When challenges offer opportunities
Huzaima Bukhari & Dr. Ikramul Haq
“It is a narrow mind which cannot look at a subject from various points of view”— George Eliot, Middlemarch
“Five percent of the people think; ten percent of the people think they think; and the other eighty-five percent would rather die than think”—Thomas Edison
The long-delayed and much-needed financial relief and stimulus package in the wake of corona pandemic hitting Pakistan as the rest of the world, announced by the Prime Minister of Pakistan on March 24, 2020 of Rs. 1.2 trillion is found “satisfactory” though “insufficient” by majority of the people. Many experts have expressed their concerns about its implementation and administrative capacity of the State to help the deprived sections of society, particularly the daily wage earners, worst affected due to lock down in various parts of the country as well as slowing down businesses and commercial activities. They question whether Rs. 3000 per month for daily wagers would be sufficient as data suggests that their average family size is larger than others, not less than five in majority cases. Secondly, critics ask where the data lies about each household of daily wagers, what is the definition of this term, as well as what would be an effective delivery mechanism to even disburse this highly inadequate allowance as all of them are not on the radar of Benazir Income Support programme (BISP), renamed as Ehsaas.
The Prime Minister, while talking to a select group of TV anchors, announced numerous “relief” (some dispute that in some cases these are mere routine expenditure) measures that included tax breaks on import of pulses, palm oil and many other items of daily use. However, the high rate of sales tax of 17% on goods of daily use and inputs of exporters has not been reduced.
The two very significant steps announced to bring down the cost-push inflation are reduction of Rs. 15 per litre on petrol and diesel and bringing down of discount rate by State Bank of Pakistan (SBP) to 11% from 12.50%. On March 17, 2020, while all were expecting at least 2% to 3% decrease in discount rate, Monetary Policy Committee (MPC) of SBP cut it only by 75 basis points and said: “As noted in the accompanying Monetary Policy Statement, the dominant development since the last MPC meeting has been the outbreak of the Coronavirus pandemic.” Strangely, they withdrew their “considered view”! The discount rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s window on an overnight basis. Central banks use this monetary policy tool to control money supply in the economy in order to achieve price stability and economic growth targets.
In addition to above, the package included among others, the following actions:
- Facility of payment in three installments (would cost about Rs. 70 billion and Rs. 30 billion respectively for power and gas companies as their cash receipts would face disruptions) by consumers using up to 300 units of electricity that consist of 75% of total consumers; and gas consumers having monthly bill of up to Rs. 2,000.
- FBR is instructed to release Rs.100 billion refunds immediately to improve liquidity crunch faced by exporters. Since they were holding this money unlawfully, so what is the relief?
- The principal and mark-up of loans deferred for certain categories.
- Rs. 100 billion relief will be given to small and medium enterprises and agricultural sector. The government has also decided to defer the principal and interest payments by these sectors.
- Rs.150 billion for providing Rs. 3,000 monthly help to daily wagers by the Centre with provinces being asked to expand coverage of the programme to maximum beneficiaries. According to Special Assistant to Prime Minister, Dr Sania Nishtar, 10 million families will be provided with cash assistance. She elaborated that each family will get Rs.12,000 over a period of four months. Half of them will be new additions to BISP (now called Ehsaas).
- The government has increased additional allocation of Rs.50 billion for Utility Stores Corporation (USC) so that provision of essential food items at affordable prices can be ensured.
- Allocation of Rs. 280 billion for procurement of 8 million tons of wheat to financially help/provide cash to farmers. It is routine annual exercise where provinces take loans from banks to procure wheat from farmers.
- POL prices will be further brought down if the existing trend of reduced prices persists in international market.
- Rs. 50 billion for procurement of medical equipments.
- Rs. 100 billion for emergency relief to spend on sectors where there is increasing requirement in the wake of evolving situation because of outbreak of corona.
- Rs. 25 billion for National Disaster Management Authority (NDMA).
- Special relief package for construction sector will be announced in the next few days aimed at “kick-starting different industries and provide jobs at this difficult times”.
