Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan, while in the grip of severe fiscal challenges, is making preparations, under the tight control of the International Monetary Fund (IMF), for presenting the federal budget 2024 in the National Assembly on June 7, 2024. The government is apprehending a huge budget deficit leaving it with little financial room to offer much-needed relief to its citizens and businesses. Consequently, there is a pervasive sense of pessimism surrounding the upcoming federal budget in which many preconditions of IMF are to be incorporated. The only expected silver lining might be avoiding additional burdens on the existing taxpayers by widening the tax net and identifying new sources of revenue.
The economic crisis, which hit critical levels in 2022 and 2023, has somewhat eased, but the situation remains far from stable. IMF has imposed stringent conditions on Pakistan to ensure the release of much-needed yet another bailout—the 25th extended fund facility (EFF) program. These conditions include measures for increasing tax revenue, such as broadening the tax base, reducing subsidies, and implementing structural reforms to improve fiscal discipline. IMF’s demands are seen as necessary for stabilizing the economy but are also likely to be unpopular among the people, who are already struggling with high inflation and unemployment. On May 24, 2024, the IMF team left Pakistan without any staff-level agreement for a new package.
One of the most pressing issues is Pakistan’s dwindling foreign exchange reserves, which have been under severe pressure due to a large trade deficit and debt repayments. This has led to a sharp depreciation of the Pakistani rupee, further exacerbating inflation, and eroding purchasing power of the average citizen. The government is in a tight spot, trying to balance between meeting IMF’s requirements and providing some form of relief to the public.
The upcoming budget will need to address these complex issues, finding a delicate balance between fiscal consolidation and public welfare. The government’s ability to steer these challenges will be necessary in determining the country’s economic trajectory in the coming months. While the reduction in economic turbulence is a positive sign, Pakistan has a long way to go before it can achieve economic stability and growth. The government’s approach to the budget will play a decisive role in shaping the nation’s financial future and restoring confidence among investors and the public.
The severity of Pakistan’s fiscal situation is evident from the financial statistics of the first nine months of the ongoing fiscal year. During this period, tax revenues have surged by 29%, and non-tax revenues have skyrocketed by 91%. These increases have contributed to achieving a primary balance of Rs. 1.61 trillion, which is remarkable being 221% higher than the same period in the previous year. However, despite these improvements in revenue collection, the overall fiscal imbalance has deteriorated. The fiscal deficit has ballooned to Rs. 3.9 trillion, representing a 27% increase compared to the first nine months of the last financial year.
The forthcoming budget will prioritize revenue mobilization and fiscal improvement, while also aiming to preserve financial support for lower-income groups. The government faces a critical challenge unless it can effectively reduce its debt burden, any gains from increased revenue will be primarily consumed by debt servicing. This means that instead of channeling funds into social protection initiatives and development projects, the government will continue to allocate a significant portion of its budget to managing its debt obligations.
Recently, the government has implemented several revenue mobilization measures, such as introducing the Tajir Dost [traders’ friendly] tax scheme and blocking mobile SIMs for certain non-filer individuals. In line with these efforts, the Federal Board of Revenue (FBR) has issued Income Tax General Order No. 01 of 2024 that aims to enforce the filing of income tax returns by individuals who are not listed as active taxpayers but are required to file for the tax year 2023 under the Income Tax Ordinance, 2001.
As part of this initiative, FBR has ordered the blocking of the mobile phone SIMs of 506,671 individuals identified as non-compliant. The objective of these measures is to broaden the tax base and ensure that more people contribute to the national revenue. By targeting those who evade taxes, the government hopes to increase its fiscal resources, which can then be used for essential public services and infrastructure development. These steps are crucial for improving overall tax compliance and enhancing the government’s ability to fund social and economic programs.
Similarly, the Tajir Dost scheme aims to generate additional revenue and broaden tax base through policy reforms. The retail sector, often criticized for being either untaxed or undertaxed, is a primary target of this initiative. Launched in six major urban centers, the scheme mandates the collection of the minimum due advance income tax starting from July 1, 2024. This effort seeks to ensure that more retailers are brought into the tax net, enhancing overall tax compliance and revenue generation.
The government has already imposed heavy taxes on corporations, a 29% corporate tax rate with an additional super tax of up to 10%. This regressive measure has negatively affected corporate cash flows, limiting their ability to grow, expand, or build reserves. Simultaneously, bank lending rates are around 25%, leaving businesses with little room to leverage growth or meet their working capital needs. This combination creates a natural recipe for economic slowdown, forcing both corporations and the broader economy into a period of stagnation.
In case the prevalent situation continues, corporate profitability will be compromised, ultimately eroding their ability to pay taxes. This creates a vicious cycle, where reduced tax revenue forces the government to rely on borrowed funds to meet its financial needs. Over-reliance on borrowing can further strain the economy, increasing debt and interest obligations. Therefore, the government must strike a careful balance between its revenue requirements and the financial health of businesses. By ensuring that tax policies do not overly burden corporations, the government can foster a more sustainable economic environment, promoting growth and stability while maintaining adequate revenue streams.
The shortsightedness and lack of vision among our policymakers and authorities are evident. These are the primary reasons behind the current economic predicaments. Disparities in the taxation system and the preferential treatment given to certain segments or sectors, at the expense of the entire economy, have stunted the growth potential of otherwise thriving sectors. As a result, the nation bears the cost of this incompetence, hindering overall economic progress.
In the budget for fiscal year 2024-25, the government should consider the removal of the unjust and harsh super tax, along with efforts to reduce the tax burden on petroleum products, currently standing at approximately Rs. 60 for motor gasoline (MOGAS), constituting about 30% of the fuel cost inclusive of the Integrated Foreign Exchange Margin (IFEM). Despite attempts to address shortcomings by adding new taxpayers to the list and removing unwarranted tax benefits and concessions, the government has opted for regressive measures without fully considering their repercussions on businesses and individuals.
Such actions risk further stifling economic growth and exacerbating the financial burdens faced by both corporations and citizens. As budgetary decisions loom large, policymakers must prioritize measures that foster economic vitality and equitable taxation. By striking a balance between revenue generation and fostering an environment conducive to growth, the government can pave the way for a more prosperous future for all stakeholders.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT-related laws, IT, intellectual property, arbitration, and international tax laws. He holds an LLD in tax law with a specialization in transfer pricing. He was a 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 the Chief Editor of Taxation. He is the country editor and correspondent of the International Bureau of Fiscal Documentation (IBFD) and a member of the International Fiscal Association (IFA). He is a Visiting Faculty at the Lahore University of Management Sciences (LUMS) and member Advisory Board and a Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE).
He has co-authored 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 the 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/articles/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
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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 has 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 ensure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan 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/
