Fiscal Management: Issues & Challenges

Huzaima Bukhari & Dr. Ikramul Haq

An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018-19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy

“Their [provinces] revenue efforts have been unimpressive to say the least, whereas their allocation on social development has been much less than what is required to bridge the existing service delivery gap. Therefore, it requires strong commitment from the provincial governments to support the fiscal consolidation efforts, bring the needed diversification in the revenue base, and gear themselves up to carry out effective public financial management to improve the quality of public spending”—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy

“Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country”—FBR Year Book 2018-19

The elite is unwilling, even in its own enlightened self-interest, to contribute on the basis of capacity to bear the resource burden required to build a fairer society. Instead, it has instituted a social order that imbibes the feudal value system and promotes a culture of paternalistic and personal relations (in contrast to impersonal market relationships and a culture of competitiveness in other economies), nepotism and patronage, violation of the rule of law, non-acceptance of the norms of fair play and justice, etc; wrecking institutions meant for checking such excesses. Even a slowly growing middle class from non-elite backgrounds has adapted to these value systems, creating a crisis of legitimacy for the state and its institutions—Shahid Kardar, Overhaul the system, Dawn, September 16, 2014.

The root cause of our economic destruction has been the policy of ‘reckless borrowing and ruthless spending’—Dr. Ashfaque H Khan, The News, August 8, 2012. 

A tax gap analysis recently completed by the World Bank indicates that Pakistan’s tax revenue would reach 26 percent of GDP if tax compliance were raised to 75 percent—World Bank $400 million Pakistan Raises Revenue Project

For the last many decades, fiscal (mis)management in Pakistan [In economics and political science, fiscal management is the use of government revenue collection and expenditure to influence the economy. Two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors] has been a serious cause for concern for all—the government, people and donors. The problems diagnosed by experts are rent-seeking structures, wasteful expenses, un-tapping of resources, inefficient and corrupt institutions, oppressive and excessive taxation, non-availability of impersonal market relationships, lack of competitiveness, violation of the rule of law, non-acceptance of the norms of fair play and coupled with ‘reckless’ borrowing and ‘ruthless’ spending amidst burgeoning fiscal, trade and current account deficits—just to mention a few. 

During the Decade of Democracy [2008-18], the governments of Pakistan People Party and Pakistan Muslim Leagues (Nawaz) showed extreme callousness towards economic well-being of the voters who elected them, especially the less-privileged. Their performance on economic front was abysmal. They resorted to regressive taxes, yet failed to bridge the burgeoning fiscal deficit—it hit historic high of 8.9% of GDP for fiscal year 2018-19. A report, issued by the International Monetary Fund (IMF) says that Pakistan’s public debt may surge this year to 78.6% of GDP. Way back in January 2016, in a paper, Rising Debt: A Serious Threat to the National Security, Ashfaque H. Khan aptly noted: The speed at which the governments have borrowed over the last several years in general and during the last two and a quarter years in particular has caused serious alarm in various circles. These circles consider the pace of borrowing as something that is posing a serious threat to the national security. If the pace of borrowing remained unchecked then the size of the external debt, in particular, would become large enough for Pakistan to service its external debt obligations in an orderly manner.

Historically, our rulers, military and civilian alike, have been seeking bailouts from IMF—many call it death-blows. With every loan came harsh conditions—ostensibly meant for economic revival/reforms by every time left us in deeper quagmire. Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality huge loans were secured for reforming (sic) the tax, banking and justice systems—just to mention a few. Fresh loans were negotiated with renewed enthusiasm by all the successive governments. This undesirable trend continues under the economic ideologues of Pakistan Tehreek-i-Insaf (PTI) who were claiming before coming to power that they would make Pakistan self-reliant and never seek any IMF’s bailout.

Pakistan signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 and got disbursements of about $7.6 billion. It failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. The main responsibility of failure was with then Economic Minister of PPP, Dr. Abdul Hafeez Shaikh, who is now selected by the government of PTI for economic revival. We have secured yet another bailout from IMF of US$ 6 billion. Will Hafeez Shaikh turn his past failures into a success this time?—there is optimism as per Premier Imran Khan and he reassured nation on December 5, 2019 that “good days” are coming and “you have not to worry”[Ghabrana nahi hai]!

However, many say that there are many valid reasons to be worried e.g. inflation in November 2019 skyrocketed at 12.7%—highest during the last nine years. The PTI government took foreign loans of US$ 10.4 billion in its first year in power resultantly Rs. 571.6 billion were consumed by debt servicing alone from July to September 2019—foreign debt servicing was Rs. 77.7 billion, showing an increase of 70%. Circular debt is expected to swell to Rs. 1700 billion by end of this current fiscal year! But we should not panic as Prime Minister assured that all these challenges will be met successfully by his team soon and that IMF has given us very good review as well as other international bodies and agencies like, the World Bank, Asian Development Bank and Moody’s etc. Moody’s has recently upgraded Pakistan’s credit rating outlook to stable, with an accompanying report saying it reflected the country’s relatively large economy and robust growth potential.

The most challenging areas of our fiscal management are inadequacy of resources, huge debt servicing and high current expenditure. In 2018 and 2019, expenditure amounted to over 21 percent of GDP. On account of debt servicing in FY 2018, actual expenditure was Rs. 1987 billion against the budgeted figure of Rs. 1620 billion. Allocation for the current fiscal year is 2891 billion, 78% higher than last year!

The target assigned to FBR for 2018-19 was Rs. 4435 billion [revised downwards to Rs. 4398 billion and then to Rs. 4150 billion].FBR collected merely Rs. 3828.5 billion showing negative growth of 0.4%. This resulted in fiscal deficit of 8.9 percent of GDP. PTI Government is not responsible for it—it was due to wrong policies and fiscal mismanagement of economic wizards (sic) of Pakistan Muslim League (Nawaz).

