In the presence of a liberal tax regime coupled with an independent judiciary the volume of litigation has increased and resultantly, more than Rs. 4 trillion tax revenue is stuck in litigation at various appellate fora, says Finance Division.
The Division in its “Medium-Term Budget Strategy Paper 2022-23 – 2024-25” stated that in order to address this problem, the government is considering engaging panels of professionally sound advocates and ‘special prosecutors’ in certain cases with an aim to get the pending issues resolved while protecting the revenue.
The current lack of harmonization of sales tax caused by a collection of sales tax on goods by the federal government and that of sales tax on services by provincial governments has resulted in major costs for businesses in the country. Therefore, the government plans to work with the provincial governments with the aim to harmonize scope, rate, etc., and bring in a system where a single sales tax return could be submitted by businesses.
Amongst the primary objectives of the Medium-Term Fiscal Framework is to facilitate medium-term policy formulation based on reliable projections of revenue and expenditure. It reflects various sources of revenues and heads of expenditures, in view of the historical trends as well as new measures, specific needs, and the government’s strategic priorities in the medium term. The framework also highlights the fiscal balance and primary balance of the federal and provincial governments. In order to project the overall fiscal balance, estimated levels of provincial surpluses have also been worked out.
Pakistan’s gross federal revenues are expected to be at 11 percent of GDP in FY22 and stabilize at around 12 percent of GDP in the medium term. Transfers to provinces are expected to follow the same dynamics assumed in the gross federal revenues.
The cornerstone of the government’s plan is to reduce deficits to restore fiscal sustainability in the medium to long term. The fiscal deficit is the key driver of macroeconomic instability in Pakistan. During the last three years, the fiscal deficit was Rs. 4,000 billion per annum on average.
From FY 2014 to 2018, however, the fiscal deficit was only Rs. 1,671 billion per annum. The higher fiscal deficit not only results in an increase in debt but also puts a strain on the current account balance. The key reason for a high fiscal deficit in the last 4 years has been the decrease in the tax-to-GDP ratio of the country.
In 2017-18, FBR tax-to-GDP ratio was 11.7 percent which decreased to just 8.5 percent in FY 2020-21. On the other hand, there were slippages in expenditure which further exacerbated the fiscal deficit situation in the country.
In view of the foregoing, the key objective of the budget for FY 2022-23 is to reduce the fiscal deficit. This will be done by increasing the tax-to-GDP ratio and curtailing unnecessary expenditure. On the expenditure side, the government will strive to rationalize untargeted subsidies, reduce the losses of public sector enterprises through improved governance, and cut down ostentatious expenditure through an austerity drive.
Budget 2022-23 will aim to move away from untargeted subsidies to create fiscal space to protect the poor from inflation. The CPI inflation during July-Mar FY2022 was recorded at 10.8 percent as against 8.3 percent during the same period last year. The government will take all possible measures to contain the current surge of inflation.
However, given the worldwide environment, bringing current inflation down will require some time and should not come at the cost of a recession. Therefore, the government plans to divert resources from un-targeted subsidies toward the protection of the poor. These subsidies will be tailor-made to provide relief to poor in the difficult time. The government will continue with the social protection programme through greater funding for BISP.
Optimal mobilization of revenue, broadening of the tax base, reduction in exemptions, efficiency in revenue administration. Key strategic priorities of the government include optimal revenue mobilization, broadening of tax base and increase of tax net, reduction in tax expenditure, efficiency in revenue administration, increase in the ratio of direct taxes, and simplification of procedures for facilitation of taxpayers. In view thereof, challenging revenue projections have been worked out for the medium term.
The government will continue the programme for PFM reforms with a view to getting a better value for its expenditure. The government will continue its policy of implementation of the Public Finance Management Act, 2019. In this regard, a new set of Rules and Regulations are being developed.
The expansion of the Treasury Single Account beyond Divisions and Attached Departments will be continued and the effectiveness of result-based budget management will be improved for greater accountability for the public expenditure.
