During 2024, due to structural impediments, lack of infrastructure and trained human resource, incompetence, inefficiencies etc, the Federal Board of Revenue (FBR) and provincial tax agencies have failed to bridge the huge tax gap faced by the country. Making the things worse, the federal government could not reduce the burgeoning debt servicing and wasteful expenses. The fiscal mismanagement of federal and provincial governments since 2008 has been badly affecting the country’s economic landscape, highlighted in various articles.

One of the results of perpetual political instability since April 9, 2022, in the wake of first-ever successful vote of no confidence in the history of Pakistan, is the worst economic crisis in our 77-year of existence. On the one hand, the federal government is trapped in further debt enslavement, and on the other, provinces—heavily dependent on transfers under 7th National Finance Commission (NFC) Award—are getting less than budgeted amounts.

Provinces have also miserably failed to mobilize their own resources by not collecting due agricultural income tax from the rich absentee landowners and failure in imposing progressive taxes assigned/devolved to them in the wake of Constitution (Eighteenth Amendment) Act 2010 became effective on April 19, 2010 after receiving assent of President of Pakistan. Their inaction on this account for over 14 years now is highly lamentable.

In the existing scenario, the government, coming into power after maneuvered results of general elections, held on February 8, 2024, has faced the most daunting challenge on the fiscal front—rebuilding of the ruined economy due to unabated political instability. The process of revival of economy continued throughout 2024.

The success of government policies in 2025 is only possible, if these are formulated and implemented after public debate, aimed at eliciting support of all stakeholders. First of all, we need to determine a right path for restoration of economy and fiscal stabilization, then to move towards an accelerated and higher as well as sustainable growth leading to inclusive development, ultimately achieving the much-desired and long-awaited goal of self-reliance. Unless it is done, we will never be able to come out of debt prison and subjugation of foreign lenders.

The materialisation of dream of self-reliant economy needs political consensus, above party lines, and concentrated efforts with right thinking and effective implementation. The present government successfully completed the  US$3 billion standby arrangement with International Monetary Fund (IMF) with tough conditions, and then negotiated yet another US$7 billion 37-month Extended Fund Facility (EFF) harsher programme.

As expected, it proved to be a very tough call for the incumbent government to manage huge foreign liabilities by improving forex reserves with own resources, not by further loans. The real test of economic team since March 2024 has been handling of burgeoning fiscal deficit, historic high inflation,  stagflation, rising unemployment, huge circular debt in electricity and gas sectors, continuous funding from taxpayers’ money of inefficient and loss-bearing state-owned enterprises (SOEs). In addition, most importantly, how to manage the mounting debt burden and meeting revenue (tax and non-tax) targets fixed for the current fiscal year (FY) 2025.

According to the latest figures released by the SBP, total debt and liabilities as on September 30, 2024 were Rs. 72.13 trillion, out of which foreign debts and liabilities were Rs. 37 trillion.

The impact of reduced policy rate by the State Bank of Pakistan (SBP) from 22% to 13% has started showing positive results for reduction in government’s debt-related liabilities.  During the July-October FY 2025, the mark-up expenditure declined by 5.3 percent. According to a news story: “The government retired Rs2.03 trillion in debt during the first half of the current fiscal year 2024-25, ending December 31, reflecting improved liquidity in the national exchequer…..The debt retirement occurred despite the FBR falling short of its collection target during the first five months of FY25. The government is expected to resort to borrowing in the second half of the fiscal year to cover the shortfall and maintain fiscal discipline”. 

According to the details of federal budget for FY 2025, the debt servicing alone is estimated at Rs 9.775 trillion (Rs 8.7 trillion domestic and Rs 1 trillion foreign), while the defence at Rs 2.12 trillion and pension at Rs. 1014 billion (military Rs. 662 billion and civil Rs. 220 billion). In this way, all estimated expenses of Rs 18.877 trillion will attract further expansive borrowing. Thus, it hardly matters that through oppressive taxes, tyrannical means and huge undue advances, the FBR manages to meet the tax target of Rs. 12.970 trillion, out of which share of provinces is 57.5 percent as per 7th NFC award.   

The above proves beyond any doubt that Pakistan’s real fiscal problem is reckless borrowing and ruthless spending, pushing the country deeper and deeper into the deadly debt trap. The budgets for last many years show grossly understated expenditures and exaggerated income/inflows, deliberately or otherwise, confirming incompetence and/or fraudulent behaviour. 