The dismal performance of FBR in 2018-19 adversely affected the provinces, heavily dependent on collection by the Centre from the divisible pool. The size of the cake is so small that even provinces are facing crunch of funds. In these circumstances, we cannot come out of debt trap or spend adequately for the welfare of the people. Provinces are also not ready to collect taxes due from the rich and generate their own resources and initiate fiscal devolution as envisaged under Article 140A of the Constitution. Failure of FBR to meet the assigned target, what to speak of tapping the real tax potential of Rs. 8 trillion, and inability of provinces to raise sufficient resources at their own has created a fiscal fiasco.

The root cause of our fiscal mess is, however, not inadequate (sic) tax collection alone, as highlighted by many, especially foreign donors and lenders, but mammoth debt servicing burden, monstrous current expenditure (mostly unproductive and wasteful), inefficient and corrupt government apparatus, loss-bearing public sector enterprises, circular debt and blocking of genuine refund by FBR—just to mention a few. For progressing, we need fiscal consolidation through decentralisation, dismantle all elitist structures and empowerment of masses at grass root level that is possible by implementing Article 140A of the Constitution of Islamic Republic (“the Constitution”) in letter and spirit. This alone can ensure economic prosperity for masses. No other strategy will work, not even the recent US$ 400 million loan from World Bank for Pakistan Raises Revenue  Project.

The biggest challenge faced by FBR is bridging monstrous tax gap. The World Bank in its report, Pakistan Revenue Mobilisation Project, has rightly noted:

Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent respectively). 

It is clear from FBR Year Book 2018-19 that over 70% tax collection came from exorbitant taxes at import stage, withholding tax regime under income tax law and advance tax. This pattern continues under the government of PTI—it has taken no corrective measures till today. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001—after Finance Act, 2019 it contains over 70 withholding tax provisions, many of which constitute minimum tax liability! Is it direct taxation? Even Chairman Shabbar Zaidi will certainly say NO!!

FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], Rs. 39.2 billion [2.7%] received with returns and Rs. 344.2 billion [23.8%] as advance tax. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR—the same trend continues in the first five months of the current fiscal year; even after imposing oppressive taxes, FBR faced shortfall of around Rs. 218 billion.

In an article [Flawed tax reforms agenda], it was observed as under:

FBR closed fiscal year 2018-19 under renowned tax expert, Syed Muhammad Shabbar Zaidi, and it is hoped that for the first time correct disclosure of collection figures will be provided to the nation after deducting the actual amount of refunds payable—withheld for years merely to show ‘extraordinary performance’ (sic) by stalwarts of FBR. Not only true disclosure is essential but all due refunds should be paid with compensation without any further delay. Stringent action should also be taken against those who criminally avoided giving appeal effects in favour of taxpayers, blatantly violating order of the higher courts and Tax Tribunals.

It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current up-to-date data of return filers and sales tax registered persons as early as possible. Hopefully, Mr. Shabbar Zaidi will take a serious note!

In the light of above note, for the first time, FBR disclosed details of income tax returns filed historically as under:

The trend for filing of income tax returns has not been satisfactory in Pakistan. Keeping in view very low compliance, FBR had initiated a Broadening of Tax Base (BTB) drive few years ago, which has not started paying dividends in shape of growth in the number of filers. The income tax returns which were just 1.5 million in TY 2016 have crossed the two million mark first time in the history of FBR. During TY 2017 the number of income tax filers reached to 1.9 million and in TY 2018 2.2 million (Table 7). During TY 2018 the number of return filers increased by 17.1% or 316,526 in absolute terms. This performance in terms of number of returns is satisfactory but payment with returns has a meager growth of 3.0%, which is the matter of concern. The desk audit of filed returns can be helpful in increasing the amount paid with returns.

An analysis of FBR Year Book 2018-19 reveals the following:

