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Repressive taxes, debt trap & fiscal fiasco

Dr. Ikramul Haq

“Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country”—FBR Year Book 2018-19

During the Decade of Democracy [2008-18], the governments of Pakistan People Party and Pakistan Muslim Leagues (Nawaz) showed extreme callousness towards economic well-being of the voters who elected them, especially the less-privileged. Their performance on economic front was abysmal. They resorted to regressive taxes, yet failed to bridge the burgeoning fiscal deficit—it was historic high of 8.9% of GDP for fiscal year 2018-19. A report, issued by the International Monetary Fund (IMF) on says Pakistan’s public debt may surge this year to 78.6% of the total size of GDP.

Historically, our rulers, military and civilian alike, have been seeking bailouts from IMF—many call it death-blows. With every loan came harsh conditions—ostensibly meant for economic revival/reforms by every time left us in deeper quagmire. Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality huge loans were secured for reforming (sic) the tax, banking and justice systems—just to mention a few. Fresh loans were negotiated with renewed enthusiasm by all the successive governments. This undesirable trend continues under the economic ideologues of Pakistan Tehreek-i-Insaf (PTI) who were claiming before coming to power that they would make Pakistan self-reliant and never seek any IMF’s bailout.

Pakistan signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 and got disbursements of about $7.6 billion. It failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. The main responsibility of failure was with then Economic Minister of PPP, Dr. Abdul Hafeez Shaikh, who is now selected by the government of PTI for economic revival. We have secured yet another bailout from IMF of US$ 6 billion. Will Hafeez Shaikh turn his past failures into a success this time?—there is optimism as per Premier Imran Khan and he reassured nation on December 5, 2019 that “good days” are coming and “you have not to worry”[Ghabrana nahi hai]!

The target assigned to FBR for 2018-19 was Rs. 4435 billion [revised downwards to Rs. 4398 billion and then to Rs. 4150 billion].FBR collected merely Rs. 3828.5 billion showing negative growth of 0.4%. This resulted in fiscal deficit of over Rs. 2.5 trillion. PTI Government is not responsible for it—it was due to wrong policies and fiscal mismanagement of economic wizards (sic) of Pakistan Muslim League (Nawaz).

The dismal performance of FBR in 2018-19 adversely affected the provinces, heavily dependent on collection by the Centre from the divisible pool. The size of the cake is so small that even provinces are facing crunch of funds. In these circumstances, we cannot come out of debt trap or spend adequately for the welfare of the people. Provinces are also not ready to collect taxes due from the rich and generate their own resources and initiate fiscal devolution as envisaged under Article 140A of the Constitution. Failure of FBR to meet the assigned target, what to speak of tapping the real tax potential of Rs. 8 trillion, and inability of provinces to raise sufficient resources at their own has created a fiscal fiasco.

The root cause of our economic problems is, however, not tax collection but inefficient and corrupt government apparatus, loss-bearing public sector enterprises, wasteful expenditure, circular debt and blocking of genuine refund by FBR. For progressing, we need to dismantle all elitist structures. Empowerment of masses at grass root level is possible by implementing Article 140A in letter and spirit. This alone can ensure economic prosperity for masses. No other strategy will work, not even the recent US$ 400 million loan from World Bank for Pakistan Raises Revenue  Project.

The biggest challenge faced by FBR is bridging monstrous tax gap. The World Bank in its report, Pakistan Revenue Mobilisation Project, has rightly noted:

Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent respectively). 

It is clear from FBR Year Book 2018-19 that over 70% tax collection came from exorbitant taxes at import stage, withholding tax regime under income tax law and advance tax. This pattern continues under the government of PTI—it has taken no corrective measures till today. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001—after Finance Act, 2019 it contains over 70 withholding tax provisions, many of which constitute minimum tax liability! Is it direct taxation? Even Chairman Shabbar Zaidi will say NO!!

FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], Rs. 39.2 billion [2.7%] received with returns and Rs. 344.2 billion [23.8%] as advance tax. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR—the same trend continues in the first five months of the current fiscal year; even after imposing oppressive taxes, FBR faced shortfall of around Rs. 218 billion.

Inflation in November 2019 skyrocketed at 12.7%—highest during the last nine years. The PTI government took foreign loans of US$ 10.4 billion in its first year in power resultantly Rs. 571.6 billion were consumed by debt servicing alone from July to September 2019—foreign debt servicing was Rs. 77.7 billion, showing an increase of 70%. Circular debt is expected to swell to Rs. 1700 billion by end of this current fiscal year! But we should not panic as Prime Minister assured that all these challenges will be met successfully by his team soon.

Let Prime Minister be informed that the iniquitous prescription of IMF of more taxes, austerity and high interest rate will not solve our problems—this has miserably failed in the past. The only solution is to reduce wasteful expenditure, right-size the monstrous size of the government, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial funds and facilitate rapid economic growth. 

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

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