Amir Khan

The federal government has set a target to raise tax revenue from Rs7.7 trillion to Rs10.3 trillion for the ongoing fiscal year 2023-24, which, if achieved, would be a 33% increase from the previous year. “The overarching revenue target for the year is set at Rs13.4 trillion, representing a 39% growth from the previous year,” says Syed Shabbar Zaidi, the former chairman of the Federal Board of Revenue, in an interview with WealthPK. “Given Pakistan’s historical challenges in revenue collection and its ongoing external account issues, this target appears overly optimistic. And the country’s prospects of exiting the IMF programme within the next five years seem unlikely,” he pointed out. He stated that while meeting this revenue target might satisfy the IMF, it will likely lead to significant issues for the people and the government.

“This is because expanding the tax base during this period seems improbable. The only viable approach to achieving the target would involve further taxing the same individuals, who are already in the tax net. This could result in the formal economy deteriorating and a resurgence of high indirect taxes and tax deductions.” Shabbar Zaidi pointed out that Pakistan’s corporate income tax rate had increased by 11% in the past two to three years, from 28% to 39%. “This rate is expected to rise even further in the future. Given the federal government’s poor track record of collecting taxes from corporations, the IMF must insist on enhancing the corporate tax rate further and maintaining a tax rate freeze on other taxpayers.”

“The government should focus on collecting taxes from those not currently paying taxes, such as traders, agricultural commodity dealers, real estate investors, and the unorganised service sector. The ‘bazaar’ (market) in Pakistan is a powerful entity that effectively obstructs tax collection from businesses operating within it, posing a major challenge to expanding the tax base and formalising the economy,” he added. The former FBR chairman highlighted that the escalation in interest costs, rising from Rs5.568 trillion in 2022-23 to Rs8.614 trillion in 2023-24 (a 54% increase), can be attributed to long-standing policy decisions over the past two decades, along with rupee devaluation and an elevated discount rate. “The bulk of this rise originates from domestic interest payments.”

Furthermore, he added that besides the Public Sector Development Programme (PSDP) and interest payments, the government’s substantial spending also extends to subsidies. “While precise details about these subsidies are unavailable, the largest one pertains to the power sector,” he said, calling for a comprehensive overhaul of the power sector given the prevalence of practices like fixed charges, sovereign guarantees and payments in US dollars that fostered rent-seeking behaviour. Zaidi said that pension expenditures constituted another significant burden for the government. “The pension system in Pakistan faces three primary issues: a large number of government employees, escalating pension amounts that sometimes exceed the last drawn pay, and a lack of funding for the pension system in the past.

These factors render the pension system unsustainable.” He said that exploring solutions was challenging, though the possibility of raising the retirement age came under discussion in the policymaking circles from time to time to alleviate immediate pension liabilities, which are estimated to be around Rs800 billion. Shabbar Zaidi said the PSDP reflected a historical inclination towards an expansive government approach. “The pertinent query for the federal government is whether the PSDP remains essential, or if it could be decentralised to provincial or local authorities.” He said the Planning and Development Ministry, initially responsible for devising national economic plans, has now become a body that approves development plans, often viewed as a form of compensation for legislators to save face before the public.

While it’s commendable that the PSDP’s share of the budget has decreased, he believes that further reduction is warranted. Shabbar Zaidi expressed surprise over the fact that the federal government still had over 60 divisions with it even after the 18th Constitutional Amendment, which devolved a lot of power to the provinces. He believes that the optimal number of divisions resting with the centre should not be more than eight. He says the federal receipts were still unsustainable given the number of divisions and ministries working under it.

Credit: INP-WealthPk