Need to reconsider fiscal management

Huzaima Bukhari & Dr. Ikramul Haq

Punjab is the most populous [110 million people] province of Pakistan with largest resources and budget size after the Federal Government and beneficiary of lion’s share from National Finance Commission (NFC) Award [for fiscal year 2019-20, it received Rs. 1.2 trillion]. For the last many years, the performance of Punjab in tax collection has been much below its real potential, especially under the long rule of Pakistan Muslim League (Nawaz)—PMLN. The PMLN turned   the historically surplus budget into deficit and incurred huge debt, contrary to claims of achieving wonders as has been done by its economic wizards (sic) like Ishaq Dar, now a fugitive, in the six federal budgets [2013-2018].

According to a latest report issued by the coalition government of Pakistan Tehreek-i-Insaf (PTI) in Punjab, it is claimed that “its tax collection under the “Own Source Revenue” increased by 7% in fiscal year 2019-20”. According to the data released by Ministry of Finance, Islamabad, at its website, in respect of federal and provincial fiscal operations for the fiscal year 2019-20 (FY 2020), the total own tax collection of Punjab was Rs. 189.79 billion that constitutes only 4% of total tax revenues of the federation—the central government and all the provinces (Rs. 4748 billion). In total revenues (tax and non-tax) of federal and provincial of Rs. 6272 billion, the share of Punjab for FY 2020 is Rs. 55 billion (0.8%).

The total expenditure of Punjab was Rs. 1468 billion (current expenditure Rs. 1202 billion) against total revenues (tax and non-tax) of Rs. 1459 billion including share from NFC Award constituting 82% of total revenues. It is worthwhile to mention that development expenditure (PSDP) was only Rs. 265 billion. Details are available at the website of Federal Ministry of Finance: https://www.finance.gov.pk/fiscal/July_June_2019_20.pdf.

According to ‘two-year performance report’, released by the Punjab government “in FY20, the collection of provincial taxes was on track for more than 20% growth and despite giving a sizable tax relief due to Covid-19, the receipts remained at the previous year’s level”. It further claims that non-tax revenue collection registered an increase of 31% and the Punjab Revenue Authority (PRA) “recorded an increase of 40% in the taxpayer base in first two years of the Pakistan Tehreek-e-Insaf (PTI) government”.

The report made a comparison with the previous government in some key fiscal areas and highlighted that PNLN government accrued liabilities of Rs. 97.4 billion “leading to more than 165 court cases on pending liabilities”. It further reveals that “there were more than 20,000 unpaid cheques amounting to Rs56.1 billion. The government had availed itself of an overdraft of up to Rs. 41.3 billion”.

The shocking revelation made in the report is that “mega projects such as operation and maintenance contract for the Orange Line train and financial close of re-gasified liquefied natural gas (RLNG)-based power plants were left incomplete and the debt stock reached Rs. 1152 billion, comprising Rs. 458 billion for commodity financing and the remaining Rs. 694 billion in government borrowing”.

According to the report, “the current government redefined its priorities and created fiscal space and through prudent fiscal management, an additional Rs. 97 billion was made available through revenue mobilisation and expenditure rationalisation”. The following salient features are highlighted in the report:

• The Resource Mobilisation Committee came up with new proposals of Rs.16.6 billion for enhancing the provincial ‘Own Source Revenue’.
• Current expenditure was rationalised, creating a fiscal space of Rs. 80.4 billion.
• Enhancement of allocation for the social sector—health and education—from Rs. 560.9 billion (34%) in FY18 to Rs. 631.1 billion (42%) in FY19.
• In support of the federal government, surplus of Rs. 147.8 billion created.
• With efficient management of development funds, the budget releases increased from 70% in FY18 to 96% in FY19.
• The ‘Own Source Revenue’ target was increased by 44.6% to Rs. 388 billion for FY20 against Rs. 269 billion for FY19.
• In the last fiscal year, 35% of funds under the Annual Development Plan (ADP) were reserved and ring-fenced for South Punjab and the development portfolio was augmented by Rs. 42 billion by leveraging private sector investment through public-private partnership model.

