EDITORIAL: Prime Minister Shehbaz Sharif announced that the tax policy function would not only be the domain of the Federal Board of Revenue (FBR) but be jointly held with the Finance Division. This decision must be supported even though the Finance Division and the FBR come under the administrative control of the Finance Ministry with both being fully on board with the conditions agreed with multilateral and bilateral donors including the International Monetary Fund (IMF) — conditions that include the revenue target for the year, unrealistic for the past decade, with the FBR’s tendency to-date of relying on the low-hanging fruit, through raising withholding taxes that are levied in the sales tax mode whose incidence on the poor is greater than on the rich.
It is unclear whether this decision would end the existing practice of influential private sector economic stakeholders meeting with FBR officials prior to the laying of the budget in parliament with the objective of seeking their sector-specific fiscal and monetary incentives.
This practice continued this year in spite of the fact that the ongoing Extended Fund Facility approved by the IMF in October last year noted that “the state’s support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward-oriented economy…despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.”
Reports indicate that during the parliamentary finance committee meetings FBR officials as well as Ministry of Finance officials repeatedly clarified to the participants that their recommendations focusing on easing contractionary fiscal and monetary policies (in favour of pro-growth policies) were not possible at the present moment in time given IMF conditions. It is well known that without an active IMF programme, the three friendly countries would not roll-over around USD 16 billion funding that, in turn, would lead to a default.
There is an in-house out of the box solution for this dilemma that the Business Recorder has been proposing for decades — notably through lowering current expenditure by at least one trillion rupees, preferably two, which would (i) require lower existing reliance on borrowing, domestic and external, which would lower the mark-up that was budgeted at 50 percent of total current expenditure in the current year; (ii) implement reforms, an example being pension reforms requiring state employees to begin contributing to their pensions as in other countries; (iii) lower administrative expenses, other than operational expenses, by deferring all procurements for two to three years by which time the economy would be less fragile compared to the present; and (iv) merging subsidies with the Benazir Income Support Programme that would make them more targeted towards the poor.
In the 2026 budget subsidies to the power sector account for 1.036 trillion rupees out of total subsidy allocation of 1.186 trillion rupees. This necessitates more holistic reforms in the power sector to improve governance and at the same time to support only the vulnerable through subsidies — vulnerable who are appropriately identified in BISP.
To conclude, the tax policy function jointly shared with the FBR and Finance Division is a step in the right direction however unless the government’s negotiations with the IMF and other lenders are more result-oriented and a phased approach agreed with fiscal reforms designed to shift the burden from indirect to direct taxes (based on the ability to pay principle) poverty levels may worsen even more than the current 44.7 percent as per the World Bank.
Copyright Business Recorder, 2025