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Punjab: tax reforms with foreign loan!  

Dr. Ikramul Haq

According to a Press report, following in the footsteps of the Federal Government, the Punjab Government has decided to borrow $ 304 million from the World Bank for tax reforms. Earlier, the Federal Government obtained loan of $400 million for Pakistan Raises Revenue (PRR) Project. Such loans, though not at all required, are being taken when debt-to-GDP ratio has reached an alarming level of 87.2% by June 30, 2020—15% increase is by PTI Government in its two years’ tenure which is against the promises of Premier, Imran Khan, during election campaigns that after coming in power, the Government of Pakistan Tehreek-i-Insaf (PTI) would not take foreign loans but would raise revenues with own efforts to the extent of Rs. 8 trillion.

The report says that the Punjab Government “plans to initiate efforts to increase its tax collection by including the potential untapped areas….” It further reveals that “out of the $304 million, the provincial government is keen to get $30 million in grant but terms are not final yet”. According to the report, the Ministry of Planning approved the loan on September 16, 2020. It is also available on the website of World Bank showing disclosure date as September 15, 2020. The report, says: “The Central Development Working Party (CDWP) approved a concept clearance paper for the Punjab Resource Improvement and Digital Effectiveness Programme (PRIDE) worth $304 million (Rs50 billion)”. This huge loan, according to report, is taken to “make taxation more progressive, broaden the tax base, reduce interaction between taxpayers and tax collectors and facilitate taxpayers to improve the ease of doing business”. The proposed paper includes “business process re-engineering, revision, change of rules and regulations, development of comprehensive automated systems, the introduction of e-services and institutional capacity building etc”.

The author of the report has raised a valid objection that “all these functions do not need any foreign money, rather it requires political will to enhance the narrow provincial tax base”. Successive governments have failed to reform tax system. No serious effort has been made by any government, military and civilian alike, to broaden the tax base through lowering of rates and effective enforcement. The decision of PTI Government to take $400 million loan from the World Bank was criticised in ‘Fundamental tax reforms’, Daily Times, March 12, 2019 highlighting that the foreign-funded reforms in the past to fix the country’s ailing tax system miserably failed to achieve the desired results.

It may be recalled that the World Bank in 2004 extended to Pakistan $125.9 million, including IDA credit of $102.9 million and DFID grant of $23 million, for Tax Administration Reform Project (TARP). The objective of TARP was to improve “the integrity and fairness of tax administration by improving organizational efficiency and effectiveness of the revenue administration”. It was a national shame that for improving the integrity and fairness of tax administration, the then government decided to go for such heavy external borrowing.

Shockingly, tax-to-GDP ratio in 2012, the last year of extended World Bank funded TARP, dipped to 8.2% from 10.6% in 2005 when the programme started! The World Bank in its report, “Implementation, Completion and Result Report” on TARP confessed that “the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services”.

In all democratic countries, special house committees are formed by elected parliaments for conducting reform exercises. Here in Pakistan we are doing it through foreign borrowing and execution through bureaucratic structures that are outdated, inefficient, incompetent and shady. The job of legislators, both in centre and provinces, is given to Revenuecracy (a term borrowed from Dr. Pervez Tahir, who coined it in his article: PTI’s budget—the old normal) that itself is the root cause of problem. This is like asking the troublemakers to do trouble-shooting.

It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is $400 million. In the past as well, World Bank, UK’s Department for International Development (DFID), now replaced with Foreign, Commonwealth & Development Office (FCDO) and others gave a lot of money to Pakistan for reforms, yet things have changed for the worse on tax mobilisation front.

The lion’s share of huge funding to the tax reforms programmes of the Federal and Punjab Governments will go in the pockets of so-called foreign experts who have no idea of our mundane realities and rest will be wasted by the inefficient and incompetent workforce we have in tax agencies at all levels.

The World Bank has yet not published any research-based study for improving tax administration at federal and provincial levels in Pakistan and a long-term growth-oriented tax policy so that its critical evaluations can be made. The borrowing of money without first having any credible and pragmatic research and open public debate shows a highly imprudent approach. Before the approval of loan by Planning Ministry, sought by Government of Punjab, there should have been input from local experts in the field. Even no debate was conducted in the Punjab Assembly, let alone seeking approval from House for incurring huge liability of about Rs. 50 billion.

Our tax revenue potential, if monstrous untaxed/informal economy is brought within tax net is not less than Rs. 8 trillion at federal level alone. For collection of taxes to this extent, we need fundamental reforms as highlighted in ‘Fix the fragmented tax system’, Daily Times, April 28, 2019 to widen the existing tax base and present a simple tax system based on equity and fairness and easy to comply. The tax machinery at federal and provincial levels should be completely overhauled, merged into single tax collection body, and exemptions/concessions available to privileged sections should be withdrawn.

For achieving above goals, we do not need any loan from the World Bank or other foreign donors/lenders. If we take money from them, we are bound to follow their conditions, as beggars cannot be choosers. Many local experts can do the reform work either voluntarily or at much less cost than what we intend to waste on foreign consultants at the commands of World Bank and others.

The PTI Government instead of considering and initiating open public debates on the recent studies of Pakistan Institute of Development Studies (PIDE), namely, Taxation and Economic Growth: A Review of Evidence from the Taxation Researchas well as two earlier studies,‘Doing Taxes Better: Simplify, Open & Grow Economyand ‘Growth inclusive tax policy: A reform proposal, quoting  Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute,2016] and suggestions presented by local experts for tax reforms, is borrowing heavily from outside, which is simply shocking. PIDE is prestigious university/think tank working under the Planning Commission and can be assigned the task, for which the PTI-led governments in the Centre and Punjab want to do with loans of millions of dollars.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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