Earlier, Advisor to PM on Commerce, Abdul Razak Dawood, told newsmen that the government would improve liquidity crunch of industrialists and exporters but they would have to give assurances that they would not retrench their workforce. “We are here to provide all kinds of relief provided you do not retrench your workforce” he added. The Prime Minister revealed that “a volunteers’ force will also be formed to assist and guide the people about prevention from corona virus”. He reiterated: “We as a nation will counter the pandemic with unity, rest assured the government is fully concentrating on the economy and food security, and trying its level best to face the endemic.”
Jihad Azour, IMF Director for Middle East, Caucasus and Central Asia, the region to which Pakistan also belongs to, in a blog. has pointed out that “beyond the devastating toll on human health, the pandemic was causing significant economic turmoil in the region through simultaneous shocks—a drop in domestic and external demand, reduction in trade, disruption of production, fall in consumer confidence and tightening of financial conditions. The region’s oil exporters face the additional shock of plummeting oil prices”.
Strangely, no anchor asked the Prime Minster, “Who are responsible for the fiscal woes of Pakistan”? These are mainly on account of the naked defiance of the rich to pay due taxes on their enormous incomes/wealth. According to the Parliamentarian Tax Directory for Year Ended 2013, released by FBR on February 28, 2014, out of 1172 parliamentarians (senators and members of national and provincial assemblies) hardly 10 members paid Income Support levy. This progressive tax remains unpaid till today by 99% parliamentarians and the rich Pakistanis. In the package its payment should have been made mandatory to be utilised for the poorest, hit by corona crisis. Prime Minister and entire Cabinet members should show to the public that they have paid it! Then all the persons liable to pay this levy should deposit it, if not done so far along with default surcharge, for the benefit of the economically distressed, affected by corona virus. While the State kitty is empty, many keen to be recognised as “great philanthropists” with coverage in media, are least concerned to discharge this liability imposed by the State. This is our real dilemma! If all of those liable to pay discharge their tax liability, it will also provide help in determining fair tax base of Pakistan and we can get rid of loans to become self reliant and move towards becoming a welfare state!
The Federal Board of Revenue (FBR) even after lapse of 7 years has failed to collect Income Support Levy from the defaulters—many of whom are criticizing coalition Government of Pakistan Tehreek-i-Insaf (PTI) for going to the International Monetary Fund (IMF) against its avowed policy. Rich businessmen, who are seeking more ‘concessions’ from PTI government, by not paying Income Support Levy meant for helping the economically distressed persons/families, proved their apathy and callousness. This progressive tax was abolished in 2014. Had this not been done, and other progressives taxes were effectively imposed on the rich, we could have avoided the economic crisis of 2018-19 when fiscal deficit reached 8.9% of GDP and in the current year due to corona virus and other factors, it would be even worse. This is our real malady but neither the Prime Minister nor the so-called critical powerful anchors raised it in their discourse as FBR data shows that majority of them [self-styled, all-knowing, reformists and great champions of rule of law] are defaulters in paying Income Support Levy due since 2013, even when the State desperately needs money to help the hapless and poor of this country.
The Prime Minister was not even aware (never told by his economic team) that billions are lying unpaid with rich industrial giants since 2006. Sections 2 and 4 of the Workers Welfare Ordinance, 1971 were amended by the Finance Act of 2006 and subsequently by the Finance Act of 2008 to broaden the scope of the obligation on industrial establishments to contribute towards the Workers’ Welfare Fund, established under section 3 of the Ordinance of 1971. These amendments were declared ultra vires Constitution by Lahore High Court in East Pakistan Chrome Tannery (Pvt.) Ltd v Federation of Pakistan and others (2012) 105 TAX 81 (H.C. Lah.) as it was not tax and could not be passed as Money Bill. This order was endorsed in 2016 by the Supreme Court. The Governments of Pakistan Muslim League (Nawaz) as well as PTI have not taken the requisite initiative through curative amendment (sending it to Senate as well) to come to the rescue of the affected workers.