• “The target for FY 2019-20 i.e. Rs.5503 billion requiring around 43% growth, is highly challenging, which would be possible only through extraordinary concerted efforts by the senior FBR management and field formations”.
• FBR has collected Rs. 3,828.5 billion during FY 2018-19 against Rs. 3,843.8 billion during FY 2017-18 indicating a negative growth of 0.4%. The revised revenue target of Rs. 4,150 billion was achieved to the extent of 92.3%. The direct taxes, sales tax, FED and customs missed their respective targets by 12.9%, 2.1%, 10.5% and 6.7% respectively.
• During FY 2018-19, FBR has missed the target by around Rs. 321.5 billion mainly for the following major reasons:
  • Petroleum (-) Rs. 96 billion
  • Telecom—Suspension of withholding tax by Honorable Supreme Court (-) Rs. 55 billion
  • Reduced Government Spending (-) Rs. 80 billion
  • Import compression (withholding at import stage) (-) Rs. 16 billion
  • Reduced rates on salary income announced in the Budget 2018-19 (-) Rs. 50 billion
  • Reduction in Customs Duty (-) Rs. 50 billion
• As per the collection FY 2018-19, sales tax is the top revenue generator with 38.1% share followed by direct taxes with 37.8%, customs 17.9% and FED 6.2%. During FY 2018-19 the share of customs duty and FED has increased, whereas the share of direct taxes and sales tax has decreased slightly.
• The overall growth in collection remained dismal during FY 2018-19. The overall collection ended at (-) 0.4%, which is Rs. 15.3 billion lesser than the collection of FY 2017-18.
• During FY 2018-19 refunds of around Rs. 121.6 billion were paid, as compared to around Rs.154.7 billion in FY 2017-18. The refund amount paid during FY 2018-19 is 33.1 billion less as compared to previous fiscal year (PFY).
• Direct taxes have contributed 37.8% to the total tax collected during FY 2018-19. Net collection stood at around Rs. 1,445.4 billion reflecting a growth of (-) 5.9 % over the PFY collection of Rs. 1,536.6 billion. An amount of Rs. 83.9 billion has been paid back as refund to the claimants in FY 2018-19 as against Rs. 69.5 billion during FY 2017-18. Collection of income tax comprises withholding taxes (WHT), Advance Tax/Payments with Returns and collection on demand (COD). Collection from arrear demand and current demand has been Rs. 18.7 billion and Rs.84.2 billion respectively during FY 2018-19. Collection from current demand showed negative growth of (-)1.1%.
• Advance Tax/Payments with Returns under the head income tax: Rs. 384 billion was collected during FY 2018-19 as compared to Rs 374 billion in the FY 2017-18. Major component of this mode of payment is Advance Tax where a sum of Rs 344.2 billion stood collected as against Rs. 335.8 billion in FY 2017-18 registering a growth of 2.5%. The second component is payment with returns, where a sum of Rs 39.3 billion has been collected during FY 2018-19 against Rs. 38.1 billion in FY 2017-18 registering a growth of 3.0%.
• WHT contributes a major chunk i.e. 67% of the total collection of income tax. The WHT collection during FY 2018-19 has been Rs. 960.7 billion against Rs. 1047 billion indicating a negative growth of 8.2%. The nine major components of withholding taxes that contributed around 80% to the total WHT collection are: contracts [Rs. 235.4 billion], imports [Rs. 221.8 billion], salary [Rs. 76.4 billion], telephone [Rs. 17.1 billion], dividends [Rs. 57.0 billion], bank interest [Rs. 58.1 billion], cash withdrawal [Rs. 32.0 billion], electricity [Rs. 35.5 billion] and exports [Rs. 34.4 billion]. As far as growth is concerned, collection from bank interest grew by around 27%, exports (22%), electricity bills (5%), imports (1%) while rest of the items recorded a negative growth in collection. The highest contributor in withholding taxes is contracts with 24.5% share, followed by imports (23.1%) and salary (8%). Further break-up reveals that the share of only two heads of WHT i.e. contract and imports is around 48% and further addition of withholding tax on salary raises the share of these three items to more than 55% of the total withholding taxes, showing high reliance on fewer heads.
• Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country.
• Direct taxes are collected from manufacturing, services, construction, whole sale and retail trade, transport and mining and quarrying. Major contributor is manufacturing sector with around 34.5% share in direct tax collection. Second major contributor is the services sector with around 24.2% share in collection. The share of wholesale & retail trade and transport sector is 2.9% and 2.3%, which is in fact very low as against the existing potential in the country.
• Wholesale and Retail Trade sectors together paid Rs. 48.2 billion: Large Retail Trade (7.9 billion), Small Retail Trade (9.7 billion) and Wholesale Trade (25.1 billion).
• During FY 2018-19, sales tax remained top revenue generating sources of federal tax receipts after direct taxes. It constitutes around 38.1% of the total net revenue collection. Collection during FY 2018-19 has been around Rs. 1,459.2 billion against around Rs. 1,485.3 billion in the PFY. Overall sales tax collection registered negative growth of -1.8% and around Rs. 26.1 billion of lesser amount has been collected during FY 2018-19 as compared to the collection of previous year. The downward revised target of sales tax has been met to the extent of around 97.9%. Major reasons of shortfall in the collection of sales tax domestic and imports during FY 2018-19 are following:
  • A sharp reduction in the GST rate on Petroleum Products at both import and domestic stages            
  • Reduced GST on Natural Gas
  • Import compression
• Domestic sales tax collection recorded a negative growth of 1.9%, whereas collection of sales tax on imports recorded a negative growth of 1.7%.The overall net collection of Sales Tax Domestic (STD) was Rs. 648.9 billion against Rs. 661.1 billion in the PFY and the net collection grew by (-) 1.9%. In absolute terms Rs. 12.2 billion less amount of revenue has been collected in FY 2018-19 as compared to PFY. The POL products the top revenue generating source, with 38.3% share, its collection grew by 4.9% during FY 2018-19. The collection from sugar, cigarettes, withholding agents, food products and electrical energy recorded a growth of 31.8%, 12.6%, 9.9%, 9.6% and 7.5% respectively during the period under review. On the other hand negative growth was recorded in cement, aerated waters, iron & steel and motor cars.
• Sales tax on imports (STM) is a significant component of federal tax receipts. The share of STM in total sales tax net collection has reached to around 55.5%. The net collection of STM during FY 2018-19 stood at Rs. 810.4 billion against Rs. 824.2 billion in FY 2017-18, registering a negative growth of 1.7%.
• Top 10 commodities of sales tax import have contributed a major chunk i.e. 76.5% in STM collection. The detailed data indicates that more than 59.6% of STM is contributed by POL products (Ch:27), machinery (Ch:84 & 85), iron & steel (Ch:72) and vehicles(Ch:87).
• Like sales tax (domestic), petroleum is the leading source of sales tax collection at import stage as well. Its share in sales tax imports is around 27.3%. During FY 2018-19 collection from POL products was Rs.221 billion against Rs. 264 billion during FY 2018-19 reflecting a growth of (-) 16.2%.
• Customs duty constitutes around 28.7% and 17.9% of the indirect taxes and federal taxes respectively. The share of customs duties in FBR collection is gradually increasing. The net collection from customs duty during FY 2018-19 has been around Rs. 685.6 billion indicating growth of 12.7%. The healthy growth in customs collection has helped the overall FBR revenues positively. Out of total net collection under the head Customs of Rs. 685.575 billion, the share of vehicle (non-railways) is Rs. 81.459 billion. POL products are the second major contributor of customs duty [Rs. 79.3 billion], Machinery & Mechanical Appliances [Rs. 42.5 billion] and Electric Machinery [Rs. 42.4 billion].
• Collection from Federal Excise Duty (FED) was Rs. 238.2 billion. FED constitutes 10.0% of indirect taxes and 6.2% of total federal taxes. The major sectors which contribute in FED revenues are tobacco [Rs. 91 billion], cement [Rs. 56 billion], beverages [Rs. 23 billion], natural gas [Rs. 10 billion] and edible oil [Rs. 6 billion] and some of the services. The tobacco (cigarette) is the top source of FED collection with around 38% share in FED revenue. The collection from cigarettes grew by around 36% during FY 2018-19. The second major sector is the cement which contributes about 24% in FED revenue. Nearly 94.6% of FED collection is realized from five items.

