Revenue raising, expenditure must be in conformity with budgetary decisions

At a three-day moot arranged by the Federal Board of Revenue (FBR) on "Tax Policy Options for Pakistan", lots of sensible proposals were made to improve fiscal position of the country. Stressing the need for an increase in revenue generation, Advisor to the Prime Minister on Finance Shaukat Tarin said that such a policy thrust was essential to ensure a sustainable growth.
So far as tax policy was concerned, Pakistan needs to have an equitable, simple and transparent tax system executed in a professional manner. It should also be broad-based and devised in a manner that each and every Pakistani should share the burden instead of burdening some people "who will ultimately find ways of not paying those taxes."
The Advisor admitted that revenue target for the current year was high but added that there were many people in the country who were not paying taxes and if the FBR could tap only 10 to 20 percent of these people, there would be no difficulty in meeting the target.
The country had to move in the direction in which most of the other countries had moved and learn from their experience. Being an autonomous body, the FBR should put in more efforts and a part of the collected amount could be utilised for improving the administration of the department and compensating its employees.
Some of the other speakers also urged upon the need to increase tax revenues. FBR Chairman Ahmad Waqar noted that his department needs to be more vibrant and effective in compliance issues. He also said that there was a consensus for integration of domestic taxes ie GST and income tax and certain other reforms. Ehtisham Ahmad of the IMF observed that revenue generation over the past 20 years was inadequate which led to vulnerability.
Some of the other proposals included excise duty on services, reinforcement of Self Assessment Scheme (SAC) with random audit mechanism and improvement in compliance in corporate income tax. We feel that statements and proposals made by various speakers at the conference are relevant to our situation. The urgency to raise tax revenues in our context is all the more important in view of the recent deteriorating trend in the fiscal balance.
At 7.4 percent of GDP, fiscal deficit during FY08 was much more than the budget target of 4.0 percent and 4.3 percent witnessed in the previous year. Notable was the fact that even revenue balance moved into deficit, reaching 3.4 percent of GDP during FY08 against a budgeted surplus of 1.0 percent of GDP.
This is highly troubling since the FRDL Act 2005 requires the revenue balance to be at least zero, as a percentage of GDP by FY08 and beyond. Deceleration in revenue growth coupled with a strong rise in expenditures caused a serious deterioration in fiscal indicators during FY08.
The situation can only be improved by making concerted efforts to enhance substantially the level of revenues and by taking stringent measures to control expenditures. We are in complete agreement with Shaukat Tarin and other speakers that a higher level of tax revenues needs to be attained and the tax system should be equitable, simple, transparent and broad-based, but the problem is that mere intentions can't translate into concrete actions and produce desired results.
The situation on ground is that tax revenues as a percentage of GDP continue to hover at around nine percent of GDP despite a number of reforms in the FBR as some of the sectors still continue to be outside the tax net. Large-scale tax evasion and existence of a large informal sector are some of the other problems.
Looking at the past experience, we are afraid that observations at the moot would not make much difference for revenue generation at the practical level due to the influence of powerful lobbies that always have a vested interest in maintaining the status quo. A high level of political commitment is needed to effect the necessary change.
A very serious problem with our fiscal policy is that we don't give enough consideration to containment of expenditures which is as important as revenue generation. Every government has its own agenda for poverty alleviation and other expenditures with a view to winning popular support.
For instance, we fully understand and appreciate the fact that Benazir Income Support Fund is targeted at most vulnerable sections of society, but the scope of this programme must not be misunderstood and extended to the purchase of tractors or construction of houses. In the past, schemes like yellow cabs and YIPs have failed miserably and the same experience should not be repeated this time, especially in the absence of any fiscal space.
Also, the country is earning lots of windfall profits by not decreasing the domestic prices of oil in proportion to the continuing reduction in international prices. Such earnings need to be kept in a separate pool to clear the outstanding dues and minimise the size of circular debt. Besides, white elephants such as PIA and railways need to be disciplined to help reduce burden on the exchequer.
These kinds of PSEs are meant to provide public services at a minimum of cost without serving as agencies for employment creation. Bold initiatives, in our view, are needed to be taken in the area of expenditure control even if these are not a requirement under Stand-By Arrangement with the Fund. The government is also required to ensure that revenue raising and expenditure must be in conformity with budgetary decisions.