Improving fiscal management – III

Period from 2008-13 was adjudged as ‘financial hara-kiri’ by some economists35. “Never in the history of this country has the nation seen such a fiscally irresponsible government. They have maintained a large budget deficit year-after-year over the last five years, and accordingly more than doubled the country’s public debt ably assisted, of course, by the exchange rate depreciation. Accordingly, they damaged a relatively robust economy in a short span of five years without guilt and shame. Because of unwillingness to mobilise resources on the one hand and reckless spending on the other along with an unconsidered NFC Award, Pakistan’s fiscal balance has been destroyed thoroughly in the last five years. The nation will witness further instances of financial hara-kiri in the last two weeks of the present regime the impact of which will continue to haunt the economy in the years to come.”36

Experts are even critical of the present policies emphasising that fiscal consolidation is not receiving due attention. There is no serious work being done to control the wasteful expenditure by right-sizing the government apparatus. They argue that for effective fiscal management and accountability, substantial reduction in unproductive current expenditure is required through the following initiatives:

(I) Twenty-five ministries can be either dissolved or rationalised, thereby saving Rs 200 billion. (II) Rs 400-500 billion on financing the losses of PSEs can be eliminated by restructuring and privatising those entities. (III) Badly targeted subsidies, consuming about Rs 500 billion should be withdrawn and some part of the saved money could be directed to expand coverage of the social protection programme for the poor. (IV) The total public debt at Rs 30 trillion is unsustainable. Debt servicing cost has reached Rs 1500 billion, which is over 40 per cent of total government revenue. Drastic measures need to be taken to reduce the debt stock by retiring some of the debt with the proceeds of privatisation of public sector corporations such as PIA, Pakistan Railways and the Pakistan Steel Mills; sale of some of the state-owned real estate which is being used for unproductive purposes as perks for government officials.37

TAX POTENTIAL The people have to understand that the tax money stolen by the corrupt rich of the country represent the good schools, colleges, hospitals, roads and many other projects of welfare stolen from us poor-The Frontier Post, January 23, 2014

The government has relied on raising tax rates rather than broadening the tax base. In other words, the government has raised the tax burden of those who were already paying taxes. Those who are influential have never paid taxes, and have once again remained out of the tax net-Hurting the poor, The News, June 14, 2013

In recent years Pakistan became target of severe criticism from many countries and donors for not collecting taxes due, especially from the rich and mighty. It is an undeniable reality that both centre and provinces are not collecting taxes diligently. For fiscal year 2012-13, FBR collected Rs 1939.4 billion against original target of Rs 2381 billion38 – showing huge shortfall of Rs 441 billion. The contribution of provinces to overall tax collection is less than 6 percent of GDP.

Pakistan’s tax potential at federal level is not less than Rs 8 trillion. There are 10 million individuals having annual taxable income of Rs 1.5 million39, total income tax collection from them at the prevalent tax rates comes to Rs 3,750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure would be Rs 5,000 billion. FBR collected only Rs 739.7 billion as income tax in 2012-13. Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2012-13, FBR collected Rs 841.3 billion under the head sales tax. Collection for customs and excise duties was Rs 239 billion and Rs 119.4 billion respectively. The total indirect collection of just Rs 1199.7 billion was pathetically low. It should have been Rs 3500 billion. If this tax gap is bridged, the total revenue collection would not be less than Rs 8500 billion without imposing any new taxes or raising existing tax rates.

The following measures at federal and provincial levels can increase the tax-to-GDP ratio from the present 8.5 percent to 16 percent, over the next two to three years:

— Bridging of tax gap through effective enforcement & voluntary compliance

— Withdrawal of all concessionary Statutory Regulatory Orders (SROs)

— Substantial property tax on the rich

— Presumptive agricultural income tax of Rs 5,000 per acre on irrigated agricultural holdings above 25 acres and Rs 2,000 per acre on un-irrigated holdings above 50 acres

— A capital gains tax on transfer of all moveable and immovable assets.

