The much needed financial relief has arrived for the beleaguered economy of Pakistan and it has given the financial managers of Pakistan a much-needed breathing space. In this context it was recorded that Saudi Arabia and the United Arab Emirates (UAE) have not withdrawn their $2 billion loans that matured last month. Not only that this development has provided Pakistan financial succour but it also strongly indicates the occurrence of a thaw between Pakistan and the leading Gulf monarchies. The relationship between Pakistan and these Gulf states were experiencing tremendous tension owing to various reasons. Some observers consider this development as the proverbial carrot offered by the Biden administration that is planning to revise its Afghanistan policy and may require Pakistan’s active assistance in doing so.
Saudi Arabia has retained the remaining $1 billion cash deposit and this looks to be a major development after the kingdom had already withdrawn $2 billion out of $3 billion loans that the oil-rich Gulf nation had extended in late 2018 to help Islamabad avoid default on international debt repayments. Moreover, it was also confirmed that the UAE has rolled over $1 billion deposit for another year. Significantly, both the loans matured in the fourth week of January and it appeared that they would have to be returned. PTI government had obtained $6.2 billion financial support package from Riyadh in October 2018 and another $6.2 billion had been agreed by the UAE though the UAE subsequently disbursed only $2 billion. The remaining $1 billion of UAE loan would mature in March which could also be rolled over for another year.
However, a certain tension in relations remains as Saudi Arabia did not sign a formal agreement with Pakistan for debt suspension under the G-20 initiative. Pakistan had estimated a $2 billion temporary debt suspension under the first phase, including $615 million to $715 million from Saudi Arabia. However, now it expects $1.7 billion temporary debt relief under the first phase, including $516 million from Saudi Arabia. The club of the world’s richest economies, G-20, had asked the applicant countries to conclude debt suspension agreements by 31 December, 2020 for phase-1. Pakistan has not been making regular debt repayments to Saudi Arabia after the kingdom confirmed in July last year to suspend the bilateral official credit under the G-20 initiative.
The problem is that Pakistan’s debt to GDP ratio has increased to over 87% from 72.5% in 2018, with the result that debt servicing eats up a major chunk of the budget every year. The fiscal operations summary for the July-December 2020 period showed that the federal government had spent Rs.1.5 trillion on debt servicing in just six months. This included Rs.1.36 trillion domestic debt servicing and Rs.118 billion external debt servicing. The Rs.1.5 trillion debt servicing was equal to 66% of the FBR’s tax collection in six months.
Despite being saddled with heavy responsibility of reforming and streamlining the taxation system, the government has made very little progress towards achieving 10 electoral promises about reforming tax system, ending corruption in tax machinery and moving towards more equitable taxation. Over the last two and a half years, out of the 10 promised tax reforms related targets, one has been fully achieved, six targets had been partially achieved, one was less than partially achieved and two remained unattended to. Work in some areas was limited only to the extent of files and there was no progress on the ground. As a sop to the government it was pointed out that two and a half years were not enough to roll out tax reforms in any country, let alone a country like Pakistan that faces various socio-economic challenges.
It may be recollected that the PTI had promised its voters that it would introduce reforms in the Federal Board of Revenue (FBR), widen tax net through a robust tax policy, an efficient tax administration structure and an effective enforcement mechanism. It also undertook to increase tax-to-GDP ratio that remains low at less than 10% – the lowest in the region – despite massive indirect taxes collected by successive governments.
The PTI had also promised to give autonomy to the FBR and in this connection the government separated the FBR’s policy board from its operation. It is now known that the board only exists on paper without clearly specified functions and it has been badly rendered dysfunctional as chairpersons of the FBR had changed five times and the current one was also going to retire in two months.
Another key goal was to shift towards direct taxes as a primary source of tax revenue but no progress was made over the last two and a half years and the share of direct taxes has remained fixed at 38% though the latest figures show that it has lately come down to 36% of the total tax collection. The PTI had also promised to incentivise businesses to be part of the formal economy and in this respect tax amnesty scheme of 2019 was introduced with the aim of documenting the economy. A total of 137,000 people availed themselves of the scheme by offering Rs.70 billion in revenue and legalising Rs.3 trillion worth of undisclosed assets.
The PTI had set the goal of championing sustainable initiatives for reducing taxes on businesses. In this connection, tax payments were made easier by introducing online payment modules for value added tax and corporate income tax and less costly by reducing the corporate income tax rate. The government reduced the number of tax payments from 47 to 34 and the total number of hours required for complying with the tax requirements per year fell from 294 to 283.
Despite tall promises, FBR has missed the deadlines to introduce desired reforms including the single sales tax regime and the target could not be achieved. The only target that has been achieved is to reduce the transaction cost of paying taxes and electronic payment facility for payment of all FBR taxes as well as some provincial taxes has been introduced for convenient and hassle-free payment. There was also a goal to improve the audit by establishing risk engines and smart algorithms to identify potential taxpayers for audit.
The FBR undertook to develop a computer application ‘Taxray’ for a 360-degree view of the taxpayer by linking data directly obtained from the taxpayer with the third-party databanks but the FBR still has not finalised the infrastructure and framework for real time access to information and databases. In this connection it was pointed out that to improve the enforcement, FBR could not make the service providers install an electronic fiscal device (EFD) for real-time monitoring and collection of income tax but it said that the tax authorities had intensified their operation against illicit and smuggled goods and the FBR took action against Benami transactions.
Smuggled goods worth Rs.29 billion were seized in the current year and assets worth Rs.7.4 billion are in the line to be confiscated after the confirmation of orders from the Federal Appellate Tribunal. The PTI had also promised to publish names of non-compliant debtors and pursue large tax evaders, a promise that has not materialised though FBR had sent e-notices to thousands of individuals and businesses in the hope of widening the tax net and it identified 20,000 wealthy non-filers against whom action was underway. TW