Once again, the FBR in FBR Year Book 2018-19 has not disclosed total number of registered sales tax persons and how many are actually paying tax despite others and ours asking repeatedly. It should be done on the closing date of every financial year. For the sake of transparency, FBR must provide on website historic and current up-to-date data of return filers and sales tax registered persons—hopefully Mr. Shabbar Zaidi will take a serious note of it!

FBR Year Book 2018-19exposes the tall claims of the apex revenue authority of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18 to only 12.6% in 2018-19). The reality is quite evident to all—higher (sic) collection has been due to exorbitant sales tax on POL products, due to over 70 withholding income tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers.

It is clear by now that the sordid story of collection through withholdings and advances continues even under the government of PTI as it took no corrective measures after coming into power.  The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum tax liability. Out of total collection under withholding provisions of Rs. 1047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent! In FY 2018-19, the same situation remains unchanged.

It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR Year Book 2018-19 concedes that “WHT contributes a major chunk i.e. 67% to the total collection of income tax”. Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], with returns came Rs. 39.2 billion [2.7%] and advance tax of Rs. 344.2 billion [23.8%]. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR.

FBR has failed to tap the actual tax potential as it would have hurt the rich, majority, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right and adding insult to injury got enormous benefit through two assets whitening schemes of 2018 and 2019. As many as 135 persons, named in the OECD database, availed the 2018 tax amnesty scheme of PML-N and declared Rs. 62.4 billion in assets. They paid only Rs. 2.9 billion whereas, their actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion from the last government. About 56 people, whose data was shared by the OECD, availed PTI’s tax amnesty scheme and declared Rs. 31.8 billion worth of assets. They paid only Rs. 1.7 billion and got a relief of Rs. 20.6 billion.

Perpetual failure of FBR [see Table] to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities.

During the last fiscal year, negative growth was the result of policies of appeasement on the part of PMLN and then PTI. Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away a large part of the budget for debt servicing/payment of principal amount.

Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement.

Our real dilemma that is very high level of current expenditure has yet not been touched by the Prime Minister. Obviously, the monstrous size of government, army of ministers, state ministers, advisers etc would not like to brief Prime Minister on it as reducing wasteful expenditure will mean less luxuries for the elite—militro-judicial-civil complex and politicians in power.

According to Budget Documents for 2019-20:

“During the last five years, total revenue as percent of GDP on average reached to 14.9 percent, whereas it stood at 15.1 percent in FY2018. The total expenditures as percent of GDP on average reached to 20.5 percent, while during the FY2018, it was the highest at 21.6 percent. Resultantly, fiscal deficit on average stood at 5.5 percent, while during the last year it was recorded at 6.5 percent.

FBR’s performance (1996-97 to 2018-19)

(Rs. in billions)

Year	Targets	Collection	Growth in Collection (%)	Target Achieved (%)	Tax to GDP ratio	Ratio in total taxes (%)
						Indirect taxes	Direct taxes
1996-97	286.0	282.1	5.2	98.6	11.6	69.8	30.2
1997-98	297.6	293.6	4.1	98.7	11.0	64.9	35.1
1998-99	308.0	308.5	5.1	100.2	10.5	64.3	35.7
1999-00	351.7	347.1	12.5	98.7	9.1	67.5	32.5
2000-01	406.5	392.3	13.0	96.5	9.3	68.2	31.8
2001-02	414.2	404.1	3.0	97.6	9.1	64.7	35.3
2002-03	458.9	460.6	14.0	100.4	9.4	67.0	33.0
2003-04	510	520.8	13.1	102.1	9.2	68.3	31.7
2004-05	590	590.4	13.4	101.8	9.1	68.9	31.1
2005-06	690	713.4	20.8	103.4	9.4	68.5	31.5
2006-07	935	847.2	18.8	101.5	9.8	60.6	39.4
2007-08	1.000	1008.1	18.9	100.8	9.8	61.5	38.5
2008-09	1,179	1157.0	14.8	98.1	8.9	61.8	38.2
2009-10	1,380	1327.4	14.7	69.0	9.0	60.4	39.6
2010-11	1,667	1587.0	19.6	95.2	8.8	61.3	38.7
2011-12	1952.3	1883.0	18.2	96.5	9.1	60.8	39.2
2012-13	2007	1939.4	03.0	96.6	8.5	61.8	38.2
2013-14	2275	2254.5	16.0	99.0	8.8	61.1	38.9
2014-15	2810	2589.9	13.0	92.2	9.2	60.1	39.9
2015-16	3103.7	3112.4	20.2	100.3	9.6	60.9	39.1
2016-17	3621	3367.8	8.0	92.9	9.8	60.1	39.9
2017-18	4013	3842.1	14.1	97.6	10.4	60.0	40.0
2018-19	4435	3828.5	-0.4	86.3	10.2	62.5	37.7

Source: Economic Surveys, State Bank Data & FBR Year Books

. In FY2016, fiscal deficit was brought down to 4.6 percent of GDP but the low trajectory could not be maintained and increased to 5.8 percent and 6.5 percent during FY2017 and FY2018, respectively.

The performance of fiscal indicators shows that total revenue growth experienced a slowdown (5.9 percent in FY2018 against 11.0 percent growth in FY2017), while, total expenditure growth was contained at 10.1 percent in FY2018 as compared to 17.3 percent in FY2017.

The net revenue receipts for 2018-19 were estimated at Rs 3,070.4 billion, which decreased to Rs 2,569.0 billion or by 16.3% in revised estimates 2018-19. The provincial share in federal revenue receipts was estimated at Rs 2,590.1 billion during 2018-19, which decreased to Rs 2,462.7 billion or by 4.9% in revised estimates.

