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Budget FY 2022

Taxes, inflation & social welfare

Huzaima Bukhari & Dr. Ikramul Haq

The Federal Board of Revenue (FBR) has achieved a historic milestone of collecting taxes of Rs. 4.17 trillion in the first 11 months of the current fiscal year, for which its top leadership, the entire team at headquarter and officers/staff in the field deserve kudos. This is extraordinary performance, especially during difficult circumstances arising out of complete and partial lockdowns since the outbreak of Covid-19 endemic. However, the real credit goes to taxpayers (majority is not filing returns of income tax and sales tax) as 97% taxes of FBR are collected at import stage, through withholding provisions (over 65 in income tax and sales tax on goods), advance tax and taxes with returns.

According to Prime Minister, Imran Khan, he and his economic team’s prudent policies in handling the deadly waves of covid-19 pandemic have started showing the beneficial results. According to him, there are undeniable facts confirming that at the end of the current fiscal year, the GDP growth rate will be not less than 4 percent, even more than originally expected. This is an appreciable achievement! However, at the same time, the fact remains that there is high inflation, especially of daily food items used by the common citizens, rising unemployment and continuous decrease in purchasing power due to double-digit inflation. The poor and middle-income earners are facing great financial difficulties.

According to a report issued by the Pakistan Bureau of Statistics (PBS) on June 2, 2021 for May 2021, inflation rate in urban areas was 10.8% and in rural areas 10.9%. The food inflation rate in cities increased to 15.3% and in rural areas to 12.8%. In May, chicken prices shot up by 60%, followed by 55% increase in prices of eggs. According to a report: “The food group saw a price increase of 14.8% in May from the same month a year ago. Within the food group, prices of non-perishable food items rose 18.2% on an annualised basis. The inflation rate for the housing, water, electricity, gas and fuel group—having one-fourth weight in the basket—increased to 8.4% last month”.

The most worrisome aspect is deteriorating food security as highlighted in a joint study prepared by the Ministry of Planning and PBS, ‘Special Survey on Evaluating the Impact of COVID-19 On Wellbeing of People. Itnotes: Although Pakistan is food surplus country and a major producer of wheat but still food insecurity is a big issue in Pakistan. Women and children in Pakistan are mostly affected by malnutrition and only 15 percent of children are consuming minimally accepted diet… Severe Food insecurity is higher in urban areas with 13 percent as compared to rural areas with 8 percent. Moderate Food Insecurity is also higher in urban areas with 33 percent than in rural areas with 30 percent”.

The Prime Minister and his Cabinet, while rightly taking credit of improvement in many areas of economy must also consider the issue of high food inflation and food insecurity highlighted in above official study. The coalition governments of Pakistan Tehreek-i-Insaf (PTI) in centre and in three provinces have failed to bring down the prices of essential food items. The growers and end users are suffering but the middlemen and those with money power (cartels) are taking benefit of the situation and tall claims of the federal and provincial coalition PTI governments of taking them to task have so far proved unsuccessful.

Institutions like, Competition Commission of Pakistan (CCP) and Federal Investigation Agency (FIA) have initiated many inquiries. The FIA even filed many cases, but failed to prosecute what Prime Minister calls “mafias” and “cartels” having vested interests to destabilise his government. According to a report, “CCP has issued show cause notices to 19 feed companies for cartelisation and a collective increase in feed prices, which resulted in an increase in the prices of chicken and eggs”. It is highly lamentable that people with money power are exploiting the financially vulnerable classes by criminal activities of hoarding of essential; commodities like wheat, sugar and now even in poultry industry.

It is time that all political parties, despite having perpetual antagonism, must engage and unite in refusing to tolerate such criminals in their parties as they are playing with the future of this country. There must also be a consensus on one-point agenda that whosoever may be in power, the top most agenda should be welfare of masses through equitable, higher and sustainable growth to provide employment to huge youth bulge for which 2.5 million jobs are required every year. They are the future of this country.             

In the coming budget, expected on June 11, 2021, the main emphasis should be on achieving higher growth and moving towards welfare state. These goals cannot be met under the existing oppressive tax system. The direct tax collection at federal level (see page 70 & 71 of PIDE Reform Agenda for Accelerated and Sustained Growth  (https://pide.org.pk/Research/PIDE-Reform-Agenda-Report.pdf) is only 3.7% of the GDP. This proves beyond any doubt that the poor and the less-privileged segments of society are subjected to oppressive taxation while the rich are contributing negligibly. What makes the situation more painful is the fact that money collected as revenue is used less for the welfare of public and more to finance the luxuries and benefits of elites—militro-judicial-civil complex, businessmen-turned-politicians and absentee landowners in power. The elites enjoy tax-free perquisites, benefits, palatial residences, free utilities, army of servants etc and then also get expensive plots at prime locations either free or at concessional rates. The way our governments—military and civilian alike—have been wasting and plundering taxpayers’ money is not a secret. Since independence, no serious effort has ever been made to undertake institutional reforms to democratise our mighty militro-judicial-civil apparatus that has miserably failed to deliver.

Pakistan has failed to achieve durable political stabilisation and sustainable economic growth due to perpetual failure of the ruling elites. The twin menace of burgeoning debt and monstrous fiscal deficit testify to continuous fiscal mismanagement.

The country is surviving on bailouts from IMF due to perpetual failure of the ruling elite to tax the rich and mighty and slashing enormous expenditure that are over 21% of GDP. Revenues worth trillions of rupees have been sacrificed by governments—civil and military alike—since 1977 extending unprecedented tax amnesties, money-whitening schemes, exemptions and concessions to the privileged classes.

The dire need in today’s Pakistan is to tap the real tax potential and make the country a self-reliant economy, stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, restructure or privatise loss-bearing government-owned corporations, accelerate industrialisation and increase productivity, improve agricultural sector, reduce inequalities through a policy of redistribution of income and wealth. It is high time that professionals and civil society campaign against oppressive, anti-people tax policies and relentlessly raise their voice for establishment of an egalitarian state.

We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and grass root spending at local government level. Solutions are available. The only thing we require is to convince our political parties to make them part of their manifestos. Elections should be fought on these issues and with the pledge that on winning, they would be tackled and solved. 

Implementation of Article 140A of the Constitution is necessary. Political, administrative and fiscal decentralisation is the key to democratisation of institutions. This is the most neglected area in Pakistan. Article 140A requires that decision-making power should be with the elected local governments. We need to establish effective local governments for providing housing, solid waste management, maintenance of roads, streets, water supply and sewerage, land-use planning and all matters relating to the residents’ free-time recreation etc. Municipalities working on the principle of self-governance alone can ensure that revenues are spent exclusively for the benefit of public and not the powerful segments of society alone. 

In the coming budget, the Parliament should unanimously pass Taxpayers’ Bill of Rights (see draft at https://primeinstitute.org/draft-taxpayersbill-of-rights/) assuring that money collected from citizens would be spent prudently on public welfare and not for the benefit of the privileged. Lowering of tax rate and broadening of tax base are keys to resource mobilisation as already elaborated in Restructuring of tax system: a blueprint, Business Recorder, May 7, 2021.  


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)

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