.8 percent to Rs 3,300.6 billion during July-April, FY2020 against Rs 2,980.0 billion in the comparable period last year. Within the total, the domestic component of tax revenue collected by the FBR grew by 14.7 percent to stand at Rs 2,777.7 billion in first ten months of the current fiscal year against Rs 2,421.1 billion in the comparable period last year”.
The Annual Budget Statement containing estimated receipts and expenditure laid before the National Assembly of Pakistan for FY 2020-21 in terms of Article 80(1) of the Constitution gives revised estimate of FBR’s collection for the current fiscal year at Rs. 3908 billion against the original budgeted target of Rs. 5555 billion. The FBR’s target for next FY (2020-21) is fixed at Rs. 4963 billion (27% increase). How has this increase been calculated is not explained, when as per claim of PTI Government “tax-free budget is presented”.
Dr. Ashfaque H. Khan in Setting FRB target for 2020-21 [Business Recorder, June 11, 2020] noted: Projecting budgetary targets, in general, and tax revenue, in particular, with a fair degree of accuracy is an essential element of sound fiscal management and, therefore, of maintaining fiscal discipline in the country…If they persist on setting an unrealistic revenue target like that of last year, it will have multiple implications for fiscal discipline in the country…… FBR Revenue for 2020-21 equal to Base Year Revenue multiplied by the product of nominal GDP growth rate and tax elasticity (9.5 x 0.85 = 8.1%)….Rs 3,850 x (1.081 = Rs 4,162 billion. Assuming some additional efforts, which will be made by the FBR administration, the tax target should not be more than Rs 4,250 billion.
FBR collected Rs. 3534 billion From July 2019 to May 2020 and in June 2020 for meeting the revised target needs to collect Rs. 374 billion, which appears an uphill task due to disastrous impact on economy in view of Covid-19 pandemic. It is an established fact that even prior to Covid-19 outbreak, FBR was far behind even the revised target of Rs. 5238 billion after first review of International Monetary Fund [IMF] under $6 billion Extended Fund Facility (EFF) programme. It was later revised to Rs. 4803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after virus outbreak, finally reduced to Rs. 3908 billion.
Dr. Ashfaque H. Khan in Setting FRB target for 2020-21 rightlynoted that“Budget 2020-21 will be a make-or-break budget. The aim of this budget should be to minimize the adverse effects of Covid-19. The government on its part should not treat this budget as a ‘business as usual’ budget….. To reduce expenditure, it is necessary that we bring discount rate to 6 percent in July 2020. A one percent decline in discount rate would reduce interest payment by approximately Rs 160 billion in one year. Hence, a two percent cut in discount rate would reduce interest payment by over Rs 300 billion which can either be used to reduce budget deficit or be used to increase expenditure on health facilities in the country. I hope, sanity would prevail both in the IMF and in the Ministry of Finance. They would refrain from setting unrealistic revenue target for the FBR”.
As expected, Dr. Ashfaque’s advice, as of many others, in pleading for a rational basis of fixing tax targets and reducing expenditure to come out of perpetual fiscal mess that is pushing Pakistan into a deeper and deeper debt trap, fell on deaf ears. Taxation in Pakistan is oppressive, lopsided and counterproductive as highlighted by Pakistan Institute of Development Economic (PIDE) in Policy Viewpoint [16:2020], Doing Taxes Better: Simplify, Open & Grow Economy also quoting the study, Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME, 2016].
The recently launched ‘Tax Payers Alliance Pakistan’ (TPAP), a voluntary network of Pakistani tax payers to act as a pressure group of professionals, business owners and individuals, in a pre-budget maiden Press release, reminded the Government that Pakistan needs a low-rate, broad-based and equitable tax system as well as the federal and provincial governments must demonstrate transparency and end undue and wasteful expenditures—details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/. .
Somebody has rightly raised the issue: Why debate on tax collection alone in media and elsewhere, and fail to mention of tax forgone of the rich and mighty enjoying facilities of resorts, golf clubs, rest houses, palatial bungalows and other unprecedented perks and benefits etc. In Economic Survey 1999-20, tax expenditure shown at Rs 1,149.95 billion is understated as impact of tax amnesty of 2018 and 2019 falling in FY 2019-20 is not shown!”
All sane voices and studies cited above have been ignored by the PTI Government while preparing Finance Bill 2020 which makes many changes in various tax codes placing more burdens on the businesses and individuals. This is the continuation of the past legacy of ill-directed, illogical, regressive and unfair taxes causing a dampening effect on the industrial and business growth whereas in the aftermath of negative economic impact of Covid-19 epidemic we need to do just the opposite. The sole stress on fixing ambitious revenue targets, without evaluating its impact on already troubled economy will certainly further destroy trade and industry. The majority of measures announced in Finance Bill 2020 amounts to over-taxing the economy that is in deep recession. It is nothing but a suicidal step!
The PTI Government must reverse the anti-business, anti-growth and anti-people tax policy to safeguard businesses from closure and lay-offs in the existing exceptional circumstances. PIDE PRIME have done a remarkable job and the government still has a chance to revise Finance Bill 2020 before its approval to remove all the irritants/maladies identified in above studies. It needs to undertake much-needed and long-delayed holistic reforms aimed at incentivising businesses to survive/revive and ultimately achieve growth that alone can enhance taxes. The number game of fixing targets in annual budgets in isolation and without research-based data analysis is highly imprudent for both fiscal management and discipline.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).