The overall expenditures during 2018-19 were estimated at Rs 5,932.5 billion, out of which the share of current expenditure was Rs 4,780.4 billion. Current expenditure in revised estimates 2018-19 showed an increase of Rs 809 billion from budget estimates. After the share of Provinces in gross revenue is transferred, the net revenue receipts of Federal Government were at Rs 3,070,439 million in the budget 2018-19, which later revised downwards to Rs 2,568,977 million in the revised estimates 2018-19 showing a decrease of 16.3%.

The budget estimates 2018-19 of the overall expenditure were Rs 5,932,463 million, which increased to Rs 6,419,111 million in revised estimates 2018-19 or by 8.2%. Current expenditure: Rs. 7. 288 trillion (FY 2019-20) showing an increase of 52.5% and 30.4% in budget and revised estimates respectively of the fiscal year 2018-19.

Within development expenditure, total Public Sector Development Program (PSDP) expenditures posted a negative growth of 7.7 percent in FY2018 and stood at Rs 1,456.2 billion as compared with Rs 1,577.7 billion (growth of 33.1 percent) recorded in FY2017. Federal PSDP (net excluding development grants to provinces) spending witnessed negative growth of 20.6 percent (Rs 576.1 billion) in FY2018 against growth of 22.3 percent (Rs 725.6 billion) in FY2017. Provincial PSDP registered a growth of 3.3 percent in FY2018 compared with 43.8 percent in FY2017. Non-tax revenue decreed to Rs. 427.3 billion in FY 19 from Rs 760.9 billion in FY 18.

Total Revenues of all provinces in FY 19 were Rs. 2995.9 billion [in FY 18 it was Rs. 2,938.5 billion] out of which share from federal taxes was Rs. 2397.8 billion [in FY 18 it was Rs. 2,217.4 billion]. Total revenues of all provinces were Rs. 488.1 billion [in FY 18 it was Rs. 548.1 billion], out of which taxes were of Rs. 401.8 billion [in FY 18 it was Rs. 401.4 billion]. Total expenditures of all provinces were Rs. 2,857 billion [in FY 18 it was Rs. 2,960.9 billion] of which current expenditure were Rs. 2350.8 billion [in FY 18 it was Rs. 2,080.7 billion]”.

The above shows that our real issue is high current expenditure of both the federal and provincial governments. The reduction of the same should be our top agenda and not following the mantra of more regressive and oppressive taxes that are anti-people and anti-growth.

Let Prime Minister be informed that the iniquitous prescription of IMF of more taxes, austerity and high interest rate will not solve our problems—this has miserably failed in the past. The only solution is to reduce wasteful expenditure, right-size the monstrous size of the government, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial funds and facilitate rapid economic growth. 

It is an undisputed fact that FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it  has been single handedly destroying Pakistan’s growth by anti-business actions especially during 2013-18. The then Finance Minister, now a proclaimed offender of the Accountability Court and suspended senator, gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative tactics like raising unjust demands and freezing bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had Ishaq Dar concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Tax is a byproduct of growth and harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will Dr. Abdul Hafeez Shaik and Syed Muhammad Shabbar Zaidi care to take corrective measures and reverse this trend.

Track record of FBR shows remote possibility of collecting even Rs. 6 trillion in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tangle will continue unchecked and further taxation through local governments, when elected, would not serve any useful purpose—there will be no relief to the people, rather tax burden will increase manifold.

The main reliance of FBR since 1991-92 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum tax liability. Out of total collection under withholding provisions of Rs. 1047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent!

FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential, which is not less than Rs. 8 trillion— FBR: new chairman, old challenges, Business Recorder, August 2, 2013. An in-depth analysis of Year Book 2017-18 of FBR exposes the tall claims of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18). The reality is known to all—higher (sic) collection was due to exorbitant sales tax on POL products, due to over 65 withholding income tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers. It is clear by now that the sordid story of collection through withholdings and advances continues even under the government of PTI as it took no corrective measures after coming into power.

For the fiscal year, 2017-18, revenue target was Rs. 4013 billion that was later revised downward to Rs. 3935 billion. FBR collected only Rs. 3842 billion. It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR’s Year Book 2017-18 concedes that “WHT contribute “a major chunk i.e. 65% to the total collection of income tax”. It adds that “the WHT collection during FY 2017-18 has been Rs. 1047 billion against Rs. 944 billion indicating a growth of around 10.9%”. The actual contribution of WHT is 68.5% that is 3.5% more than what FBR has claimed in Year Book 2017-18.  

FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.

The total revenue collection in 2016-17 was Rs. 3368 billion. FBR missed the original target by a wide margin of Rs. 250 billion. In 2015-16, FBR, despite imposing additional taxes of Rs. 360 billion, allegedly blocking over Rs. 220 billion refunds and taking Rs. 30 billion as advance failed to meet the third-time revised target showing shortfall of Rs. 222 billion vis-à-vis original target of Rs. 2810 billion, which was first reduced to Rs. 2691 billion and then to Rs. 2605 billion. In 2012-13, it even failed to collect Rs. 2000 billion.

In fiscal year 2013-14, the target was revised downward twice, yet FBR could not meet it. The failure to tap real tax potential poses a tough challenge to both the federal and provincial governments. Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on what the Centre collects and transfers to them from the divisible pool. Provinces are not ready to collect taxes due from the rich landowners and generate their own resources after establishment of local governments as envisaged under Article 140A of the Constitution. Centre is unwilling to grant the provinces their legitimate taxation rights while it collects too little to meet their overall financial demands. The size of the cake—divisible pool—is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter to which part of the country they belong.