— Imposition of sales tax on all kinds of services by the provinces

Amending of tax codes each year through Finance Bill and in between, by way of statutory regulation orders (SROs) is not serving any useful purpose – this is not a solution to improve tax administration. The solution lies in converting FBR into an autonomous body run by independent Board of Directors comprising professionals and answerable directly to the Parliament and not the headquarters of the ruling party. Taxes should be imposed by Parliament and not any executive authority. FBR must be insulated from all kinds of political influences.

Enforcement of tax laws without any fear or favour should be the first and top most priority of the government if it wants to rescue the country from the present economic mess coupled with expending taxes for the benefit of masses and desisting from wasting funds on white elephants – monstrous public sector enterprises sleaze with inefficiency and corruption – so that public can see that the elected government is a responsible one and cares for them. This would promote tax culture and restore people’s faith in the tax system. Voluntary tax compliance can be improved only through a strong deterrent system where the compliant taxpayers are respected and rewarded, while evaders are exposed and punished under the law.

CONCLUSION At present, both centre and provinces are not collecting taxes diligently and same will happen to local governments once elected. Our tax potential at federal level alone is Rs 8 trillion. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure would be around Rs 12 trillion. For harnessing the full tax potential at federal, provincial and local government levels, National Tax Authority (NTA) is the need of the hour. Through consensus and democratic process, all the parliaments can enact laws for establishing autonomous NTA that will facilitate people to deal with single Revenue Authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].

Taxation, a potent instrument to shape and influence the socioeconomic policies of a country, has not received due attention in Pakistan. The foremost objective of a rational tax policy is raising resources for administration and development, transferring of resources from private to public use. In social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society eg women and children, minorities, the disabled and unemployed. All these elements are missing in our tax policy.

Effective fiscal management and accountability alone can help Pakistan to effectively overcome fiscal deficit40. Once fiscal space is created by good governance, the government can focus on providing basic amenities like safe drinking water, health and education, transport and housing to the people. Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.

(Concluded)

(The writer is an Advocate of Supreme Court of Pakistan and international tax counsel, heads Huzaima & Ikram (Taxand Pakistan), a leading law firm specialising in tax practice. He is also Visiting Professor at Lahore University of Management Sciences (LUMS)

1 “The Chairman of Federal Board of Revenue says that because of SROs and different agreements, almost two-thirds of our imports are duty free and only the remaining one-third is taxable. If only the SROs, which are nothing more than tax exemption to government’s favourite businessmen and business houses, are revoked, the government can easily double its revenues. If dishonest practices such as under-invoicing and tax evasions are eradicated, the government can easily triple its revenues. Imagine the finance minister of any civilised nation, saying the economy is going in the right direction when two-third of tax money is virtually stolen under his very nose”-The Frontier Post, January 23, 2014

2 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.

3 Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006.

4 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 31st 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.

5 Taxing “agricultural income: qua Constitution, Business Recorder, April 9, 2010.

6 FBR: new chairman, old challenges, Business Recorder, August 2, 2013.

7 Municipal self-governance, Business Recorder, July 19, 2013.

8 Dr Akmal Hussain in ‘The knife Edge of Fiscal Space’ [Daily Times, January 22, 2004] aptly observed that: “The history of economic policy in Pakistan shows that economic disasters have befallen the hapless citizenry due to sins of commission as much as by sins of omission. We will show in this article that there was a time over a decade ago when incorrect sequencing of the Structural Adjustment Programme led to disastrous economic consequences. That was a sin of commission. Today we may be about to commit a sin of omission: The failure to translate the over 10 billion dollars State Bank reserves into increased GDP growth and poverty reduction could lead to continuing and unnecessary increase in the misery of the people, and an erosion of the reserves themselves. Successive governments stricken by the discreet charms of the IMF sought to reduce the budget deficit, regardless of the cost in terms of rising poverty and declining growth. That elusive symbol of economic health is now at hand. After a decade of stringent restrictions on development expenditure and more recently a sharp reduction in the debt-servicing burden (following debt restructuring), the fiscal deficit as a percentage of GDP has fallen from 8.8 per cent in 1990-91 to 4.5 per cent in 2002-03, while State Bank reserves are at an all time high level of over 10 billion dollars”.

