The first quarter of the ongoing fiscal year will paint a pretty decent picture of whether or not the government is on track to achieving its ambitious economic targets. Immediate focus should be on how successfully the government is posturing towards freeing desperately needed fiscal space. In it lie answers to several very important questions. For example, if relevant authorities are able to build suitable reserves, they will relieve pressure from the development budget, bank borrowing, private sector crowding out, etc.
Significantly, while the federal machinery goes about revenue collection, which will revolve mainly around expanding the taxpayer base, the performance of the provinces will be crucial in getting the economy back on track. The 18th amendment has granted them much prized autonomy, but now it is up to them to reflect the sense of responsibility expected of them.
So far, the provinces’ share of Pakistan’s tax-to-GDP ratio is an embarrassing 0.5 per cent. In this regard, we lag far behind contemporary emerging economies that have withstood the international recession best. So far, the provinces have developed a reputation of living on federal handouts, with good reason. For the economy to come anywhere near takeoff position, provincial contribution to revenue generation must immediately rise above one per cent, with the aim of elevating it to close to five per cent in the medium term. At present India, Turkey and Brazil have provincial tax-to-GDP ratios of 4-6, 10 and 16 per cent respectively.
The provinces’ most stern test will come on the agriculture tax issue. The finance minister has made it amply clear that constitutionally, the agri tax is provincial domain, and the ministry will only indulge in it if either requested to by provinces, or mandated by two-third parliamentary vote. Since neither is likely in the foreseeable future, it is up to the provinces to implement and collect agriculture tax revenues. So far, all attempts to incorporate this important head in the tax net have been bulldozed, mostly by the very political setup that is charged with implementing it.
The government needs reminding that mere sentiment will neither enable it to meet budgetary targets nor earn public good will. And since the general election will follow next year’s budget presentation, the importance of achieving targets cannot be emphasised enough. Provincial governments will have to muster the political will needed to finally make a meaningful breakthrough on the agriculture tax issue. Till revenues are generated, the exercise is fruitless.
There are also several avenues where government regulation can add to revenue generation. The Capital Value Tax is one example. There are discrepancies in transaction prices because District Court (DC) prices are not properly correlated with market prices. There is a need for an across-the-board adjustment in these figures. They should be revalued dynamically on CPI basis, to bring them more in line with prevailing prices. Presently, DC values reflect but one-fourth of actual prices. Anything sold at higher value than purchase should be taxed on the differential. The provinces will have to ensure spot evaluations to ensure removal of incongruities.
To enable these initiatives, the provinces will have to build significant capacity, which is where they will need substantial federal help. The FBR’s problems are more management-related than infrastructural. As a working model, it provides a good example for the provinces to follow, which have been given autonomy but are still without adequate revenue generation machinery.
For the FBR itself, this year’s assignment is its toughest to date. Though even achieving the targeted 9.3 per cent of GDP is inadequate considering our needs, achieving it will require a thorough overhaul of its administrative and operational procedures. The provinces and the federation will have to complement each other. Failing that, if the system continues to run on the business-as-usual model, the economy can expect to register yet more surprises to the downside.
Again, the budget made clear that the government will rely predominantly on increased tax revenues to meet this year’s targets. Since it fell well short of preceding years’ estimates, it will have to make visible efforts this time around, and it will not be long before results begin to show. It does not reflect too well on the government if it is constantly seen missing targets it sets for itself. It will have to go out of its way to show it has the political will and management abilities to incorporate bold changes. At stake is not just its electoral future, but also the fate of the economy. Inability to increase tax revenues, that too very quickly, will keep the economy locked in debilitating stagflation, making subsequent turnaround much more difficult.
The writer is a former finance minister
