All out efforts needed to meet revenue shortfalls
There is huge potential to increase untapped resources and also open new vistas of revenue growth. Various research results on resources potential indicate that revenue can multiply if potential sources are properly harnessed through modern tools of management

By M. Osman Ghani

In a recently held community meeting organised by the Pakistan ambassador in Washington, former World Bank economist and ex-Pakistan finance minister, Shahid Javed Burki reportedly painted a grave economic picture for Pakistan. As per Mr. Burki there was going to be a drastic reduction in the national growth rate - with high inflation, galloping urban unemployment and a sharp increase in poverty. There would be a two-three per cent fall in Pakistan’s rate of economic growth in the current fiscal year. He said Pakistan is the only large Asian economy that is out of step with other Asian economies. While other Asian countries have introduced stimulation packages to generate growth, Pakistan has not yet done any such thing. Pakistan is being advised, in fact, to cut expenditure when it needs to invest in employment generating projects. What Pakistan needs is a fundamental economic restructuring. Mr. Burki found it alarming that six to seven times more was being spent on the non-development sector than on development. According to him immediate action is required to create more employment in urban areas and a more serious view of the situation need to be taken.

While, one may disagree with the views of Mr. Burki on the present economic condition of Pakistan, but there is no room for complacency. Pakistan, with huge population of 170-180 million, ever growing demands of income and employments for its teeming millions of young and educated job seekers, and some new and big expenditure heads, like increasing costs of war on terror, and income support programmes for the penniless and helpless will require huge resources both from the internal and external sources. According to some estimate Pakistan will require hundred of billions of rupees in the next fiscal year to continue the war on terror at its present frequency. The cost to the economy of militancy alone is more than $5 billion a year, with power shortages only adding to the economy’s woes. The external current account deficit, despite the gains from the sharp drop in commodity prices, will be around $10 billion during the out going fiscal year. And if the on-going war on terror escalates into new areas it will need even more funds. On the other hand, Pakistan may continue to suffer due to prevailing global slump and internal uncertainties that may create further slow down in GDP growth, investment, exports and revenue collection in the next fiscal year.

A big positive point for Pakistan is that it has huge potential to increase its untapped resources and also open new vistas of revenue growth. Various research results on resources potential indicate that Pakistan can double its revenue collection if potential sources are properly harnessed through modern tools of management.

To improve its revenue base Pakistan is required to maintain a favourable macroeconomic environment and requires additional resources for investment in physical and social infrastructure and to help improve the living standards of those whose incomes and jobs depend on agriculture. There was never as much urgency as there is now to increase the government revenue and control its expenditure. Major efforts are also required to reduce the fiscal deficit and mobilise domestic resources for sustainable economic growth. At 9.5 per cent, Pakistan’s tax-to-GDP ratio is one of the poorest in the whole region. In emerging economies such as Singapore, Malaysia and Indonesia the ratio between direct taxes and GDP ranges between six to seven per cent, while in Pakistan it has stayed stagnant at around three per cent over the last many years. The country’s tax base has remained narrow due as much to tax exemptions as to large-scale tax evasion in all its varied manifestations, including non-filling and under-filling.

The sub-sectors whose tax contribution does not match with their share in GDP include wholesale and retail sectors, aside from transport and construction industry. Then there is the problem of recovery of outstanding taxes, which can only be tackled, with the help of a task force, whose basic function will essentially involve identification of non-filers and under-filers. Livestock (including poultry industry, animal farming, milk, meat etc) contributes about 50 per cent of the value added in agriculture, although it has virtually no share in taxes. Likewise, the contribution of orchards and horticulture too is negligible. The Federal Board of Revenue (FBR) has proposed to establish a Special Revenue Generation Task Force (RGTF) as a part of its three pronged strategy to improve tax collection in the short-term. The establishment of RGTF is a good initiative that needs to be implemented in letter and spirit.

An efficient resource mobilisation could provide the necessary financing to government to bridge the gap between income and expenditure, if it succeeds plugging in loopholes in the revenue system. The tax evasion in Pakistan is estimated at Rs500 – 600 billion per annum that is almost half of the total tax collection of about Rs1200 billion during the current fiscal year. The untapped amount is almost equivalent to the country’s annual budget deficit.

Tax evasion is a global phenomenon. Tax collection is based on the theory that not many people wish to voluntarily pay taxes. Therefore tax collection system must be developed in such a manner as will ensure flow of taxes into the coffers of the State to enable it to not only meet running expenses but also finance development expenditure. In Pakistan, those who do not pay taxes, enjoy the luxury of liberal exemptions. Easy escape to payment of legitimate and due taxes are some of the major defects of our existing taxation system.

At present, the government faces difficulties as internal financial cushion is not available to finance the operating and development needs. The shortfall in tax collection creates tremendous pressures on the recurring budgets in the shape of debt servicing and cripples economic sovereignty of Pakistan. Therefore, there is a need to properly understand tax evasion dimensions and evolve a sound strategy to tackle it for adding strength to financial frontiers of the country. As a result of persistent efforts made by the Federal Board of Revenue (FBR) some success has been made to increase overall tax collection but a major break through is yet to be made.

Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and Pakistan would not have needed to borrow as much as it has been borrowing now. It is estimated that the impact of the underground economy in Pakistan is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. It is estimated that the underground economy ranges between Rs2.91 trillion and Rs3.34 trillion (54.6 per cent to 62.8 per cent of GDP respectively in 2005 and tax evasion ranged between 5.7 per cent to 6.5 per cent of GDP in 2005). Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend thereafter.

The underground economy (UE) and tax evasion have been a focus of research in Pakistan for many years now. The growing interest in these areas is because of persistent budget deficits resulting from inadequate tax revenues. Lack of information in this regard is often held responsible for distortions in major macroeconomic indicators. In effect, the social-economic policies based on these indicators are made ineffectual. Thus up-to-date estimates of the size and growth of the underground economy are very important. The term underground economy encompasses a vast variety of activities that are not deemed legal by law and one cannot be sure of the exact meaning of the phrase. There are several synonyms of the term underground; for example secondary, hidden, irregular, parallel, unofficial, black etc. Pakistan should also exploit other sources of income like launching various mega projects which are almost ready to kick off. For example the Gwadar Port is not fully operational as yet.

Despite nearly a decade of rhetoric, mega project Gwadar Port is still not linked with the hinterland. It is neither linked with Herat nor Quetta. It does not have yet potable drinking water, and other vital facilities. The manufacturing sector of Pakistan is declining and no transit infrastructure has been developed to establish it as a trade or energy hub in the region. Pakistan remains to be in a quandary as far as hydrocarbons are concerned and no self-sufficiency initiative has been taken to rid it of foreign dependence on edible oil. Despite a billion dollar plus potential, the maritime resources of Pakistan have been continuously ignored.