The federal and provincial governments have forged a National Fiscal Pact involving a detailed 19-point agenda aimed at reinforcing fiscal discipline and promoting collaborative governance across federal and provincial levels.
As per a media report, the agreement, in alignment with the IMF’s conditions under the $7 billion EFF, includes the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan, with Memorandums of Understanding signed over a span from June 27 to July 30 this year.
This fiscal compact is designed to streamline and enhance the efficiency of financial management and public administration across Pakistan. It targets a variety of fiscal responsibilities, ranging from tax reforms to strategic spending adjustments, thereby setting a framework expected to drive economic stability and growth.
Key aspects of the pact include the devolution of certain spending responsibilities from the federal to the provincial governments as per the 18th Amendment. This shift allows provinces to directly manage and fund sectors such as higher education, health, social protection, and infrastructure development.
Provinces are also encouraged to boost their internal revenue generation through more effective collection of sales tax on services, property tax, and agricultural income tax.
Revenue-related directives under the pact stipulate significant reforms:
– The provincial governments are to amend their Agricultural Income Tax (AIT) frameworks to synchronize them with Federal Personal Income (for small farmers) and Corporate Income (Commercial Agriculture) tax regimes by October 2024. Taxation under this new regime will commence on January 1, 2025.
– A transition of the services GST from a positive list to a negative list approach by FY 2025-26 is planned to combat tax evasion effectively.
– Provinces are tasked with developing and implementing a common approach to property taxation and expanding their tax bases in additional revenue areas.
On the expenditure front, the agreement outlines that provinces will assume full financial responsibility for PSDP projects that exclusively benefit their regions.
Additionally, they will contribute to federally supported initiatives like those of the Higher Education Commission (HEC) and aim to increase spending on health and education as a share of GDP.
Governance enhancements include the implementation of the Electronic Pakistan Acquisition and Disposal System (e-PADS), the adoption of green budget tagging by the end of June 2025, and coordination among provincial anti-corruption establishments with national agencies to enforce the national AML/CFT strategy.
Moreover, the pact addresses the need for digital transformation in government transactions and public record-keeping, aiming to facilitate access to credit for underserved segments of the population by promoting the digitalization of government payments.
The Ministry of Finance emphasized that this comprehensive approach, once fully implemented, is expected not only to satisfy the stipulations set by the IMF but also to significantly improve the fiscal management and governance landscape of Pakistan, ensuring greater economic resilience and transparency.
