(042) 35300721
Mon - Fri 09:00-17:00
Free consultant

Fiscal deficit and tax system

Dr. Ikramul Haq

In fiscal year 2019-20, the coalition government of Pakistan Tehreek-i-Insaf (PTI), according to a report, posted fiscal deficit of Rs. 3.4 trillion or 8.1% of GDP against the estimate of International Monetary Fund (IMF) of Rs. 3.9 trillion (9.2% of the GDP) due to deadly economic toll of Covid-19 endemic. The news has certainly pleased the PTI economic team but there are certain facts that need to be considered for correct evaluation. In FBR’s collection and unpaid refunds, Daily Times, August 9, 2020, it was mentioned that the actual amount of refunds payable by the Federal Board of Revenue (FBR) was understated to inflate the figure of collection. It is now revealed in a report that actual refunds payable were of Rs. 578 billion which if excluded, the net collection of FBR comes to only Rs. 3.4 trillion against the claimed figure of Rs. 3.9 trillion (just 8.2% of GDP). Resultantly, the fiscal deficit is around Rs. 4 trillion, if FBR’s correct net collection is taken into account.      

The report reveals that the FBR’s team on August 10, 2020, in a meeting chaired by Advisor to Prime Minister on Finance and Revenue, Dr. Abdul Hafeez Shaikh and attended by some other ministers, admitted that “quantum of income tax, sales tax and customs duty refunds surged to Rs.578 billion” till June 30, 2020 (sales tax Rs. 142 billion and income at Rs. 436 billion). The meeting was reportedly informed that “the stock of sales tax refunds of Rs.142 billion remained unchanged but the income tax refund claims that stood at Rs. 421 billion a year ago increased to Rs. 436 billion by the end of June 2020 and customs duty-related refunds were less than Rs. 1 billion”.

For curtailing fiscal deficit, the PTI Government offset the shortfall in revenues by massively cutting down development spending. Against the budgeted Public Sector Development Programme (PSDP) of Rs. 701 billion, the actual spending was only Rs. 467.7 billion.

The report further says that “during fiscal year 2019-20, overall expenditures of the federal and provincial governments was Rs. 9.65 trillion that was lower by Rs. 188 billion when compared with the IMF’s post Covid-19 projections. Compared with that, total revenues of the federal and all provincial governments were Rs. 6.3 trillion, higher by Rs. 352 billion than IMF’s assessment”.

The persistent failure on fiscal front is partly due to our existing faulty and ineffective tax system that contains heavy tax rates, but lower yields due to weak enforcement. The tax system has been made further unjust and oppressive through Finance Act 2020 by enhancing rates rather than lowering the same or waiving the advance taxes to help businesses recover from heavy losses due to Covid-19 endemic and lockdowns. Through the Finance Act, 2020, laws/rules are made more complex and cumbersome.

The real tax potential, if we bridge tax gap, is much higher at federal and provincial levels. In these columns, it is showed around Rs. 12 trillion that can solve the issue of burgeoning fiscal deficit and ever-rising debts. Unfortunately, the PTI Government has not considered proposals to raise total revenues—tax and non-tax—to the extent that can turn Pakistan into a self-reliant economy, inducing investment, producing more jobs and increasing productivity.

The main impediment in the way of inclusive growth is the prevalent unfair tax policy that benefits the rich and mighty (exploitative elements having monopoly over economic resources) and fleeces the economically-deprived classes as well as creates innumerable problems for existing and new investors. For example, a writer is now subjected to withholding tax on royalty instead of giving him tax incentive for contributing to society. Many seasoned and senior citizens contribute to newspapers/journals and get meagre amounts as compensation, subjected to 10% withholding tax that is minimum liability, whereas politicians in power, judges and high-ranking civil-military officials enjoy palatial bungalows, facility of servants, free utilities, cars etc and ironically all from taxpayers’ money.  

There is no political will to tax the privileged classes in Pakistan. The common man is subjected to exorbitant sales tax (though standard rate is 17% but actual incidence is over 40% on imports after applicable customs duty, regulatory duty, sales tax with mandatory value addition and advance income tax etc). In return, a common citizen does not even get what is guaranteed by the Constitution e.g. free education, healthcare, not even clean drinking water, what to speak of affordable shelter and transport. On the other hand, the mighty sections of society, monopolistic industrialists, absentee landowners, generals, judges and bureaucrats get exemptions/concessions/amnesties. The cost of tax-free perquisites and benefits, including state lands at free or at concessional rates, to members of militro-judicial-civil and political elite, alone is in billions!   

Determination of a tax base capable of measuring an individual’s ability-to-pay is a major problem. In all democracies, this rule is followed by adopting progressive tax-rate schedule for personal income tax and property tax according to size and amenities. In Pakistan, we have moved from this policy to unequal sacrificial rule where the mighty militro-judicial-civil complex (now an integral part of our landed aristocracy by earning State lands as awards and rewards) and political elite are paying peanuts as taxes and actual incidence is shifted to the less-privileged. The businessmen are offered presumptive/minimum tax regimes, even under income tax law, to pass on the burden to customers and then for untaxed income/assets frequent amnesties. The masses are overburdened with oppressive indirect taxes, ever-rising costs of public utilities, price-hike of items of daily use and rise in petroleum products through inflated levies.

A fair and just tax system is essential for maximising economic growth and raising revenues as proved in a detailed study [Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016]. It can be debated to find a workable tax model that should be simple, low rate on a broad-base as acknowledged by Pakistan Institute of Development Economics (PIDE) in its two recent studies: ‘Doing Taxes Better: Simplify, Open & Grow Economyand ‘Growth inclusive tax policy: A reform proposal. If this paradigm is made to work, then incentive to avoid taxes will be almost non-existent.   

As suggested by Donald J. Johnston of Organisation for Economic Co-operation and Development (OECD) in ‘Tax and wealth creation, “politicians must have the nerve to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed programmes introduced more to collect votes than social returns, but on important investments in creating human capital (e.g. education, training and health), and necessary public infrastructure to increase productivity of the economy”.

It is aptly concluded in ‘Tax and wealth creationthat“simply put, the government must unshackle the constituent elements of economic growth by letting market forces play their respective roles. And governments must transfer the benefits of economic growth to enhance social well-being and cohesion through transparent and well-designed taxation”. The PTI Government should explore this “sensible balance”, introduce pro-growth and investment-inductive tax policy, remove harmful taxation and counter tax avoidance through use of technology.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).

Related Posts

Leave a Reply