Pakistan has been facing a formidable challenge in establishing an efficient tax policy framework. Instead of devising a rational tax policy by establishing an independent Board, lowering tax rates, bringing the broadest possible base into tax net through simplification of procedures and incentivizing documentation of the monstrous informal economy, the government on December 18, 2024 tabled in National Assembly the obnoxious anti-people, anti-business and largely unconstitutional Tax Laws (Amendment) Bill, 2024.

As usual, FBR is facing huge shortfall in its half-yearly target as per media reports despite getting huge amount of nearly Rs. 70 billion from banks through a Presidential Ordinance promulgated on December 29, 2024. The overwhelming quantum of taxes collected by FBR is from withholding taxes and advance tax paid by large corporations, owned by the federal and provincial governments, as well as banks and multinational companies. According to a news report of December 31, 2024, “FBR has estimated to collect Rs1225 billion during December 2024 against the assigned target of Rs1373 billion, reflecting a shortfall of around Rs.148 billion”. An earlier report says:

“The government is set to face a major revenue shortfall this month [December 2024] as the collection has so far reached Rs450 billion. Only 10 days are left during which the FBR is required to generate another Rs920 billion to achieve the monthly target.

The FBR has already missed its five-month tax receipt target by Rs341 billion and the shortfall is expected to widen further by the end of December. The IMF will assess December’s tax collection before deciding on bringing a new tax-loaded budget. According to the FBR’s assessment, the sales tax policy measures generated an amount which was Rs85 billion less than the estimate. It was mainly because of weak enforcement and economic slowdown”.

Many writers, institutes and think-tanks like Pakistan Institute of Development Economics (PIDE) and Prime Institute have been highlighting the vices of oppressive and narrow-based taxation in various reports/articles/research papers/books. Viable solutions have also been offered to make it fair and broad-based, but Ministry of Finance, FBR and foreign lenders and donors have never paid any heed.

The following need consideration on macro level:

•       Corporate tax rate should not be more than 20% including super tax etc.
•       Income tax rate should be lowered to maximum 10% with alternate tax of 2% on net wealth exceeding Rs. 100 million, whichever is higher.
•       All individuals should be facilitated to file simple income tax return [no wealth statement]—those earning below taxable limit should be paid income support [negative tax].
•       Single-page return form should be in English/Urdu/all regional languages that can even be submitted through a simple mobile app. Reporting of real income by all will help create data bank at national level of all households. Their earning levels will determine who needs to pay and who should be entitled to social benefits and how to improve social/economic mobility ending poverty trap.
•       The State must end the culture of appeasement by withdrawing all exemptions and concessions to retrieve monstrous tax expenditure of trillions of rupee and in future there should be no immunities and amnesties.
•       The State must end the culture of appeasement—no more amnesties/immunities giving incentives to the dishonest and penalizing the honest. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It will yield much more than target fixed for FBR at Rs. 12.970 trillion.
•       For reducing fiscal deficit to the level of 4% of GDP, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. palatial government houses etc. through public auction and for specific activities to generate employment and boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based and payable with ease.
•       Instead of being overburdened with advance/heavy taxes/duties/other charges businesses should be facilitated by improving ‘Ease of Doing Business’ and reducing ‘Cost of Doing Business’.
•       Tax credits/incentives for investing in human resource development (HDR) and research & development (R&D) to have qualified workforce in all areas—providing employment to all and paying them as ordained in Article 3 of the Constitution.
•       All possible facilities and incentives to all kinds of entrepreneurs/innovators, especially Small & Medium Enterprises (SMEs) to concentrate on innovations, growth and productivity. Banking sector must be proactive in lending to SMEs and big businesses. Banks are overwhelmingly extending loans to the government considering it as a safe bet. Banking laws need to be amended for quick disposal of disputes as done in many countries.
•       Facilities to foreign investors including grant of long-term visas and/or nationality. Many Afghans and Iranians are keen to invest.
•       Central data creation/management of all citizens to determine their economic status. There should be universal pension, social security/food stamps for the needy, at the same time empowering them to unshackle themselves from the trap of poverty.
•       Establishment of National Tax Agency (NTA) and All Pakistan Unified Tax Services having professional expertise in all related fields. NTA would communicate to all citizens what their income/expenditure levels are—it would determine correct tax obligations and bona fide entitlement of social support from the State.
•       National/provincial legislators should impose simple, predictable and low rate taxes—income tax on all incomes including agricultural income, which should be under the exclusive domain of federal government and harmonized sales tax on goods/ services exclusively to the provinces on the basis of goods produced/supplied and services rendered/performed within their territories—it would ensure fiscal consolidation making the country self-reliant.
•       We must abolish  multiple taxes and collect local taxes e.g. property, vehicle taxes etc. to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
•       Allocation of minimum of 4% of GDP for education and additional 2% for R&D by federal and provincial governments.
•       All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.