9 Economic Survey of Pakistan 2012-13, page 48.

10 Ibid

11 Fiscal Policy Statement for 2013-14, Debt Policy Co-ordination Office of Ministry of Finance- http://www.finance.gov.pk/publications/FPS_2013_14.pdf

12 Current expenditure mainly included the general public services and defence expenditure and recorded at Rs 3660 billion in the 2012-13 compared to Rs 3122 billion in the previous year showing an increase of 15 percent. The current expenditure exceeded the budgeted amount of Rs 3452 billion yielding a variance of Rs 208 billion in absolute terms.

13 Fiscal Policy Statement for 2013-14, Debt Policy Co-ordination Office of Ministry of Finance.

14 Ibid

15 Ibid

16 Ibid

17 Ibid

18 Ibid

19 Ibid

20 Ibid

21 Ibid

22 Ibid

23 Fiscal Policy Statement for 2012-13, Debt Policy Co-ordination Office of Ministry of Finance – http://www.finance.gov.pk/publications/FPS_2012_13_web.pdf

24 Debt Policy Statement for 2013-14, Debt Policy Co-ordination Office of Ministry of Finance-http://www.finance.gov.pk/publications/DPS_2013_14.pdf

25 Ibid

26 Ibid

27 Ibid

28 Pakistan’s public debt (both rupee and dollar components) have grown at an average rate of 21.5 percent per annum from 2008-12 as against an average rate of 6.6 percent per annum during 2000-07. In absolute terms, public debt rose from Rs 6,040 billion in 2007-08 to Rs 14,255 billion by the end of June 2013.

29 State Bank of Pakistan, Annual Report 2011-12- www.sbp.org.pk/reports/annual/arFY12/complete.pdf.

30 Dr Ashfaque H Khan, External vulnerabilities, The News, December 31, 2013.

31 Fiscal Policy Statement for 2013-14, Debt Policy Co-ordination Office of Ministry of Finance.

32 Economic Survey of Pakistan 2012-13, page 52

33 Ibid

34 Ibid

35 Dr Ashfaque H Khan, Financial hara-kiri, The News, March 5, 2013

36 Ibid

37 Dr Akmal Hussain, Creating the fiscal space, The Tribune, February 14, 2011

38 “The original target of Rs 2381 billion was however downward revised to Rs 2007 billion. FBR has collected Rs 1,939.4 billion. In absolute terms an additional amount of Rs 57 billion has been collected over the collection of past fiscal year. The growth in net revenue collection has been 3.0 percent over the collection of FY: 2011-12 which is lowest during last 13 years. Similarly the tax-GDP ratio dropped from 9.1% in the preceding year to 8.5% in 2012-13”-FBR Year Book 2012-13

39 http://data.worldbank.org/country/pakistan

40 The Finance Minister of Pakistan during his meeting with a delegation of DFID on January 21, 2014 expressed satisfaction over results of economy and its direction. He said that “revenue collection has shown an increase of 16%, exports have gone up by 5%, remittances by 9% and growth in the economy in the first quarter has been reported by the Pakistan Bureau of Statistics to be at 5%”. Besides there has been an unprecedented surge in the Karachi Stock Exchange Index which has crossed the 27000 points. On the foreign exchange reserves position, he said the government inherited a fragile position and entered into an IMF programme to stabilize it. Admitting that Pakistan has negative inflows despite an IMF plan, Ishaq Dar said that the government “has chalked out a plan to increase the foreign exchange reserves to US $16 billion by the end of the current year”. Earlier, the team of IMF at the end of its first review visit to Pakistan [October 28-November 8, 2013] issued official statement that it “expects growth to reach about 23/4 percent for FY2013/14 as a whole”. The mission said it was pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation of the government’s structural reform agenda.