Foreign sector, private sector and government fiscal balance make up the three major sectorial balances of a state. Budget balance is total government tax receipts plus revenue from other sources less expenditure whereas fiscal balance includes interest payments made by government on its borrowings usually over a specific fiscal year. Pakistan’s budget balance is one such aspect where we have failed to manage our revenues and expenditures leading to large imbalances, increased public debt to manage imbalances which lead to large fiscal deficits and unavailability of funds for social programs. Historically we have run fiscal deficits as a percentage of GDP which in past 10 years has risen from 5% to 7.8% in fiscal year 2023. Addressing this deficit is important to free up resources for uplifting of the populace which is primary job of any government.
Government revenues consist primarily of tax revenues on a recurring basis and it is here Pakistan has been lacking. Tax to GDP ratio has in recent times been hovering around 10% whereas ideally as per the World Bank it should be around 15% or more. It is in line with our neighbors India and Bangladesh who also fail to meet this criterion but well below 30% plus figures achieved by developed countries like Japan, New Zealand etc. Most of our tax collection is via indirect taxes such as customs, excise and sales tax with 54% of revenue coming from these three in fiscal year 2023. In developed world share of direct taxes is much higher than indirect and our tax system is regressive since indirect taxes don’t differentiate between income levels of populace. Boosting tax collection at federal and provincial level is the first step to addressing our fiscal deficit problem and requires expanding the tax base and ending exemptions given to certain sectors. Total tax exemptions cost 2.4 trillion rupees in last fiscal year. Sales tax exemption on petroleum products was the biggest with 633 billion in tax loss followed by exemption under sixth schedule for imports costing 257 billion, Zero rating under fifth schedule to sales tax act 1990 139 billion, exemptions to local supplies 133 billion and reduced rates under eight schedule 130 billion. Similarly exemptions on income tax and custom duties on imports for FATA and Baluchistan caused loss of 27 billion in potential revenue. Income tax exemptions for individuals earning from power generation projects were around 57 billion which were the biggest exemptions under this category followed by cigarette and pharmaceutical distributors enjoying 15 billion exemptions. Reducing these exemptions can help in increasing indirect tax collection in short run which is easier to achieve compared to increasing tax base which has to be done in the medium term. Secondly expanding the tax base by bringing agriculture, real estate, retailors and export sectors into tax net is of utmost importance. An estimated 3.2 million retailers are currently outside the tax net as per Federal board of Revenue (FBR) with revenue collection of 400 to 500 billion per annum collection possible by bringing them in tax net. According to Punjab board of investment and trade the retail sector in 2017 was estimated around 42 billion USD with sales in excess of 105 billion bringing potential tax collection even
Higher should a 4% sales tax and 1 % income tax on gross turnover be levied. Similarly exporters in Pakistan earned 4.3 trillion incomes in first six months of current fiscal year but tax paid was 46 billion compared to 158 billion paid by salaried class. Exporters are only paying 1 percent of their income in form of income tax and rates need to be revised to increase collection from this sector. Tax collection from the real estate sector is also not done at market value of properties with value assessed for tax collection being usually 40 to 60% of actual market price. Tax on rental income is also not collected due to most rent being taken in form of cash and not reported along with low annual property taxes on ownership.
Second major step for tackling fiscal imbalance requires expenditure cuts from both provincial and federal governments. 710 billion were spent in last fiscal year at federal level on ministries that post 18th amendment should have been devolved to the provinces. Similarly pension costs will touch 2 trillion in current fiscal year at all levels and are projected to reach 10 trillion in the next 10 without reforms. A contribution based pension system where employee contributions are matched by the government is necessary similar to what India did in 2004. Tax on existing pensions is also another option for reducing overall pension bill with a 10% tax on pension above one million per month under-consideration which could be expanded at different rates to other slabs as well. Furthermore slashing non-combat defense expenditure can also be implemented which will have no effect on security needs but will allow for substantial savings. The exact amount that can be saved is difficult to verify due to the secrecy surrounding the breakdown of the defense budget. Reforms are also needed in the way the public spending development budget (PSDP) is utilized as there are issues of cost overruns, corruption and time management issues with the current model. Currently it takes 14 years on average for a PSDP project to be completed and several of these projects suffer from increased costs due to such long timelines. The 1 trillion per annum expense could be more cost effective under the public private partnership development model that can help ensure timely completion and cost efficiency with the model replicable at the provincial level as well.
These reforms, amongst others, will allow greater spending on health, education and infrastructure for the public which is the primary responsibility of any government and will help address issues that are stopping us from progressing from a developing country to a developed one.
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