Fiscal decentralisation requiring the transfer of taxing and spending powers to sub-national levels of government is totally non-existent in Pakistan despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. The provincial performance in the case of sales tax on services completely belies the impression that provinces do not have the capacity to generate taxes. If sales tax on goods is given back to provinces, as was the case at the time of independence, they would perform much better as experience of handling sales tax on services shows. However, the performance of provinces in collecting agricultural income tax is extremely poor. This is a common issue both at federal and provincial level arising from absence of will to collect income tax from the rich and mighty—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and Centre in fiscal year 2018-19—should be a serious cause for concern. It is imperative that right to levy tax on income, including agricultural income, should be with the Centre. In return, the Centre should hand over sales tax on goods to the provinces—Taxing “agricultural income: qua Constitution, Business Recorder, April 9, 2010.

The fiscal consolidation is one of the daunting challenges faced by Pakistan, especially the debt servicing. In fiscal year 2018-19, total payment, as per budget documents, on account of debt servicing, was Rs. 1987 billion against the budgeted figure of Rs. 1620 billion. Allocation for the current fiscal year is 2891 billion, 78 % higher than last year! If FBR achieves reduced target of Rs. 5503 billion (original fixed in budget was Rs. 5555 billion and after request from Government, IMF agreed for reduction to the tune of Rs. 233 billion against the demand of Rs. 300 billion), after transfer to provinces under 7^th National Finance Commission (NFC) Award of Rs. 3200 billion, net tax collection available to the federal government will be Rs. billion 2300 billion, which is short by Rs. 591 billion of debt servicing of Rs. 2891 billion!! This shows the gravity of the fiscal crisis faced by Pakistan and aptly highlighted by Prime Minister in his address to FBR’s to notches on November 13, 2019. He rightly pointed out that successive governments failed to end harmful tax policies and reduce wasteful expenses. It a sad but incontrovertible reality that no serious effort has been made by any government, military and civilian alike, to give relief to the people by spending money for their welfare which was and is still possible by getting revenues—taxes and non-taxes—by broadens the tax base through lowering of rates and effective enforcement as well as taking utilising untapped resources—mineral wealth lying ideal—and state land to be leased out for commercial ventures.

Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, the parliament will have to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.

Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed in the Constitution—Local government and taxes, Business Recorder, February 19, 2019. The principle of universal entitlements seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism/marginalism takes the form assisting the poor and the needy, and thus implicitly defining them as certain types of social groups.

The provincial parliaments in Pakistan should be pressurized by civil society to enact laws for establishment of local governments as ordained under Article 140A of the Constitution on the basis of social policy—they have so far just copied the previous outdated ones with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.

In a nutshell, for achieving the goal of fiscal decentralisation, local governments’ financial resources must commensurate with the responsibilities provided for by the constitution and the law to ensure welfare of the people and ensure sustainable growth at grass root level. Part of the financial resources of local authorities should derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.

There is no political will to implement the above mentioned well-defined fiscal reform agenda, though general consensus on it exists in society. Addiction to borrowed money and lust for wasteful spending are the main stumbling blocks for achieving the cherished goal of self-reliance that can pave way for rapid growth, employment generation and substantial spending for social sectors. The ever-widening fiscal deficit amongst many other reasons has its roots in wasteful funding of a monstrous government machinery, especially corruption-ridden-inefficient public sector enterprises (PSEs), and extending of tax-free perks and perquisites to elites. These profusely bleed the already scarce resources—both tax and non-tax. The story of persistent failure of implementing a prudent fiscal policy in Pakistan and poor management of economic affairs is thus, not unknown or untold—it is even candidly admitted in all official documents, released from time to time, relating to taxation, public expenditures and public borrowing.

It is a bitter reality that after the 7^th NFC Award, both the federal government and provinces failed to observe strict financial discipline. Monstrous size of government machinery at all levels, largely inefficient, corrupt, incapable and outdated, is causing colossal wastage of resources. The governments are spending recklessly, a tendency that continues under civilian and military regimes, alike since the last many decades.

In the recent months, many economists and analysts have showed with facts and figures that the 18th Amendment and 7th NFC Award are harming fiscal stability. So is the underlying message of SBP in its Annual Report 2018-19—The State of Pakistan’s Economy.  In a  write-up, Federation’s fiscal dismemberment, it is insinuated that “the imbalances triggered by the 7th NFC Award directly and indirectly contributed to a range of macroeconomic problems and turned out to be an unmitigated disaster for the federation”. Ali Salman highlighted in his op-ed, Economic stability put on back burner by major political parties:

“Pakistan’s economic progress notwithstanding still faces uphill challenges on its path of development, including sustained economic growth, while creating more jobs through the expansion of private sector. The energy sector does require deeper policy engagement to improve governance. Tax environment remains on the weakest front”.

Position under 7^th NFC Award

Salient features		Who will get what?
*    Final share of provinces: Punjab 51.74 percent, Sindh 24.55 percent, Khyber Pakhtunkhwa (KPK) 14.62 percent and Balochistan 9.09 percent. *    Federal collection charges to be reduced from 5% to 1% *    Sindh to receive additional transfer of Rs. 6 billion from federal government *    Provinces in agreement on multiple indicators and respective weights *    Sales tax acknowledged as provincial subject *    KPK to be given additional 1% from federal divisible pool		Vertical distribution
			7th NFC	6th NFC	Change
		Centre	44%	52.5%	-8.5
		Provinces	56%	47.5%	+8.5
		Horizontal distribution
			7th NFC	6th NFC	Change
		Punjab	51.74%	53.01%	-1.27%
		Sindh	24.55%	24.94%	-0.39%
		KPK	14.62%	14.88%	-0.26%
		Balochistan	9.09%	7.17%	+1.92%
		Projected amount (in billions)
			FY 2018	FY 2019	FY2020
		Punjab	1282	1205	1611
		Sindh	649	616	814
		KPK	426	404	533
		Balochistan	233	238	295

 Source: Budget in Brief—a synopsis of the Federal Budget 2019-20

Note: The province-wise ratios given above are based on multiple indicators and their respective weights as agreed are: population (82%), poverty or backwardness (10.3%), revenue collection or generation (5%) and iinverse population density (2.7%).