The report says that Covid-19 outbreak in the latter half of 2019-20 “came in the way of achieving the targets set for the year”. The province provided Rs. 24.5 billion to combat the pandemic in FY20, which included Rs.18 billion in tax relief packages for different businesses.

The Punjab government has allocated Rs, 337 billion for the ADP in FY21 and has given a tax relief package amounting to Rs. 56 billion to different sectors to spur economic growth. This includes a reduction in the Punjab sales tax on services from 16% to 5% for over 20 industries in the services sector.

Official figures show that the Punjab in the first half of 2019-20 spent less than 30% or Rs. 103.1 billion from already truncated annual development programme of Rs. 350 billion. While announcing the budget for 2019-20, it was claimed: “In a major break from the past, the present Government has adopted an aggressive resource mobilization strategy for next financial year. Revenue mobilization measures suggested in the budget include proposal for revision in the rates of land based Agricultural Income Tax (AIT). The rates were last set in 2001. In the income mode of AIT, the exemption threshold has been proposed to be raised from PKR 80,000 to PKR 400,000 to bring in greater horizontal equity in the taxation system vis-à-vis taxation of non-agricultural income. The reality is quite the opposite as reported in a story, published in The  Express Tribune on June 26, 2020 as under:

“The richest landlord in Punjab pays 85% less income tax compared to the highest paid salaried person due to a year-old decision of the Pakistan Tehreek-e-Insaf (PTI) provincial government, when it adopted low agricultural income tax rates.

The difference between tax rates for a landlord and a businessman widens up to 150%, showed the comparison of income tax rates being charged to the landlord, on business income and salaried income.

Since July 2019, the Punjab government has been collecting abysmally low taxes on agricultural income, particularly from big landholders, who pay just Rs500 per acre or 15%, whichever is higher.

The revision in tax rates has benefited Pakistan’s biggest landholders, some of whom are sitting federal and provincial ministers and others are members of national and provincial assemblies.Now, a salaried person earning up to Rs1 million annually pays 900% higher income tax than a landholder in Punjab having similar earnings, showed the comparison of effective average income tax rates being applied to landlords and salaried persons.

In the highest slab, the richest landlord pays 85% less income tax as compared to a salaried person. The effective average rate for the richest landlord is 12.3% while the salaried person pays on average 22.7% tax after adjusting exemption thresholds”.

This is the same old story repeated by PMLN and other governments of the three provinces. First make tall claims and then show no will to tax the rich absentee landlords and owners of posh bungalows and farm houses.

In the wake of Eighteenth Constitutional Amendment in 2010, progressive taxes e.g. inheritance tax (called estate duty in Pakistan), wealth tax and capital gain tax on immovable property, and gift tax etc are with the provinces, but the Punjab like other provinces, has shown no interest in levying these taxes.

The Ministry of Finance on August 12, 2020 released the consolidated summary of federal and provincial fiscal operations during fiscal year 2019-20. According to a report, “the summary showed that public finances of Punjab and Khyber Pakhtunkhwa governments deteriorated and books of both the governments were in the red”. This is in contrast to what is claimed in its recent report by Punjab Government.

The figures released by Ministry of Finance show that in FY 2020, the four provinces received Rs. 2.5 trillion from the federal government in the fiscal year 2019-20. The Punjab government suffered a deficit of Rs. 8.4 billion even after receiving Rs. 1.2 trillion as its share under the NFC Award, which was equal to 82% of its total revenues. 

The spending of government of Khyber Pakhtunkhwa reached Rs. 597.2 billion against its revenues of Rs. 595 billion, showing a deficit of Rs. 2.2 billion. It received Rs. 401 billion under the NFC Award.

The Sindh government showed a positive budget balance of Rs. 63.4 billion. Its total revenues stood at Rs. 842.4 billion against spending of Rs. 779 billion. Sindh got Rs. 614 billion through federal transfers.

Balochistan government’s total revenue was at Rs. 344 billion as against total expenditures of Rs. 320 billion, showing a surplus of Rs. 24.2 billion. Balochistan received Rs. 291 billion under from the federal government.

