Dr. Ikramul Haq & Abdul Rauf Shakoori
The signs of economic stabilization are strengthening, with gradual disinflation underway and external pressures easing further since the first review on the back of improved fiscal balances. However, the outlook remains challenging, with downside risks remaining exceptionally high—IMF Country Report No. 2024/105, Executive Summary of Second and Final Review of Stand-by Arrangement, May 10, 2024
Pakistan’s engagement with the International Monetary Fund (IMF) under the 9-month US$3 billion Stand-By agreement (SBA) has yielded satisfactory results, confirming the government’s steadfast commitment to economic reform and stability. Through diligent implementation of the SBA, both elected and interim governments have successfully steered the country towards financial resilience. Enhanced revenue mobilization and prudent spending have led to a primary surplus during the first nine months of the current fiscal year. The surplus amount of Rs. 1.615 trillion (1.5% of GDP), is significant improvement compared to Rs. 503.774 billion (0.6% of GDP) in the corresponding period of last fiscal year. This shows that Pakistan is on the path to recovery with better fiscal management and sustainable growth strategies.
An encouraging trend that emerged in tax collection is now fading. The data released by the Ministry of Finance revealed 30 percent growth in revenue collection by the Federal Board of Revenue (FBR) in the first nine months of the ongoing fiscal year as tax collection reached Rs. 6.71 trillion, up from Rs. 5.15 trillion in the corresponding period of preceding year. Notably, federal excise duty registered 64.2 percent increase, while direct taxes 41.4 percent. Sales tax and customs duty also registered healthy growth, rising by 17.7 percent and 15.2 percent respectively.
However, amidst this robust performance, there are reports of shortfall of Rs. 163 billion to Rs. 183 billion on the part of FBR in meeting annual target of Rs. 9.415 trillion. It is worrisome that FBR missed its 10-month target by Rs. 52 billion—it collected Rs. 7.362 trillion against the target of Rs. 7.414 trillion. The collection of April 2024 at Rs. 650 billion was short of target by Rs. 57 billion.
It is a fact that Pakistan continues to grapple with serious challenges on fiscal front. The repercussions of imprudent borrowing and extravagant spending, spanning both developmental and non-developmental domains, have exacerbated our fiscal predicament. Although there has been an increase in the absolute number of taxpayers, the growth in real terms, when juxtaposed with GDP, remains disappointingly sluggish.
The tax-to-GDP ratio emerges as a pivotal gauge, shedding light on tax compliance, capacity, and efficacy within the national taxation framework. Improving this ratio, which remained at 6.9 percent in the first nine months of the current fiscal year, has now assumed paramount importance in fortifying fiscal sustainability and fostering economic resilience. Addressing these challenges demands strategic reforms in FBR and prudent fiscal management, steering Pakistan towards a path of enduring fiscal health and prosperity.
Enhanced tax collection, coupled with a higher tax-to-GDP ratio, expands the fiscal leeway for the government, enabling organic revenue generation domestically, thereby reducing reliance on borrowing. However, Pakistan’s tax-to-GDP ratio has persistently remained low over the years. Examining recent data yields intriguing observations: the ratio stood at 8.8% in FY-2009, rose to 9.8% by FY 2018, but subsequently witnessed a decline, plummeting to 8.5% in FY-2021 following a peak of 9.2% in FY 2022. This trend underlines the need for concerted efforts to bolster tax compliance and broaden the tax base, ensuring sustainable fiscal growth and reducing dependency on external financing. Achieving a higher and stable tax-to-GDP ratio is imperative for fortifying the country’s fiscal resilience and fostering long-term economic stability.
During a pre-budget conference, Federal Minister for Finance and Revenue, Muhammad Aurangzeb, emphasized the necessity of enhancing the tax-to-GDP ratio, highlighting a commitment to comprehensive reform. Achieving this goal demands a multifaceted strategy encompassing digitalization of the tax infrastructure, improved collection methods, broadening the tax base, and fostering transparency in operations. Despite this acknowledgment, insufficient attention has been directed towards addressing the issue of a narrow tax base. Major sectors such as agriculture, retail, and real estate either evade taxation altogether or face disproportionately lower tax rates relative to their potential contributions.
The proliferation of exemptions and concessions exacerbates distortions within the tax framework, fostering an environment of unequal treatment among taxpayers and sectors. This inequity undermines the integrity of the tax system and perpetuates disparities in fiscal obligations. In order to rectify these shortcomings, concerted efforts must be undertaken to streamline taxation policies, eliminate preferential treatment, and incentivize compliance across all sectors of the economy. By fostering a fair and equitable tax regime, Pakistan can unlock untapped revenue streams, fortify fiscal sustainability, and propel economic growth.
In addition to addressing current fiscal challenges, the Pakistani government has also made significant strides in implementing SBA. This includes the introduction of a scheme aimed at registering retailers and enforcing tax filing to bolster revenue collection. Initially scheduled for launch at the beginning of the calendar year, the scheme has been recently rolled out, albeit with some delay.
As outlined in SRO 457(I) /2024, which delineates a special procedure for small traders and shopkeepers in key urban centers such as Karachi, Lahore, Islamabad, Rawalpindi, Quetta, and Peshawar, these entities are mandated to pay monthly advance taxes effective from July 1, 2024, for the relevant tax year. The first payment is due on July 15, 2024, followed by subsequent payments on the 15th day of each month thereafter. This initiative aims to enhance tax compliance among retailers, ensuring the government receives its rightful revenue share and thereby contributing to fiscal stability and economic development.
FBR’s transition into a semi-autonomous body is essential to its ability to strategize, plan, and execute revenue mobilization efforts independently, devoid of political interference. It is imperative that amidst its operations, FBR undertakes this transformation. Additionally, FBR must proactively tackle challenges like tax evasion, the informal economy, smuggling of goods, lack of automation, and litigation. By granting FBR greater autonomy and authority, Pakistan can bolster its capacity to effectively combat these issues and optimize revenue collection. Moreover, investing in advanced technological solutions and streamlining legal processes will further strengthen FBR’s capabilities. Ultimately, these initiatives will foster fiscal transparency, fortify the economy, and facilitate sustainable development.
Pakistan needs to improve its legal framework for expeditious resolution of tax disputes, as delays inflict significant losses on the national exchequer. Recent news reports reveal a staggering backlog of 145,036 cases across various courts, involving disputed sum of Rs. 4.23 trillion. Specifically, at the Supreme Court level, 3,455 tax-related cases with a total sum of Rs. 1.40 trillion remain unresolved, while at the High Court levels, 19,528 cases involving Rs. 740 billion await adjudication. This pressing issue requires focused attention to streamline processes and ensure timely and enhanced revenue collection to expedite tax dispute resolution, thus paving the way for a conducive business environment. By doing so, we can mitigate financial losses, stimulate economic growth, and attract foreign investment. Consequently, this will fortify GDP growth, maintain fiscal equilibrium, and drive overall development, leading to heightened per capita income and reduced inflation rates.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.
