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Daunting fiscal challenges

Since the assumption of power in April 2022, the coalition government of Pakistan Democratic Movement (PDM) has been facing daunting challenges on the fiscal front. It is evident from the Summary of Consolidated Federal and Provincial Fiscal Operations, 2022-23 [“the Summary”], released by the Ministry of Finance (MoF) on February 8, 2023, for July-December 2022, the first six months of the current fiscal year [FY 2023]. The emerging most startling fact is that the entire defence spending was met with borrowed funds. It is more than a fiscal fiasco—a serious cause for concern threatening economic viability and national security of the state.

The disastrous outcome of mindless and costly borrowing, both external and internal, has resulted in 44 percent increase in debt servicing. According to the Summary, in the first six months of FY 2023 total expenditure on debt servicing was Rs 2573 billion against Rs 1453 billion in the corresponding period of FY 2022. It was against the full year allocation of FY 2023 at Rs 3950. According to press reports, debt servicing at the close of FY 2023 may reach Rs 5.5 trillion. Resultantly, fiscal deficit, mother of all ills, will be much higher than budgeted and expected. In six months, it has already reached Rs 1.7 trillion.

The Federal Board of Revenue (FBR) collected Rs 3.4 trillion from July to December 2022. After transferring Rs 1549 billion funds to provinces under 7th National Finance Commission (NFC) Award, the net available to federal government from tax and non-tax revenue (Rs 914 billion) was Rs 2463 billion that could not even meet debt servicing of Rs 2573 billion (domestic Rs 2273 billion and foreign Rs. 300 billion). Hence, the total defence spending of Rs 639 billion was met from expensive borrowed money.

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 2022, it received Rs 936 billion from the Federal Government and collected only Rs 142 billion of taxes at its own. The total expenditure from July-December 2022 of Punjab was Rs 1059 billion — Rs 123 billion more than its share under the NFC Award, whereas its total non-tax revenues were just Rs 37 billion. In other words, it has a meagre surplus of Rs. 38 billion that reflects deposits of Rs 36 billion in banks and Rs 2 billion kept elsewhere.

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, Punjab’s performance in tax collection has been much below its real potential, especially under the long rule of Pakistan Muslim League-Nawaz (PML-N). PML-N turned the historically surplus budget into deficit and incurred huge debt, contrary to claims of achieving wonders by its economic wizards (sic) like Muhammad Ishaq Dar, now fourth-time federal finance minister, in the six federal budgets [2013-2018].

Details are available at http://www.finance.gov.pk/fiscal/July_June_2019_20.pdf.

Punjab’s performance under the coalition government of PTI was equally appalling. Official figures show that in the first half of FY 2023, Punjab failed to mobilise its tax and non-tax revenues according to its actual potential—the total collection of non-tax items was only Rs 37 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 100 billion. 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. After mentioning all tax items, sales tax on services (Rs 100 billion), excise duty (Rs 1254 million), stamp duty (Rs 22 billion), motor vehicle tax (Rs. 9512 million), “others” are mentioned at Rs 18 billion.

There is a meagre collection of AIT that was intentionally not shown being clubbed with “others”. This is the same old story repeated by the PTI coalition government in Punjab and other governments of the three provinces. First make tall claims and then show no will to tax rich absentee landlords and owners of posh bungalows and farmhouses.

As a consequence to Constitution (Eighteenth Amendment) Act, 2010 [commonly known as the 18th Amendment, that received the President’s assent on April 19, 2010], progressive taxes e.g. inheritance tax (called estate duty in Pakistan), wealth tax and capital gains tax on immovable property, and gift tax, etc., are with the provinces. However, 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.

When on August 19, 2022 the MoF released consolidated summary of federal and provincial fiscal operations during FY 2022, it transpired that public finances of Punjab and Khyber Pakhtunkhwa governments had deteriorated and books of both the governments were in the red.

The data released by MoF show that in FY 2022, the four provinces received Rs 3.589 trillion from the federal government. The Punjab government suffered a deficit of Rs 352 billion even after receiving Rs 1.8 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, as there is meagre surplus of Rs 38 billion and that too at the cost of development expenditure.

The position of other provinces from July-December 2022 is as under:

* The Sindh government showed a surplus of Rs 58 billion. Out of total spending of Rs 581 billion total revenues stood at Rs 639 billion. Sindh got Rs 469 billion under NFC Award.

* Government of Khyber Pakhtunkhwa’s spending reached Rs 378 billion against its revenues of Rs 372 billion, out of which Rs 314 billion was received under the NFC Award.

* Balochistan government’s total revenue was at Rs 184 billion as against total expenditures of Rs 173 billion, showing a surplus of Rs 11 billion. Balochistan received Rs 161 billion under NFC Award.

A meagre collection of agricultural income tax and giving the rich absentee landowners unprecedented relief proves the point that before dissolution, PTI’s coalition government in Punjab and having a two-third majority in Khyber Pakhtunkhwa were not at all inclined to tax the rich agriculturist lobby.

All the governments in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan since 2010 failed to undertake fundamental reforms to merge three tax departments, namely, Board of Revenue, 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 a one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection, but no such effort has been made despite making promises to this effect during election campaigns.

The PTI-led governments in Punjab and Khyber Pakhtunkhwa were keen to get more tax from service providers, who conveniently pass it on to 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. Pakistan People’s Party’s government in Sindh is following in the footsteps of Punjab and Khyber Pakhtunkhwa governments.

In FY 2022, debt servicing by federal government was Rs 3182 billion (domestic Rs 2829 billion and foreign Rs 354 billion) against net revenues of Rs 4774 billion after transfers to the provinces. Debt servicing was 67% of total net revenues of the federal government and 52 % of tax collection of FBR. In the first eight months of FY 2023, it increased to Rs 3.18 trillion, exceeding total net income of the federal government by Rs 9 billion. 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 the 18th Amendment, fiscal management, both at federal and provincial levels, needs fresh thinking. The federal government, having all buoyant and broad-based taxes, is not tapping 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 the increasing needs of the ever-growing population.

The provinces must be included in national tax policy and collection apparatus as their share (57.5%) in NFC Award is larger than the federal government’s, and Article 156(2) of the Constitution of Islamic Republic of Pakistan [“the Constitution”] 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 of the Constitution—all participating in retiring debt burden that would eliminate fiscal deficit. The complete blueprint of this model is provided in the following:

1. ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, December 2020:https://primeinstitute.org/wp-content/uploads/2022/04/TOWARDS-FLAT-LOW-RATE-BROAD-AND-PREDICTABLE-TAXES-Second-Ed…pdf

2. 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

3. Two studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economy and Growth inclusive tax policy: A reform proposal

(Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the 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’)

Huzaima Bukhari, Dr Ikramul Haq and Abdul Rauf Shakoori, "Daunting fiscal challenges," Business recorder. 2023-03-31.
Keywords: Political science , Political leaders , National security , Public finances , Fiscal management , Fiscal deficit , Pakistan

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