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
The Government of Pakistan Tehreek-i-Insaf (PTI) contrary to its election promises after coming into power avoided fundamental structural tax reforms that could have yielded required revenue to make Pakistan self-reliant. It only resorted to patchwork here and there, thus, 2019 witnessed securing record loans, external and internal, no will to cut unproductive/wasteful expenditure, introducing regressive taxes etc. The prevalent stagflation leading to recession in economy amongst some have roots in oppressive and outmoded taxes.The then Finance Minister, Asad Umar, while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 followed the traditional babu approach to balance the books. He failed to give a roadmap to fulfill the promise of collecting Rs. 8 trillion by PTI-in fact target of Federal Board of Revenue (FBR) was reduced by Rs.169 billion-a reduction of 3.5% over the original budget! He did not bother to study the paper Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016) that gives step-wise action plan for raising revenues of Rs. 8 trillion at federal level alone. The same was the case with the Finance Supplementary (Second Amendment) Bill of 2019 presented on January 23, 2019-once again no steps were taken to harness the real tax potential. What made the situation more painful was the fact that in its first budget for fiscal year 2019-20 presented on June 11, 2019, greater burden was imposed on the common man, while appeasing the mighty, extending benefits to the rich and toeing the line of the lenders/donors.
Dr. Abdul Hafeez Shaikh, Advisor to Prime Minister on Finance, Revenue and Economic Affairs, heading the economic team of Premier Imran, in post-budget press conference on June 12, 2019, openly admitted that the heaviest taxes in the history of Pakistan were imposed "to qualify for new programme of IMF". He went on to say that "I am ready to offend people for the sake of collecting Rs. 5503 billon taxes" [the target on December 23, 2019 was reduced to Rs. 5238 billion]. This confirmed that he had no concern whatsoever about the disastrous impact of oppressive taxes on our ailing economy. While he announced many unjust indirect taxes to make life of the less-privileged and downtrodden further miserable, a generous money whitening scheme was given to the rich and mighty tax evaders and plunderers of national wealth.
Before coming to power, top leadership of Pakistan Tehreek-i-Insaf (PTI) was calling tax amnesties as "immoral", "undesirable", "unlawful" and a "slap on the face of honest taxpayers". After coming into power, PTI took many U-turns and one was offering asset whitening scheme, drafted proudly by Chairman FBR, Shabbar Zaidi, resulting into tax losses of billions of rupees. PTI's first asset/income/expenditure whitening scheme notified through a Presidential Ordinance on May 14, 2019 gave generous incentives to those who had not been paying their taxes honestly and cheating the State. About 56 people, whose data was shared by the OECD, availed the PTI's tax asset whitening scheme and declared Rs. 31.8 billion worth of assets by paying only Rs. 1.7 billion.
The Prime Minister, while addressing top officials of FBR on November 13, 2019, sought their input/recommendations in respect of a three-year-long tax reform agenda, approved by him through a letter dated October 3, 2019. The plan included among others: (i) a nationwide survey for tax assessment (ii) evaluating wealth parked in real estate (iii) implementing a new value added tax system (iv) setting up the Pakistan Revenue Authority by June next year and (v) restructuring FBR in the interim period. It was shocking that he approved the same without consulting the stakeholders and seeking opinions from experts. In his address, the Premier admitted that "masses get little in return for taxes, and that there exists huge trust deficit between the citizens and taxpayers".
The important question for remaining six months of the current fiscal year and beyond is: Will the above actions desired by World Bank under its US$ 400 million 'Pakistan Raises Revenue Project' and accepted as such by PTI achieve the fiscal consolidation that is one of the daunting challenges faced by Pakistan, especially debt servicing and bridge the trust deficit? 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 collects even the revised target of Rs. 5238 billion (many says it will be difficult and collection will be around Rs. 5000 billion or even less than it) billion, after transfer to provinces under 7th National Finance Commission (NFC) Award, net tax collection available to the federal government will be around Rs. 2400 billion-short by Rs. 491 billion for debt servicing of Rs. 2891 billion! This shows the gravity of the fiscal crisis faced by Pakistan and rightly highlighted by Prime Minister. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government, military and civilian alike, to broaden the tax base through lowering of rates and effective enforcement-PTI has also proved that it is no exception.
According to a Press report, after meeting of Prime Minister with top officials of FBR, the Chairman FBR, Syed Muhammad Shabbar Zaidi, said that the timelines with reference to 'reorganisation' as given in October 3, 2019 letter shall be put on hold. "Meanwhile we at FBR shall strive to collect optimum revenue", he added. It showed not only delaying the much-needed and much-delayed structural reforms but also serious doubts about achieving the target set originally in the budget of Rs. 5503 billion. Now according to IMF, Pakistan's budget deficit will slip from the projected 7.3% of GDP or Rs. 3.2 trillion to Rs. 3.4 trillion or 7.6% of GDP for the current fiscal year.The Prime Minister in his address emphasised upon the FBR officials to collect minimum Rs. 8 trillion "if we have to survive as a viable State". It was not a new statement on the part of Prime Minister, but as usual he and his economic team did not divulge any roadmap to achieve this goal. In the meantime, the people of Pakistan in general and businessmen in particular are disillusioned with the performance of PTI. In recent months, prices of items of daily use (food, medicines, petrol, utilities) have skyrocketed and business activities have substantially slowed down leading to drastic cut in economic growth and unemployment. The cost of doing business has increased manifold making industries uncompetitive to produce exportable goods. Agricultural sector is also facing the brunt of wrong policies (heavy taxation of inputs and costly energy), reluctance to rely on indigenous expertise, while rural poverty is on the rise.
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 reduction in unprecedented luxuries available 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.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 root cause of our economic problems as showed above is not only tax collection but also inefficient and corrupt government apparatus, loss-bearing public sector enterprises, wasteful expenditure, circular debt and blocking of genuine refund by FBR. For progressing, we need to dismantle all elitist structures. Empowerment of masses at grass root level is possible by implementing Article 140A 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 on tax mobilisation front 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 say NO!!(To be continued)
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)
Copyright Business Recorder, 2019