Dr. Ikramul Haq and Abdul Rauf Shakoori
Fiscal balances improved on the back of strong budget execution and revenue performance. The general government achieved a primary surplus of 1.8 percent of GDP in FY24H1, exceeding projections by 0.4 percent of GDP, driven by strong PDL, excise, and direct tax revenues, which offset lower-than-expected import-related revenues and SBP profits. Federal current spending matched program forecasts, but federal PSDP was significantly under-executed. Provincial overspending was only PRs 136 billion in FY24H1, as Punjab’s total expenditures in FY24Q2 were curtailed to partially offset an earlier overrun. 4 Other provinces’ PSDP is anticipated to remain close to SBA projections given the government’s constraints and the time required for the new government to develop new schemes—IMF Country Report No. 24/105 – May 10, 2024
In Pakistan, the federal revenue collection process overseen by the Federal Board of Revenue (FBR) encompasses a diverse array of revenue streams. These include general sales tax (GST) on goods, which extends to services in Islamabad Capital Territory (ICT), as well as customs duties and registration fees. Additionally, excise duties on both imported and domestically produced goods, along with levies on oil derivatives and various other fees, contribute to the revenue pool. Within this framework, sales tax, and unclassified revenues, which incorporate income tax and other sources, are key components.
The calculation of net revenues collected is performed regularly, with cumulative sums tallied from the fiscal year’s outset. Quarterly assessments of FBR’s performance are benchmarked against predefined thresholds derived from cumulative end-of-quarter data. It is noteworthy that the responsibility for levying and collecting sales tax on services was devolved to the provinces under the Eighteenth Constitutional (Amendment) Act, 2010 [“18th Constitutional Amendment]. Consequently, the administration of this tax falls within the provincial domain, except in ICT, targeting services rendered within their respective jurisdictions.
Pakistan’s tax structure, rather than evolving into a simplified and progressive framework, has grown increasingly convoluted and regressive over time. Businesses now contend with a plethora of taxes, originally hampering their growth prospects, and the continual escalation of rates exacerbates sustainability challenges. This intricate taxation landscape imposes significant burdens on businesses at various stages of the supply chain, adversely impacting cash flow and bloating cost structures. Consequently, consumers face higher prices, contributing to inflationary pressures. It is imperative for taxation experts to recognize these complexities and work towards streamlining policies. By addressing these challenges, Pakistan can create a more conducive environment for business growth and economic stability.
The elevated cost structure significantly inflates the cost of doing business, thereby compromising returns on investment. Consequently, consumer goods experience price hikes, particularly non-essential items, leading to decreased consumer demand. This phenomenon is particularly pronounced in economies like Pakistan, where parallel challenges such as rampant smuggling and the prevalence of undocumented economic activities exacerbate the situation. As a result, businesses grapple with reduced profitability, hindering their growth potential and contributing to economic instability. Addressing these intertwined issues is paramount for fostering sustainable economic development and mitigating the adverse impact on consumers and businesses alike.
Incompetence and administrative failures within enforcement agencies significantly impede the growth prospects of compliant sectors, undermining their competitiveness. Moreover, a pervasive issue persists throughout the supply chain, with manufacturers, distributors, and retailers operating outside the tax net, granting them a pricing advantage over compliant counterparts. This discrepancy not only distorts market dynamics but also undermines the viability of tax-compliant businesses. Furthermore, the influx of goods imported through unofficial channels poses a formidable challenge, spanning various categories such as beverages, tobacco, petroleum products, and consumer goods like solar panels.
The illicit imports not only evade taxation but also disrupt market equilibrium, perpetuating an environment of unfair competition and economic distortion. Addressing these systemic challenges demands concerted efforts to enhance enforcement mechanisms, fortify regulatory frameworks, and promote transparency across all levels of the supply chain. Only through collaborative action can Pakistan foster a business environment conducive to sustainable growth and equitable market participation.
The widespread availability of these goods throughout Pakistan, spanning urban, rural, and local government jurisdictions, as well as cantonment areas, casts doubt on the effectiveness and commitment of enforcement agencies in addressing this pressing issue. Consequently, the government foregoes substantial revenue streams, resorting instead to costly borrowings or imposing higher tax burdens on compliant taxpayers to offset these losses. This not only exacerbates the financial strain on law-abiding citizens and businesses but also undermines the integrity of the tax system.
Urgent measures are imperative to curb the proliferation of illicit goods and enhance revenue mobilization efforts. Strengthening enforcement mechanisms, bolstering interagency cooperation, and implementing stringent penalties for offenders are critical steps toward combating this pervasive challenge. Moreover, fostering public awareness and engagement can empower communities to identify and report instances of illicit trade, thereby augmenting enforcement capabilities and safeguarding government revenues. Through concerted action and collective responsibility, Pakistan can mitigate the adverse impacts of illicit trade and foster a more equitable and sustainable economic landscape for all stakeholders.
Local businesses, typically reliant on financial institutions to support their growth and working capital needs, face significant challenges when borrowing costs are compounded by a policy rate as high as 22 percent. Moreover, the imposition of regressive and anti-growth taxes, such as the super tax, further burdens companies, erodes their capacity to reinvest surplus funds. The application of a one to ten percent tax rate, in addition to the standard 29% corporate tax rate, kicks in once taxable income surpasses Rs. 150 million. This tax burden escalates progressively, reaching up to 10 percent when taxable income exceeds Rs. 500 million, resulting in an overall tax rate of 39 percent.
The imposition of a 20% Federal Excise Duty (FED) on fruit juices in June 2023 in addition to sales tax of 18 percent led to a significant 40 percent decline in volumes for the formal packaged juice industry. This decline starkly contrasts with its projected growth trajectory. With over 100,000 individuals engaged in its value chain, the fruit-based beverage industry now faces increased unemployment and underutilization of production capacity. Moreover, consumers are turning to cheaper, lower-quality alternatives from the undocumented sector due to the FED, posing health risks and hampering revenue collection efforts. Addressing this issue is necessary in the fortcoming Budget for fiscal year 2024-25 for economic stability and public health, emphasizing the need to maintain access to healthier beverage options.
Additionally, the decline in fruit procurement has negatively impacted rural economies, emphasizing the importance of supportive policies to safeguard farmers’ livelihoods. Progressive taxation measures and regulatory interventions are essential for promoting sustainable economic development and ensuring the formal juice industry’s long-term viability through collaborative efforts among stakeholders.
Such punitive tax measures not only stifle entrepreneurial endeavors and discourage investment but also undermine the competitiveness of local businesses in the global market. Addressing these structural impediments is essential for fostering a conducive business environment to ensure sustainable growth and prosperity. Collaborative efforts between policymakers, businesses, and financial institutions are imperative to devise tax policies that incentivize innovation, spur economic activity, and promote inclusive development. Through targeted reforms and strategic interventions, Pakistan can unlock the full potential of its entrepreneurial ecosystem and drive long-term socioeconomic progress.
______________________________________________________
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
_______________________________________________________________
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Adbul Rauf Shakoori
The recent publication, coauthored by these writes with Huzaima Bukhari, is Pakistan Tackling FATF: Challenges & Solutions, available at:
https://www.amazon.com/dp/B08RXH8W46 and
https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/