The Prime Minister now in difficult financial times in consultation with other parties should move a Bill in the light of observations of the Supreme Court and ensure retrieval of lost contributions retrospectively i.e. from 2006. No party in the National Assembly and Senate will oppose this Bill for fear of being branded as anti-labourer. Recovery of money and its settlement between the federal government and provinces under Article 144 of the Constitution will help millions of workers, presently feeling hardships in the wake of lock-down to fight corona outbreak. The money in billions lying with the rich, seeking more benefits, can provide pensions, decent housing, and free education and health facilities for the workers/daily wage earners who have been promised just peanuts under the relief package.
The PTI Government, compelled to borrow more at high interest rate, does not know that billions are lying unpaid with industrial undertakings/employers. Thus issue is not that of funds but getting due taxes/levies from the wealthy and tax evaders and using the same for welfare of the needy and revival of economy. This must have been part of stimulus and relief package during these testing times as these wealthy people otherwise claim to donate money as responsible and pious citizens. The perspective of PM and his team in preparing relief and stimulus package lacked this perspective. Thus, it is not based on understanding the true challenges faced by Pakistan—the long-delayed and much-needed structural reforms and collecting dues from the rich and mighty rather than making them richer through incentives. It is high time that we must reduce income/wealth inequalities. As a nation we can fight corona crisis or any other challenge through this approach, ensuring reforms for growth with equality. However, it can be successful only if comprehensive analysis is made of the whole system that is administrative structure, state of economy, taxpayers’ attitude, proper utilisation of public funds for welfare of all, revenue needs of the country with prudent spending and ending VIP culture, tax-free perks to affluent classes, ending wasteful expenditure, improving social service for all citizens, and other allied matters.
Unfortunately, successive governments—military and civilian alike—have been ignoring or sidetracking fundamental institutional reforms to achieve a higher rate of investment and growth and make the tax system simple, predictable, fair and equitable. It was a golden opportunity for the Government of PTI in 2018 and 2019 to undertake institutional reforms but it also ignored the same like its predecessors. All the governments have failed to tackle the most essential issues of ensuring ease of doing business, reducing cost of doing business, accelerate growth, induce and boost investment, concentrate on human skills, tap resources, reduce inequalities, concentrate on educational and vocational skills that generate employment, and deconstruct the unproductive tax system which imposes high taxes, but yields low revenues. A system that is operationally inefficient, anti-business, complex, time-consuming and costly. Even after imposing all kinds of oppressive taxes and tall claims of “extraordinary” performance, revenues are still below Rs 10 trillion at federal and provincial levels that is our minimum need to survive without borrowing just to meet fiscal/trade deficits. We should have low-rate and long-term project loans for improving physical infrastructure and human capital. Borrowing for meeting budget deficits shows we are not living within our means and pushing the nation into further debt trap, increasing poverty and raising wealth/income inequalities.
Our economy, even before Coronavirus pandemic was moving from stagflation towards recession. The main reason is not the policies of the present coalition Government of PTI alone, but fiscal (mis)management for decades on the part of successive governments, military and civilian alike (see details in our various columns, the latest one, Dealing with debtocracy, Business Recorder, February 14, 2020).
In Pakistan without any exception, all the governments, on the dictates of lenders/donors, especially the IMF and World Bank (WB), have stressed on “more and more taxes” with no concern for providing universal pension, income support, skills and funding for arranging earning apparatus for the unemployed; and other economic/social benefits, like free health and education, decent living and transport as quid pro quo—the principle of tax reciprocity recognised universally but not by our thoughtless, insensitive, incompetent rulers. This aspect has been highlighted by us in many articles in this newspaper, for example in Taxes, prosperity & welfare, Business Recorder, August 9, 2019 and Taxes for welfare, Business Recorder, August 10, 2018. Unfortunately, the PTI coalition Governments in the Centre and provinces have failed to undertake long-delayed and much-needed structural reforms to end elitist capture and frame policies that protect the deprived sections of the society as well as induce inclusive growth.