Meagre collection of agricultural income tax and giving the rich absentee landowners unprecedented relief in tax rates proves the point that PTI Government in Punjab, like its predecessors, is not at all inclined to tax the rich agriculturist lobby. It also did not bother to study Reforming the Urban Property Tax in Pakistan’s Punjab, done by Development Policy Research Centre (DPRC) of Lahore University of Management Sciences (LUMS) that, if implemented, could have brought extra tax of over Rs. 100 billion.

The PTI Punjab government also failed to undertake fundamental reforms to merge three tax departments, namely, Punjab Board of Revenue, Excise & Taxation Department and Punjab Revenue Authority. These could have been merged into one to provide one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection, but no such effort has been made though during election campaign promises to this effect were made.

The PTI Punjab Government, while not taxing the rich and mighty, is keen to get more tax from service providers that they conveniently pass on the same to the end users—this is a regressive tax, whereas we need more from the rich class for economic growth of Punjab that is essential for the entire country due to its size and share from NFC Award.

There is a dire need for a new tax model entailing harmonised sales tax on goods and services and its collection through a single national agency as well as low tax rates on broader base. The complete blueprint of this model is provided in ‘Towards Flat, Low-rate, Broad & Predictable Taxes’ [PRIME Institute, 2016]. This study shows total tax potential of Federal Board of Revenue (FBR) at Rs. 8 trillion and Rs. 4 trillion by provinces in the second revised edition of the study, which is soon to be made public. This level of collection alone can ensure fiscal stabilisation and make Pakistan a self-reliant economy, getting rid of burgeoning debt burden and deadly debt trap consuming the major share of federal revenues. In FY 2020, debt servicing by federal government was Rs. 2620 billion (domestic Rs. 2313 billion and foreign Rs. 307 billion) against net revenues of Rs. 3278 billion after transfers to the provinces. Debt servicing was 79% of total net revenues of the federal government and 65 % of tax collection of FBR. This is the real dilemma and challenge at fiscal front faced by Pakistan.

In the wake of Eighteenth Amendment, the fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential even though the country is heavily indebted. On the other hand, provinces, which are almost entirely dependent on the NFC Award, have failed to raise their own sufficient resources for the needs of the ever-growing population.

In the given circumstances, through democratic process, we need to establish an autonomous tax collection agency, manned by All Pakistan Unified Tax Services [Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018]. The working of this body can be discussed and finalised under Council of Common Interests [Article 153] and its control can be placed under National Economic Council [Article 156]. The provinces must participate in national tax policy and collection apparatus as their share in NFC Award is larger than the federal government and Article 156(2) requires federalised economic planning and not centralised. A new tax model with simplified and low-rate taxes can ensure economic growth as well as the much-needed ease-of-doing business climate to existing and future investors and help the economy to recover from heavy toll of Covid-19 endemic and lockouts. 

__________________________________________________________________________

About Authors

Our joint and individual articles can be seen at:

https://www.brecorder.com/authors/77911/dr-ikramul-haq

https://www.brecorder.com/by/byline/huzaima-bukhari-and-dr-ikramul-haq/

https://www.thenews.com.pk/tns/writer/huzaima-bukhari

https://www.thenews.com.pk/tns/writer/dr-ikramul-haq

https://dailytimes.com.pk/writer/huzaima-bukhari/

https://dailytimes.com.pk/writer/dr-ikramul-haq/

https://nayadaur.tv/author/huzaimabukharianddrikramul-haq/

https://www.thefridaytimes.com/author/huzaima-bukhari/

https://surkhiyan.pk/author/huzaima-bukhari-dr-ikramul-haq/

https://surkhiyan.pk/author/dr-ikramul-haq/

_________________________________________________________

Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad. She has also coauthored with Dr. Ikramul Haq many books that include Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, 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). She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

__________________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation and Visiting Faculty at Lahore University of Management Sciences (LUMS).

He has also coauthored with Huzaima Bukhari many books that include Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, 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 signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns 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.