Nothing is lost unless the hope is lost!

Economic development of a country depends largely on three factors: natural resources, capital formation and market size. However, a strong and thriving economy also depends on the legal, political and economic stability as well as tax policies of the country. There is no such thing as a non-filer in global tax vocabulary, and the same must be undone in Pakistan too. Pakistan has an unsymmetrical tax base, and the machinery to collect the revenue is inefficient and corrupt. Pakistan needs an equitable broad-based efficient tax regime with a ‘no Sacred cows’ stance. While this may be a time-consuming process, it needs to remain a high priority. Currently, the composition of direct and indirect taxes is 35% and 65%, respectively, which shows that chargeability of the taxes on income is very low. Income Tax is being collected from 2.5 million Pakistani citizens only. Some of the areas that need to be brought into tax net include real estate, retail, agriculture and financial markets.

The country’s biggest revenue problem is tax evasion, and a gigantic pie of the informal economy that is run by black-marketers, hoarders and mafias. The tax regime instead of broadening the tax net is slapping more taxes on exporters, a segment of society that must otherwise be facilitated as they are the backbone behind earning foreign exchange. Rather, all unnecessary imports must be scuttled. The government should take impeccable measures to broaden the tax umbrella, plough leakages and improve enforcement of laws by writing them anew. The suggestion to amend Section 111 of the Income Tax Ordinance, which allegedly provides for a parallel tax-free economy, is on the mark.

Likewise, a 5% advance income tax on future dividends of listed companies and 7.5% on non-listed companies; slabs on the distributable reserves of taxpayers such as 1% tax on active payees, and 4% on unregistered ones seem to be compounding the equation. It is the high time to document and broaden the revenue generation.

At the time of making the budget in June last year, the FBR had taken the inflation rate of 11.5%, which is currently 36%. All this did not prove sufficient to achieve the tax targets.

The shortfall will result in more borrowing, which in turn will squeeze the government’s budget space due to higher interest costs. Tax authorities had hoped that the government would allow monthly imports up to $5.1 billion but actual imports remained lower. Nonetheless, it does not provide a valid reason for missing the target, as taxmen have developed a habit of getting effortless revenues at the import stage or through withholding taxes.

The government has increased the standard general sales tax (GST) rate to 18% besides increasing it to 25% on dozens of goods. This too has proved insufficient. According to an understanding reached with the IMF, in case of a shortfall in tax revenue, the government will make adjustments in expenses or levy more taxes to cover the gap. Slowdown in imports and economic growth has hurt the FBR’s revenues, which for years had been relying on imports. The collection of Rs5.62 trillion in 10 months of current fiscal year was Rs762 billion more than the same period of last year, showing a growth of 16%, but it was less than half of the nominal GDP growth of 36%. Collection of customs duty remained below target for the tenth consecutive month. The FBR received Rs750 billion in customs duty during the July-April period, which was Rs180 billion less than the target. The customs duty collection was also lower by nearly Rs42 billion from last year’s receipts.

The FBR needs to shift away from its model of collecting maximum taxes on imports and through withholding taxes. In April alone, the customs duty collection stood below the target by Rs45 billion. Income tax collection in the first 10 months of FY23 came in at Rs2.5 trillion, up by Rs758 billion, or 44%, the only success story in the long list of failures. The 10-month collection exceeded the target by Rs134 billion. In April, the FBR got Rs193 billion in income tax, exceeding the target by Rs22 billion. Sales tax was another weak area as its collection amounted to nearly Rs2.1 trillion in 10 months, which was Rs285 billion less than the target. It was a major failure as the FBR was unable to reap the benefit of over 36% inflation. Sales tax collection at the import stage constituted nearly 64% of the total sales tax collection. The FBR received Rs1.33 trillion in sales tax at the import stage out of the total of Rs2.1 trillion. Ten-month GST collection was a mere Rs19 billion more than the last fiscal year. In April, the FBR pooled Rs183 billion in sales tax, missing the target by Rs80 billion despite an increase in GST rate.

Our exports remain around USD 30 billion, compared to Bangladesh at USD 48 billion and India at USD 670 billion. Other main areas of imbalance are the wealth and income distribution: top 10% Pakistanis control 60% of wealth and 43% of income, middle 40% control 35% wealth and 40% income, and the bottom 50% of the population has mere 5% of wealth and 17% of income (World Inequality Database). Similarly, if we look at the land distribution, in reality 5% of the people hold 64% of farm land and more than 50% of the population does not own a single foot of land (Land Portal).

The agriculture contributes to 22.7% to GDP and proving employment to 37.4 %. During FY 2021-2022 agriculture sector recorded a remarkable growth of 4.40 % and surpassed the target of 3.5 %. The total Agricultural Income Tax is Rs.3 billion a mere of 0.02% of the agricultural GDP of the country. It has been estimated around Rs.10 billion to Rs.200 billion whereas real estate has 9.6 % share in services and 5.6% share in GDP with construction having 2.56% share in GDP.