Shockingly, both IMF and FBR have ignored proposals given in Tax reforms: Agenda for Self-Sustainability for collecting Rs. 30 trillion at federal alone enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens. Failure to undertake fundamental reforms as suggested above is the real problem. The federation can easily collect taxes of Rs. 30 trillion (15% of GDP if informal economy is also included) to create adequate fiscal space to come out of the present economic mess and provide the much-needed and long-delayed benefits/entitlements to all citizens and reliefs to trade and industry.

For achieving the above levels of taxes, our focus should be on rapid/sustainable higher growth that will increase taxes as a byproduct—harsh taxation only hampers expansion and prevents investment in existing and new businesses.

The way forward is determination of fair taxation rights under the Constitution between the federation and federating units need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the federal government.

For example, Balochistan should get “net proceeds” of Excise Duty on natural gas, and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution and which is presently not the case. Their current share in sales tax from 7th NFC Award is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get meagre shares for goods they produce. The same is the case for Sindh. They should even get the right to levy sales tax on goods as was the case at the time of independence.

In view of Article 167(4), the role of National Economic Council (NEC) has become very important though it has yet not been realized by the centre and provinces. Planning in the aftermath of 18th Amendment should be federalized rather than centralized. The 18th Amendment redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’.

Through Article 172(3) the 18th Amendment also confers 50 percent ownership of hydrocarbon petroleum resources on the provinces that needs to be implemented. Earlier the federal government held this subject. Presently, many economists and politicians are arguing that the 18th Amendment and 7th NFC Award are harming fiscal stability of Pakistan. Their argument needs consideration. The issue of 7th NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically and in historic perspective.

The provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling.

After the 18th Amendment, right to levy wealth tax and capital gain tax on immoveable assets, gift tax, inheritance tax etc. is with provinces but they are not ready to levy these on the rich and mighty. This is a common issue both at federal and provincial levels arising from absence of political will to collect income tax from the rich classes—the paltry collection of agricultural income tax—less than Rs. 3 billion by all provinces and the Centre in fiscal year 2023-24—is highly lamentable.

It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. This would help FBR in collecting income tax as per actual potential and the provinces, by levying sales tax on goods in addition to services would generate sufficient funds for their own needs. It will also reduce fiscal deficit at the federal level. This is the only way to achieve fiscal stabilization in Pakistan. However, this can only be achieved if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms.

The FBR and all provincial tax collection agencies, after necessary reforms, should ultimately merge into single National Tax Authority [NTA], manned by members of All Pakistan Unified Tax Service (APUTS). The NTA would collect taxes at all levels to be distributed as per the Constitution to respective entities. It would also disburse benefits like pension, social security, food stamps and income support etc.

The linkage of database of various bodies with NTA (complete digitization) would be a great step towards e-government model that is presently non-existent, but efforts are now being initiated for achieving this goal. The mode and working of NTA can be discussed and finalized under CCI and its control can be placed under (NEC).

It is high time that federal and all provincial governments, including the representatives of Azad Jammu & Kashmir and Gilgit Baltistan, sit together under the umbrella of Inter-Provincial Coordination (IPC) Division. They should discuss the issues of federalization of economic planning that is the command of the Constitution, pool all the available resources under APUTS, and achieve fiscal consolidation to make Pakistan a prosperous country with inclusive development for all citizens and attractive place for investments—internal and external. 

The above should be nation’s resolve for 2025, which can be named “2025: Year of Road to Prosperity”. There has been much talk about ‘charter of economy’ in Pakistan, but none of the political parties and other stakeholders have ever bothered to consider the true spirit of the 18 Amendment even after lapse of more than fourteen years.