Overcoming fiscal deficit Huzaima Bukhari & Dr. Ikramul Haq Pakistan is in serious fiscal difficulties. The politics of sit-ins creating instability is bound to worsen the already pathetic economic situation. In fiscal year 2013-14, the original tax target of Rs 2475 billion was fixed, which was first reduced to Rs 2345 billion and then to Rs 2275 billion. The Federal Board of Revenue (FBR), according to claims (still to be officially verified by State Bank of Pakistan), collected Rs 2266 billion. The federal governments total revenues (both tax and non-tax) in budget 2013-14 were projected at Rs 3420 billion out of which share of provinces was estimated at Rs 1502 billion (how much they actually received is not made public yet). The federal expenditure under debt servicing was Rs 1154 billion, defence affairs & services was Rs 627 and running of civil government was Rs 275 billion. After these four items, there was revenue deficit of Rs 138 billion alone whereas total fiscal deficit was over one trillion, meaning by, more borrowings and more burden for next year under the head, debt servicing! The real story of fiscal deficit during fiscal years 2013-14 is unfolded in Federal Budget FY15: Tale of fiscal stabilisation by Muhammad Sabir [Business Recorder, September 17, 2014] as under: To check the consistency of provincial surplus, province-wise and aggregate budget surpluses/deficits are computed by using provincial budget documents. Surprisingly, the result indicates that Sindh has a deficit of more than Rs 10 billion instead of surplus. Among the rest of three provinces, Punjab has a surplus of Rs 35 billion, Khyber Pakhtunkhwa of Rs 13 billion and Balochistan has budget surplus of roughly Rs 14 billion. The sum of these budgetary balances result in a net surplus of Rs 51.6 billion instead a surplus of Rs 183 billion for 2013-14. The situation for 2014-15 depicts a gloomy picture since the aggregate projected provincial budget surplus is only Rs 7 billion rather a surplus of Rs 289 billion. Aggregation of provincial and federal budget deficit and surpluses gives a relatively higher overall budget deficit of Rs 1.6 trillion in 2013-14 and Rs 1.7 trillion in 2014-15, which is 6.3 and 5.9 percent of the projected GDP. After taking into account the, monetary impact of overestimation in revenues and underestimation in current expenditures of the federal government, this overall budget deficit is likely to reach 7 percent of GDP in 2013-14 and cross 6 percent of GDP in 2014-15. In fiscal year 2013-14, the government, after missing the original revenue target of Rs 2475 by Rs 200 billion registered a huge revenue deficit as it also exceeded the sanctioned current expenditure by Rs 112 billion. The current expenditure was originally estimated at Rs 3242 billion. It is, thus, clear that the government was understating expenses and overstating revenues to hide the actual fiscal deficit in addition to wrongly presenting figures of provincial surpluses. One wonders how these can be taken as a tool to cap fiscal deficit-is it in the spirit of true federalism? The burgeoning fiscal deficit is not an isolated phenomenon. It is related to a lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, tax the rich and mighty, crack down on parallel economy by confiscating untaxed assets, abolish unprecedented perks and benefits to the ruing elites, eliminate wasteful expenses, dismantle rent-seeking structures, provide impersonal market relationships ensure the rule of law, stop reckless borrowing and ruthless spending. All these show the crisis of governance (in fact a lack of it) in Pakistan. The most disturbing aspect of governance besides above factors is unwillingness of rulers to devolve administrative, political and fiscal powers to local self-governments despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Fiscal decentralisation and municipal self-rule should essentially be linked to a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements-healthcare, education, public transport, housing, clean drinking water, civil amenities, energy supply, waste management, street and road maintenance and environmental protection-guaranteed in the Constitution. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only seven percent-in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by federal government through a levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services. Despite levying taxes that should have been within the domain of provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that reached Rs 1.8 trillion in fiscal year 2013-14 and in the current year may be more than Rs 2 trillion. Unfortunately, however, provinces have not been allowed to generate their own resources by collecting sales tax on goods as was the case till 1948. Had it been the case, the present chaotic situation could have been averted. Islamabad has been claiming that provinces lack infrastructure to efficiently collect sales tax. This has been proved wrong as Sindh and Punjab collected much more sales tax on services after establishing their own tax apparatuses in 2011 and 2012 respectively than collected by FBR. In 2013 Khyber Pakhtunkhwa also followed in their footstep and results shown for fiscal year 2013-14 were impressive. We urgently need amendments to the Constitution to ensure a judicious distribution of taxation rights between the Centre and federations units. Unless it is done, the provinces will continue to remain heavily dependent upon transfers from the federation through National Finance Commission (NFC) Award. Transferring indirect taxes on consumption of goods to the provinces would empower the federating units and raise tax-to-GDP ratio to a satisfactory level, eliminating fiscal deficit at all levels. The provincial performance in the case of sales tax on services completely belies the impression that they do not have the capacity to generate taxes. If sales tax on goods is reverted to provinces, as was the case at the time of Independence, they would perform much better. The experience of handling sales tax on services by them confirms it beyond any doubt. However, the performance of provinces in collecting agricultural income tax is extremely pathetic. This is a common issue both at federal and provincial level arising from sheer absence of the political will to collect income tax from the rich and mighty-a meagre collection of agricultural income tax-less than Rs 2 billion by all provinces together in fiscal year 2013-14-should be a serious cause for concern. It is imperative that right to levy tax on income, including agricultural income, should be with the Centre. In return, the Centre should hand over sales tax on goods to the provinces. While the provinces have not been allowed to levy and collect indirect taxes on goods within their geographical boundaries, the federal government has utterly failed to tap the real revenue potential. This failure of FBR adversely affects the provinces. In fiscal year 2012-13 due to a massive revenue shortfall of Rs 441 billion on the part of FBR, all four provinces could not get the promised amounts from the 7th NFC Award. FBRs revenues shortfalls due to exemptions and concessions through statutory regulatory orders (SROs) jeopardise revenue collection projections given in the budget and give rise to higher fiscal deficit than claimed every year in official documents. This is a blatant violation of Articles 77 and 162 of the Constitution as held by Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) [Para20 &29]. FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential, which is not less than Rs 8 trillion-see the working in our last weeks column. Shahid Javed Burki in Provincial Rights and Responsibilities [Journal of Economics, September 2010] opines that about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy. He further says that some 15 million can be regarded as rich, another 25 million as belonging to the upper middle class, another 65 million fall in the category of the lower middle class; the remaining 65 million are desperately poor. The tax system is not taxing the rich 15 million and income distribution disparities are rising widely. The track record of FBR shows a remote possibility of collecting even Rs 8 trillion in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tangle will continue unchecked and further taxation through local governments, when elected, would not serve any useful purpose-there will be no relief to the people. Rather tax burden accompanied by procedural complications will increase manifold. Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, Parliament will have to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens. (The writers, tax lawyers and partners in law firm, HUZAIMA & IKRAM, are Adjunct Faculty at Lahore University of Management Sciences)
Posted on: Fri, 10 Oct 2014 09:58:09 +0000
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