Similarly, large-scale urbanization and heedless town planning have led to continuous loss of agricultural land, and these processes have put pressure on farmers reducing the agriculture sector’s efficiency and output. The development of urbanization that too on agricultural land should be prohibited. According to a survey Pakistan real estate has developed sufficient enough to meet the needs of next 100 years to come. Unnecessary urbanisation has also put in peril food security as little green land is left where the rest is being sold and developed for personal gains causing a big blow to our own food needs and thus depriving us of wheat exports. This development should be curtailed and particular laws need to be framed that agricultural land could not be used for the development of real estate.

This is the high time government needs to wake up to this final call. Employment in construction sector reached 6.4 million. Whereas Government has been providing friendly schemes and subsidies to both sectors, depriving textile industry that contributes 8% to GDP and is the biggest source of bringing in foreign reserves particularly at this very crucial time. With unfriendly export policies, and abrupt changes textile industry is nose-diving.

The textile sector was showing consistent growth whereas the agriculture sector has caused food insecurity in spite being the seventh largest agro producing country. Industrial sector’s capacity and performance are far below the economic requirement of the country. We need to reshape this sector again on the lines of export orientation and value addition. The main sectors to focus are information technology, mining, defense exports, fishery, solar and semi-conductor/chip industries.

Looking onto the way forward, there are certain short-term and immediate solutions that can be achieved through rectifying the anomalies in our system. We need to do take some staunch and hard decisions the sooner the better. Firstly, the criteria of resource allocation must be changed and rationalized with much lesser weightage to population and more on developmental parameters.

There is a dire need to develop a regulated energy model on the pattern of emerging markets. Similarly, electricity is produced through different means yet complied in one grid station and processed with other additional charges creates unnecessary pressure on the consumers particularly industry. Regulatory capacity needs improvement, domestic use of gas has to be capped and moved to industry. Subsidies are provided to other provinces as compared to Punjab whereas it is the hub of all major exports. WACOG is deemed as the only possible solution. The disparity in the local provinces should be abolished first and later on the international level.

How can we make our exports market competitive if we are not offering a competitive rate within the country. 18th Amendment to the Constitution through insertion of Article 172(3) provides for joint and equal vesting of mineral oil and natural gas in Provinces, the Petroleum Exploration & Production Policy 2012 was issued with the approval of the Council of Common Interests and yet not implemented is a big failure at the government’s end.

Looking onto the way forward there are certain short-term and immediate solutions that can be achieved through rectifying the anomalies in our system. We need to do take some staunch and hard decisions the sooner the better. Firstly, the criteria of resource allocation must be changed and rationalized with much lesser weightage to population and more on developmental parameters.

The loss-making SOEs are prime real estate assets worth trillions of rupees but non-productive. These should be immediately sold through transparent sale proceeds; their defaults should be adjusted along with management changes whereby market-based talent should replace the existing incompetent senior management and boards. If not, then immediate privatization should be initiated.

Immediate reopening of regional trade markets, refocus on SAARC, India, Afghanistan, Iran and CIS states. This should include preferable trade agreements and not to compete products in international markets.

Increase industrial and commercial share in the power/energy sector. It is 65:35 (domestic:commercial) in Pakistan compared to international average of 35:65. Similarly, develop a regulated energy model on pattern of emerging markets. Islamization of economy is also a viable alternate and can go a long way in fixing fundamental problems. It can actually help in increasing the revenue (tax to GDP ratio), documentation of economy and financial inclusion. Introduction of a hybrid official ‘zakaat’ structure for joining the income tax regime can prove very beneficial. In Pakistan around seventy-five million individuals pay Zakat but none of it hits the exchequer account. We should create a separate entity, independent of FBR (Federal Board of Revenue) to collect and consume ‘zakaat’ in a transparent mechanism. With Pakistan being the seventh largest producer of agriculture of around USD 65 billion, Ushr can actually help in materializing this untaxed sector.

Islamic banking’s share is mere 19% in the industry in a country of 97% Muslim population. Agriculture sector reforms that include revamping farm to market inefficiencies and anomalies including water management, PCR Abiyana, seed, fertilizer, middleman replacements, storage/silos facilities, easy access to bank loans and integration/connectivity with neighborly and regional markets. Focus should be on establishing agro-based export and value-added industry for all major crops, dairy, fruits and livestock. While being the seventh largest agro producer, our yields are one of the lowest; we need to make our agricultural research institutions more effective and agriculture departments need total revamping, or privatize them.

FBR, Planning Commission, BoI (Board of Investment), etc., to focus on ease of doing business. We must initiate a 10-year plan for industrialization, tourism industry, FDI initiatives and for social protection, education and health sectors. Just to reduce the import bill it is pertinent that luxury items should be banned.

Last but not the least, devolution in actual spirit by making local governments more effective, and federal and provincial governments’ role to be curtailed to bare minimum. A suggestion could also be to replace the current political system by proportional representation to get rid of the ‘political electable mafias’.