Since 2009, our politicians sitting in parliaments—federal and provincials—and their economic managers have been following the 7th NFC Award—even in 2019 budgets exercises by the federation and federating units, it was followed without taking into account results of the latest census in utter violation of supreme law of the land! It is thus clear that the federal and provincial governments have never been concerned with the fundamental issue of judicious and evenhanded distribution resources between Centre and federating units to ensure prosperity for all. Balochistan should have exclusive right to levy sales tax on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This levy can make them rich. Their present share in sales tax from divisible pool is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh.

The target of Rs. 5.5 trillion for the current fiscal year is still achievable provided collection is fully automated, tax machinery is overhauled, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, WAPDA, PTCL and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database, FBR can easily determine fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made in the remaining months of the current fiscal year.    

Pakistan is in dire need of fiscal decentralisation—presently major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies provinces the right to levy sales tax on goods within their respective territories—a right available to the provinces before the independence. The provinces also have shown apathy to devolve administrative and fiscal powers to local governments.

Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only six percent—in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the Centre for transfers from divisible pool. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services—Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006.

Pakistan has failed to achieve durable political stabilisation and fast economic growth due to perpetual failure of the ruling elites. The twin menace of burgeoning debt and monstrous fiscal deficit testify to continuous fiscal mismanagement. The government has to borrow more and more money—externally and internally—just to meet day to day expenses. The historic high fiscal deficit of 8.9% of GDP for Fiscal Year 2018-19, posed enormous challenge for the Government of Pakistan Tehreek-i-Insaf (PTI) that also inherited record public debt, trade deficit and current account deficit. The callous economic policies of Pakistan Muslim League (Nawaz) from 2013 to 2018 left the PTI Government with no choice but to seek yet another bailout from the International Monetary Fund (IMF) and resort to massive rupee devaluation along with austerity measures leading to stagflation. The result of IMF-imposed policies is: Trade deficit fell from $11.7 billion from July-October of FY18-19 to $7.8bn during the same period this year and current account deficit dropped to $1 billion a month (in FY2019) compared to $2 billion a month in FY 2018. However, the critics say that total debt & liabilities as on September 30, 2019 rose to Rs. 41.5 trillion and inflation in October was 11% and in November even higher and figure at the end of 2019 will not offer any substantial relief, especially record high food inflation that is hitting the common citizens drastically.

After review on December 19, 2019, the IMF posted the following at its website:

• “Pakistan’s economic reform program is on track. Decisive policy implementation by the Pakistani authorities is helping to preserve economic stability aiming to put the economy on the path of sustainable growth.
• Transition to a market-determined exchange rate has been orderly; inflation has started to stabilize, mitigating the impact on the most vulnerable groups of the population.
• The authorities remain committed to expanding the social safety nets, reducing poverty, and narrowing the gender gap.
• The Executive Board of the International Monetary Fund (IMF) on December 19, 2019 completed the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF). The completion of the review will allow the authorities to draw SDR 328 million (about US$ 452.4 million), bringing total disbursements to SDR 1,044 million (about US$ 1,440 million).
• The Executive Board approved the 39-month, SDR 4,268 million (about $6 billion at the time of approval of the arrangement, or 210 percent of quota) EFF for Pakistan on July 3, 2019 (see Press Release No. 19/264 )”.

Following the Executive Board’s decision, Mr. David Lipton, First Deputy Managing Director and Acting Chair, issued the following statement:

“Pakistan’s program is on track and has started to bear fruit. However, risks remain elevated. Strong ownership and steadfast reform implementation are critical to entrench macroeconomic stability and support robust and balanced growth.

“The authorities are committed to sustaining the progress on fiscal adjustment to place debt on a downward path. The planned reforms include strengthening tax revenue mobilization, including the elimination of tax exemptions and loopholes, and prudent expenditure policies. Preparations for a comprehensive tax policy reform should start early to ensure timely implementation. Enhanced social safety nets will help alleviate social costs and build support for reforms.

“The flexible, market-determined exchange rate remains essential to cushion the economy against external shocks and rebuild reserve buffers. The current monetary stance is appropriately tight and should only be eased once disinflation is firmly entrenched. Strengthening the State Bank of Pakistan’s autonomy and governance will support these efforts.

“Faster progress is needed to improve the AML/CFT framework, supported by technical assistance from the IMF and other capacity development providers. Swift adoption of all the necessary measures is needed to exit the FATF’s list of jurisdictions with AML/CFT deficiencies.

“The authorities have adopted a comprehensive plan to address the accumulation of arrears in the power sector. Its full implementation is key to improve collection, reduce losses, and enhance governance. Timely and regular adjustment of energy tariffs will bring the sector in line with cost recovery.

‘Efforts are ongoing to further improve the business environment, strengthen governance, and foster private sector investment. Reform of the state-owned enterprise sector will help put Pakistan’s public finances on a sustainable path and have positive spillovers by leveling the playing field and improving the provision of services.”

The country is surviving on bailouts from IMF due to perpetual failure of the ruling elite to tax the rich and mighty and cutting enormous expenditure that are over 21% of GDP. Revenues worth trillions of rupees have been sacrificed by governments—civil and military alike—since 1977 extending unprecedented exemptions and concessions to the privileged classes.

The dire need in today’s Pakistan is to tap the real tax potential and make the country a self-reliant economy, stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, restructure or privatise loss-bearing government-owned corporations, accelerate industrialisation and increase productivity, improve agricultural sector, reduce inequalities through a policy of redistribution of income and wealth. It is high time that professionals and civil society campaign against oppressive, anti-people tax policies and relentlessly raise their voice for establishment of an egalitarian state.

