The economic indicators are worsening, and the government is eyeing debts from international donors and financial markets to overcome its fiscal difficulties. This strategy is unlikely to work effectively.

The solution lies in structural changes in the present taxation and fiscal system which suffers from a large gap between revenue and expenditure. The government’s focus is on the revenue generation only. It needs to look into the surging expenditures side.

The fiscal difficulties can be resolved through mobilising resources with a strong political will. The government has to identify loopholes and inconsistencies in the taxation system and the reason for the high level of reluctance in society to pay taxes. The issue may be taken up on two fronts.

First, the most important aspect of the issue is to scrutinise expenditure policy.

The government is capable to generate revenue required by it as the tax collection target has hit $1trillion now. But the fiscal crisis has worsened and it has not helped break the begging bowl.

Official figures indicate that the debt servicing shared 37 per cent of the total expenditures in 2007-08 and has been budgeted higher at 38 per cent for 2008-09.

The high and rising external debts are serious constraints on development, restrict growth and poverty reduction.

Further, the debt must be utilised effectively and productively. This is not the case. The government spent less at 21 per cent on the Public Sector Development Programme in 2007-08 compared to debt-servicing at 37 per cent. Health and education have been very low priority sectors.

The funds borrowed for development programmes are often utilised for current, mostly unproductive expenditure.

To resolve the crisis, fiscal deficit should be reduced, export promotion measures need to be undertaken and a business-friendly environment be created. Given the present policy environment, many industrialists have turned to trading or even speculative activities in stocks, commodities and real estate.

Besides, the flight of capital is also visible, leading to further depreciation of the rupee. The government should provide infrastructure to the industries, especially power to boost industrial production.

The issue of fiscal crisis is so deep that it cannot be resolved easily and it requires revolutionary steps for revenue generation by improving the taxation system. First, by streamlining the tax administration and then restructuring of the tax policy.

The amnesty schemes for whitening of black money announced by the successive governments since 1958 including the present one make the efficiency of tax administration questionable. These schemes reflect leakages in the tax collection system such as weak or inefficient tax collection machinery, a flaw or improper enforcement of tax laws or presence of the discretionary powers of tax officials in tax statute which pave way to tax evasion.

The imbalances in the present tax system are basically responsible for generating tax evasion.

Further, there is a need to restructure tax policy. The present tax policy is based on taxing those who pay taxes without giving any benefit to them.

Tax defaulters are given tax incentives through amnesty schemes whereas the honest tax payers are loaded with burden of higher and higher taxes in every budget. The burden of the income tax is unevenly distributed. Just 1-2 per cent of the total population of the 160 million is in the tax net.

The successive governments have failed to broaden the tax net as they lacked political will to take measures which could bring all categories of taxable incomes into the ambit of tax net. The present tax policy is anti-growth and anti-poor. It passes on most of the tax burden to middle and lower income classes. It hurts the genuine taxpayers and also is a major cause of tax evasion.

The present tax policy lacks a level playing field. The onus of increasing revenue to meet budget deficit falls on well-documented corporate sector that has to forgo 35 per cent of income earned and the salaried class who are subject to deduction of tax at source. The common man suffers heavy indirect taxes that are universally believed to be regressive in nature.

Revolutionary steps are required for plugging loopholes in taxation regime, broadening the tax net encompassing more sectors of the economy for revenue generation, bring all the sources of income under tax net, increase the component of direct tax on higher income groups and eliminate the exemptions from tax.

The Chairman of Federal Board of Revenue (FBR) is in search of grey areas for taxation. CBR has undertaken a detailed sectoral analysis and has identified the mismatch between sectors whose contribution to the GDP is significant but not in taxes.

He assured that the taxation policy in coming years will focus on those areas which have considerable tax potential. When this materialises is to be seen.

There is a very big segment of people with enormous wealth and lucrative occupations such as state functionaries, agriculturists and investors in real estate and stock market who are almost out of the tax net. Everyone should pay his due share in taxes for economic development.

Agricultural contributes nearly 21 per cent to the GDP, but its contribution in taxes is negligible. It is time that this sector be taxed in the same manner as other sectors. The other potential revenue lies in capital gain tax on stocks transactions and real estate deals.

CGT is necessary with a view to discourage speculative and non-productive investment. The Planning Commission has already recommended bringing these sectors into tax net.