In democratic dispensations, tax laws recognise the cost of living either alone or with family—expenses to nurture children are always taken into account. The laws, thus, allow deductions/allowances according to size of family. In Pakistan, successive governments not only deny any such allowance or deduction, but extort advance income tax even from the lower-income earners and their family members having no income on facilities like mobile phones. They even get advance income tax from fee paid to schools beyond certain limit, rather than providing free education to all as fundamental duty under Article 25A of the Constitution. They collect advance income tax from all mobile users even if they have below taxable income or no income. Adding insult to injury, FBR expects them to file tax returns to obtain refund of their withheld money, whereas the cost to expedite it is much more than the amount due and chances of harassment after filing return are obnoxiously high. This is the right time to not only give refunds to exporters but to all those who paid advance income tax on their below taxable incomes. This perspective is totally missing in the relief and stimulus package announced by Prime Minister.
The real issue of Pakistan is appeasing the rich and mighty through exemptions and amnesties, lavish spending on comforts of elites but no social protection for the millions living below the poverty line. No expert hired by WB or IMF has ever highlighted this aspect of our oppressive economic and tax structures/systems. The main incidence of taxes in Pakistan is on the middle-low-income groups, while the beneficiaries of taxpayers’ money are rich members of the militro-judicial-civil complex and public office holders who get enormous tax-free perquisites and benefits. The State, captive in the hands of a few, is facing tremendous challenges on the fiscal front as parasitic elites have failed to deliver even universal entitlements to the have-nots.
In our fiscal woes, there has also been criminal culpability of IMF/WB as well that they did not restrain people like Ishaq Dar, now a fugitive, from raising sales tax rate to the extent of 50% on high speed diesel oil, 30% on kerosene, 29.5% on light diesel oil, 26% on motor spirit excluding HOBC and 24% on HOBC through statutory regulatory orders (SROs)—detailed comments in Constitutional violations in taxation, Business Recorder, October 9, 2015. They knew that such actions not only burden the poor but also constituted open violation of Articles 77 and 162 of the Constitution of Pakistan. In their countries, they talk about “rule of law” and in Pakistan they overlook our rulers’ blatant violations of the supreme law of land with impunity. The Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v. Federation of Pakistan and Others (2013) 108 TAX 1 (S.C.Pak.) held that:
“Parliament/Legislature alone and not the Government/Executive is empowered to levy tax. As far as delegation of such powers to the Government/Executive is concerned, the same is for the purpose of implementation of such laws, which is to be done by framing rules, or issuing notifications or guidelines, depending upon case to case, as we have come across some of the cases noted hereinabove. But in no case, authority to levy tax for the Federation is to be delegated to the Government/Executive. Therefore, arguments so raised by learned counsel have no force and the same are repelled hereby.”
The IMF in its parleys with our negotiation teams had never raised the issue of violation of constitutional provisions and burdening the poor with unprecedented taxes on petroleum products. Why should they? They are mainly concerned with getting their own money back, no matter if it means sucking the poor dry. The fault, of course, mainly lies with our shameless ruling elites, who beg before them, thrive on borrowed funds (mainly through kickbacks in projects) and taxes paid by the masses and live lavishly at home and abroad.
We should set our house in order and stop blaming lenders/donors. An undeniable reality is that the Pakistani nation is the most heavily taxed in the entire region and the citizens get neither education nor health facilities from the State, what to speak of social protections like pension for all, out of taxes paid over the period of time. There is overwhelming reliance on indirect taxation [even under the garb of direct income taxation through presumptive/minimum tax regime on a number of transactions] without evaluating its impact on the economy and life of the less privileged sections of society. The present crisis gives an opportunity to the PTI Government to dismantle elitist structures and follow what is elaborated in detail Need for all-out reforms, Business Recorder, March 20 & 26, 2020 to protect the less-privileged. It is hoped that the Prime Ministers will initiate all these measures in consultation with all provincial governments to make Pakistan a prosperous nation, having socio-economic justice and capacity to counter all negative impacts of pandemics like the corona virus.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)