We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and grass root taxation at local government level. There is nothing to be pessimistic. Solutions are available. The only thing we require is to present the same, debate these publically and convince our political parties to make them part of their manifestos. Elections should be fought on these issues and with the pledge that on winning, they would be tackled and solved. 

Municipal taxation should be our top priority as envisaged under Article 140A of the Constitution. Political, administrative and fiscal decentralisation is the key to democratisation of institutions. This is the most neglected area in Pakistan. Article 140A requires that decision-making power should be with the elected local governments. A council, elected by the residents, must enjoy the right to levy municipal taxes. Municipalities should be given wide-ranging powers. Extensive functions that fall within the specific sphere of authority must include education, health care and social welfare services. The municipalities should also be responsible for matters related to the residents’ free-time, recreation, housing, and the management and maintenance of their living environment (i.e. roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.

In all successful democratic models, taxes at grass root level play a critical role in municipal self-governance. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible for under the law. In social democratic countries e.g. Sweden, Norway, Denmark and Finland, the most important feature of fiscal management and delivery of social services is municipal tax. Local governments in Finland in 2018 spent €42 billion. Country tax collection was 43% of GDP [$274 billion]. In Pakistan, total tax collection—both at federal and provincial level—in fiscal year 2018-19 was around US$ 37 billion (just 12% of GDP $314.5 billion)!

If a country of 5.5 million people (Finland) can achieve 43% tax-to-GDP level and through municipal taxation can provide free services of health and education, we a nation of 220 million can definitely do much more, provided there is political will. One of the central constitutional principles regarding municipal self-governance in Finland is that when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system which ensures municipal resources and residents’ equal access to services. We can learn from this great innovation of Finland. It can change the fate of our nation in a short span of time. We have the resources but the system for self-governance as in vogue in Finland and elsewhere in the world is non-existent despite clear command contained in Article 140A of the Constitution. Resultantly, power is not with the people but in the hands of the privileged few.

The Parliament, first of all, should introduce Taxpayers’ Bill of Rights assuring that money collected from citizens would be spent prudently on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised sales tax (HST), covering all goods and services, at a low rate of 8% should be introduced and implemented. Economic equality and prosperity, peace and social tranquility can never be achieved unless the taxation system is restructured and social welfare model is implemented as explained and elaborated in a study, Towards Flat, Low-Rate, Broad & Predictable Taxes [Prime Institute, 2016].

It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After 18th Amendment, right to levy wealth tax, capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and the Centre in fiscal year 2018-19—is lamentable.

We need to formulate a rational economic/tax policy aimed at incentivising investment, encouraging savings and facilitating capital formation in the private sector for job creations, innovations and rapid economic development. Our policymakers have miserably failed to achieve these goals—for them taxation means raising more money and nothing else.

Overemphasis on regressive taxation by the successive governments could not avert record fiscal, trade and current account deficits. For achieving fiscal stabilization/consolidation in Pakistan, it is imperative that right to levy tax on income, including agricultural income, should be given to the federal government. In return, the federal government should hand over sales tax on goods to the provinces as was the case before independence.

There should be single tax agency to collect all taxes—it alone can generate sufficient funds for the federation and federating units. The share will be distributed as per Constitution and provinces are wrongly opposing it as centralisation of taxation. It is in fact federalisation of tax collection in the wake of 18th Constitutional Amendment. The detail discussion is available in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018 and ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018.  

We need to implement Article 140A in letter and spirit. Mere existence of local governments without devolvement of political, administrative and financial power is not the fulfilment of constitutional command. Decentralization of financial powers requires levy and collection of taxes by local governments for meeting the needs of local residents in the form of education, health care and social welfare services. Municipalities working on the principle of self-governance alone can ensure that revenues are spent exclusively for the benefit of public and not the powerful segments of society alone.

The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Sales tax on goods at time of independence was a provincial subject. In 1948 it was made a federal subject by the Constituent Assembly of Pakistan through the Pakistan General Sales Tax Act, 1948 enacted on 31^st March 1948. It was deviation from section 100(1) of the Government of India Act, 1935 providing that provinces will have right to levy taxes on sale of goods and advertisement. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite levying taxes that should have been with provinces, the by federal government has miserably failed to reduce the burgeoning fiscal deficit that reached historic high of 8.9 percent of GDP, which was in excess of the 4.9 percent target set in the Budget 2018-19— The State Bank of Pakistan (SBP), Annual Report 2018-19—The State of Pakistan’s Economy.

Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures— The State Bank of Pakistan (SBP), Annual Report 2018-19—The State of Pakistan’s Economy. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted. Centre has been claiming that provinces lack infrastructure to efficiently collect sales tax. This has proved wrong as Sindh and Punjab collected much more sales tax on services after establishing their own tax apparatuses in 2011 and 2012 respectively than collected by Federal Board of Revenue (FBR). In 2013 Khyber Pakhtunkhwa also followed in their footstep and results shown for fiscal year 2013-14 were impressive.

We need amendments in Constitution to ensure judicious distribution of taxation rights between the federation and its units. Unless it is done, the provinces will continue to remain hugely dependent upon federal transfers. Transferring of indirect taxes on consumption of goods to the provinces will empower the federating units and raise the tax-to-GDP ratio.

The Government of PTI is claiming to have been taking the right steps/measures/policies to put the country back to higher growth path in the coming years after achieving stabilisation and overcoming the chronic challenges on external front inherited from the previous government. Let us all pray and work for a prosperous Pakistan in 2020 and beyond. We can resolve all the irritants in the way of rapid progress and increasing local and foreign investment by open public debate and not seeking inputs from the bureaucrats alone sitting behind closed doors, through rational policies and pragmatic decisions based on research suggesting solutions and taking all the stakeholders on board. There is no dearth of experts and worthwhile studies. The only shortcoming is that we are not trying to implement the same after due consideration and meaningful consultation with all the concerned parties.

____________________________________________________________________

The writers, lawyers and authors, are adjunct faculty at Lahore University of Management Sciences (LUMS).