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Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy is undergoing a challenging phase after the alliance government of Pakistan Democratic Movement (PDM) has undertaken aggressive macro-economic adjustment measures for “cooling down” growth of nearly 6% witnessed in the fiscal year (FY) 2021-22 that was like a Mayday signal after perpetual deterioration of domestic and external financial position. However, in the first quarter (Q1) of the current fiscal year (2022-23) the Federal Board of Revenue (FBR) collected taxes of Rs. 1635 billion (claimed to improve further once final figures are compiled), 7% higher than the assigned target of Rs. 1609 billion, registering an overall growth of “more than 17% for the quarter”. According to FBR, this “revenue performance” is “reflective of robust revenue mobilization strategy”, “despite zero rating of Sales Tax on POL products, import compression and the prevailing situation of floods”.
FBR’s Press release of September 30, 2022 claims that “performance in overall collection” sans 17% sales tax on petroleum products (zero-rated) and “41% increase in direct taxes” was in line with the policy of the PDM government to tax the affluent. Further, during Q1, FBR paid refunds to the tune of Rs. 84 billion, higher by 35.5% as compared to Rs. 62 billion in the same quarter of the last year.
It is worth mentioning that the impact of macroeconomic adjustments and forced economic slowdown by the incumbent government has started surfacing. Media reports suggest that the spell of collecting beyond target by FBR is withering away. During the month of October 2022, as per report in an English daily, FBR’s collection at Rs.512 billion showed growth of just 16%, below the required target of 23% and missing the monthly target of Rs. 534 billion by Rs. 22 billion. The detailed disclosure of this underperformance is still awaited on the part of FBR and the Ministry of Finance (MoF). Since this trend of missing targets by FBR due to contraction in imports, appears to persist in the coming months, the expected mini budget is going to create more financial hardships for ordinary citizens—already squeezed to the last drop by government’s fiscal adjustment policies and hyperinflation (26.6% in October).
The imprudent tax collection strategy (failure to broaden tax base and withdraw exemptions available to the rich and mighty) is one of the root causes of our fiscal mess. The tax-to-GDP ratio (especially FBR’s direct tax collection) is on a decline (2.3% in Q1 of FY 2022-23) whereas fiscal deficit reached Rs. 1026 billion (1.2% of GDP) as per summary of fiscal operations issued by MoF. Contrary to the claims of FBR, in Q1 of the current fiscal year, out of total tax collection of Rs. 1634 billion, direct tax was only Rs. 683 billion (41%) and indirect Rs. 951 billion (59%). If withholding income tax on imports, contracts, goods and services is extracted being indirect in nature, the contribution of income tax will be not more than 25%. It is for FBR now to present the data on its website to refute this point.
Undoubtedly, the federal government has been unsuccessfully struggling for years to curtail budget deficit as is evident from yearly figures of fiscal operations on MoF’s website. After transfer of taxes to provinces [Rs. 880 billion in Q1 of FY 2022-23], net resources of Rs. 964 billion are not enough to meet two expenditures, namely, burgeoning debt servicing and defence, at Rs. 954 billion and Rs. 312 billion respectively, reconfirming this dilemma beyond any doubt and which will persist.
The second formidable challenge for economic managers is to increase foreign exchange reserves level to maintain the balance of payment and stabilize Pak rupee. It was conveyed to the public that economic wizard of Pakistan Muslim League (Nawaz) and fourth-time finance minister, Muhammad Ishaq Dar, will tackle these issues successfully. However, it is proved since his taking oath that without fundamental long term structural reforms, no “magic” can work to overcome fiscal woes and correct economic direction of the country. Despite all the tall claims, no relief has been made available to an overwhelming majority in Pakistan, which is facing the severe impact of high inflation due to failed policies of successive governments, especially that of coalition government of Pakistan Tehreek-e-Insaf (PTI) and the austerity measures by Miftah Ismail in the name of saving the country from the risk of potential default!
In his various interviews and articles, Ishaq Dar criticised the amendments made by PTI in State Bank Act, 1956 and vowed to reverse these after assuming power but in the last six months, no action has been taken in this direction. Ishaq Dar was relying on the International Monetary Fund (IMF) and expecting release of the next tranche. His visit to Washington to secure concessions, especially after devastating floods, could not succeed because IMF’s mission will not come unless new taxes are imposed and all unfunded subsidies are withdrawn. No doubt, violation by PTI government of conditions agreed with IMF has added to the miseries of the people. Miftah Ismail told the media that the federal government was losing around Rs. 2500 million daily due to what he called ‘minefields’ laid down by PTI government. Resultantly, the incumbent government committed with the IMF for revival of programme, imposition of monthly Petroleum Levy (PL) so as to reach Rs. 50 per liter as onJanuary 1, 2023 for petrol and for diesel on April 1, 2023. The commitment also ensured that PL would remain at Rs. 50 per/liter for both fuels until the end of the FY 2022-23.
The politically motivated subsidies given by PTI government had brought economy to the verge of collapse as domestic and external financial buffers were exhausting rapidly and the present government had no choice but to withdraw the same to create breathing space for the economy. Due to violation of the agreement, IMF imposed harsh preconditions for revival of the programme. The PDM government fulfilled the demand of raising PL to Rs. 50 per liter in November 2022. It deprived the public of the benefit in price in the last few cycles of petroleum price announcements. At the same time, the decline in the value of Pak rupee is complicating the situation as the base price level constantly remains elevated.
The current government, while resuming the Extend Funded Facility (EFF) with IMF, further agreed that in case the monthly revenue data showed underperformance by FBR in Q1 vis-à-vis targets fixed for FY 2022-23, it would immediately raise additional revenues, specifically levying 17% sales tax on fuel products. The government further agreed to streamline sales tax exemptions, raising taxes on sugary drinks as well as withdrawing unjustified exemptions extended to exporters, and/or increase federal excise duty on Tier I and Tier II cigarettes by at least Rs. 2 per stick with immediate effect.
Considering the recent challenges faced by the economy, especially post-floods, the collection targets will be compromised. In case, the government decides to impose 17% sales tax, it will further aggravate the skyrocketing inflation and businesses will be a step closer to closure due to abnormally high cost of doing business.
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Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.