Also calls for broadening the tax base, reorienting PSDP to increase allocation for productive sectors, controlling recurrent expenses, reducing number of PSDP projects to ensure timely completion, among other suggestions
The government must make non-filing of tax returns a crime and increase the penalty for tax evasion.
This was stated in Institute for Policy Reforms (IPR)’s proposals for budget 2016-17 issued on Wednesday. The report states that financial constraints restrict the government from providing public service and infrastructure to the people.
“People want jobs, economic activity, and reliable power supply. Everyone knows the reasons for the low tax to GDP ratio. It is now time to take action,” the IPR statement said.
The government has met fiscal challenges successfully, the IPR said, adding that the Federal Board of Revenue (FBR) will most likely achieve this year’s tax collection target. Fiscal deficit also will likely stay within the target of 4.3%. However, the government has yet to introduce structural reforms to stimulate economic activity and investment. It has not addressed the issues of political economy, governance improvement, and productivity enhancement. The external sector remains vulnerable with falling exports and high foreign debt.
The report recommends that though Pakistan’s Extended Fund Facility (EFF) arrangement with the International Monetary Fund (IMF) will end soon, the economy must not lose the stability gained in recent years. At the same time, there should be no new taxes, except to reduce tax expenditure (exemptions) from direct and indirect taxes. Revenue increase must come from broadening the tax base. Current expenditure may stay at the present inflation adjusted level. Growth inducing public investment must increase to enhance productivity. It is necessary to increase the development envelope also for CPEC projects. The government may reorient the Public Sector Development Programme (PSDP) to increase allocation for productive sectors.
The report makes specific recommendations for increase in tax collection. They centre on broadening of tax base and on strengthening compliance. Tax rate is already high in Pakistan. The problem is to make people pay. It is important for government to highlight major delinquent cases, the IPR said. Where necessary, immovable property transactions should require a tax ID. The FBR may integrate its database with other organisations to identify non-filers. Equally, it is necessary to enforce ‘Benami’ accounts restriction on the banks. The report also recommends structural changes in the FBR. There is need to simplify procedures, rationalise systems, and remove distortions. The federal government must impress on the provincial governments to increase revenue from agriculture and urban property taxes.
To build effectiveness in current expenditure, the government must begin to review recurrent expenses, which is about eighty per cent of the budget. Current expenditure receives funding with practically no review. It is critical that expenditures align with the government’s major objectives. Zero-based budgets, especially for the over 100 autonomous organisations and departments in the government, will help determine their contribution. This will enable the government to decide their use and further existence. The government may also consider merger or devolution of some federal ministries. With markup rates low, the government must rationalise debt-servicing expense by increasing share of long-term debt to lock in present low markup rates. Eventually, it must address the issue of unpaid circular debt. It is critical to check revenue leakage from distribution companies (DISCOs). Likewise, public sector enterprises (PSEs) preempt considerable resources. Improvement in their performance is necessary.
For effective development spending, the Planning Commission may prepare annual plans several months before the PSDP. As the roadmap for PSDP, there should be broad consultation on the annual plan with political leadership and other stakeholders. This will reduce top down project selection and create a better connection between strategy and budget. Rather than spread thin limited resources, the Planning Commission must prioritise three or four sectors for funding so that projects do not have a throw forward of more than three years (other than for operational reasons). Reduction in the number of PSDP projects will help with the timely completion of priority projects while staying within the Ministry of Finance (MoF) envelope. To ensure long-term benefits from projects, new approvals must have MoF’s assurance that funds for maintenance will be available.
The report emphasises that budget preparation must not be an exercise to balance receipt with expenses. It must support the country’s development strategy. The budget must meet larger objectives of the economy such as to build competitiveness and alleviate poverty.