OPINION
Budget expectations are not about what concessions the government would give to the trade and industry but about the additional levies the government might impose on businesses to boost revenues.
Revenue in Pakistan is a hanging fruit that no government dares to benefit from. Many real estates and high rise buildings challenge the tax collectors to catch them. Markets loaded with smuggled goods operate fearlessly as no government official has the courage to ask them for the import invoices or surrender the goods to the state. Parents paying no taxes at all or a meager amount send their children to schools and colleges where the annual fee alone is much higher than the amount on which tax is payable.
The businessmen do not want their accounts to be audited; they are dead against raids in their premises by tax officials. It is not the writ of the government that counts but it is the will of the tax evaders that prevails. Millions of shuttered shopkeepers deposited only Rs1 billion as income tax last year, but they pose as if the country is running only on the taxes that they pay to the exchequer.
Transparency in Pakistan in fact is the main reason for low revenue collection. Tax to GDP ratio in the country has hardly touched 10 percent. In developed economies it is 35-40 percent of GDP; and in economies of Pakistan’s size the average tax to GDP ratio is 15 percent. The government could increase the revenues to Rs4.5 trillion only if we come at par with economies of our size in tax collection. There would be no budget deficit if this target is achieved.
The target can be achieved in one year if the government handles all tax evaders evenly. In fact the revenue generation efforts should start from the top. To start with, wealth, income and assets of all the public office holders and representatives should be audited. They should be made to deposit their due taxes. The law bars loan defaulters from contesting elections, but it is silent on those that do not pay taxes. Tax evaders should have no right to represent the people of Pakistan. Once the people’s representatives start paying their actual taxes they would not resist collecting taxes from other evaders.
This government has brought some stability in the economy taking some difficult steps against the wishes of vested interests. It has generated most of the revenues through increase in tax rates. It would be prudent if tax rates are not enhanced this year but measures are taken to apprehend tax evaders, under filers and unethical importers that pay nominal government levies through under invoicing, but charge consumers as if the full levies have been paid. Same is the case with those industries that avoid sales tax on part of the goods they produce but charge it from the consumers. If a beverage manufacturer, cement producer or sugar mill indulges in partly selling their produce without paying sales tax but do pay income tax; a deep analysis would reveal that the income tax that they pay is less than the amount they cheated by under filing their production.
The finance minister should review additional import duties levied last year across the board that also included some raw materials. The government should also do away with undue protection of domestic industries. The maximum protection to the domestic industry should not be more than five percent. Otherwise the domestic producers take advantage of protection and fix prices that are slightly lower than the cost of a duty paid product. Since domestic industries have captive local consumers that pay them higher than the global prices they are not interested in exports. Higher profits ultimately make them lethargic and inefficient.
The agricultural sector needs special attention in the coming budget. Pakistan’s GDP growth would have crossed 5.5 percent of the GDP had the agriculture growth been on target. This year it was in negative. Low global commodity prices did impact the agriculture income but more than that the high sales tax on agriculture inputs squeezed farmers’ income. It has been proved that support price does not protect the farmers from falling prices.
Instead of giving subsidies, the government should withdraw sales tax on agricultural inputs like fertiliser and pesticides. The sales tax on tractors should either be withdrawn or reduced. Import duty and sales tax on soybean meal should be withdrawn.
Administrative barriers are seen as one reason for large informal sectors in Pakistan, since the costs of formalising are higher than the gain in productivity from entering the formal sector.
Reducing these barriers does not require rocket science. Strategies to remedy administrative barriers have been developed in many countries, including the use of transparency measures, regulatory reforms, efficiency reforms such as one-stop shops, and increasing use of e-government and information technology solutions. These successful strategies should be applied in Pakistan. The government planners should look at specialised solutions and principles which are now well accepted in specific areas, such as customs reforms and trade facilitation.
Pakistan is perhaps the only country that rewards tax evaders by drastically reducing taxes to whiten their black money while honest tax payers pay not only full taxes but are penalised for delayed payments. Government specifically rewards smugglers, tax evaders, and power defaulters by drastically reducing the tax rates with the stated aim of bringing them into tax net. These malpractices continue even after availing tax amnesty schemes, as smugglers and tax evaders continue accumulating black money. They then wait for the next tax amnesty scheme that successive governments have been offering since the last three decades.
It is extremely difficult in Pakistan to speed up tax and administrative reforms, as influential vested interests make sure that the reforms are not introduced; and if introduced there should be loopholes that enable them to continue their malpractices. They are aided in this regard by those bureaucrats that are partners in their illegal wealth accumulation. Bureaucrats in fact are the main obstacles to reform.
In their attempt to affect public policy, genuine organisations should try to influence government personnel, as well as legislators. They should speak up and raise their voice louder to have a say in setting the reform agenda. In India, the reforms were spearheaded by the businessmen so vocally that their bureaucracy had to back away. Only genuine and transparent reforms can attract foreign investors, as happened in India.
Structural reforms are important for elevating the potential of the economy, as it would raise the degree of competition and level of participation of different segments of the society. Required job creation is only possible through structural reforms and not from routine budgetary measures to increase revenues from the existing tax base.
At the current level of revenue collection, even if it is increased by 20-25 percent, the government would still be short of cash by over a trillion rupees. This money would have to be borrowed. It would be prudent if the government goes for long term borrowing. Otherwise it would be scrambling year after year to service the short term debt by borrowing more.
The economic planners would also have to factor in the uncertainties that could be created by the policies of other economies and volatile international markets. The impact could be largely reduced with strong and transparent policies. Experiences in some countries show that low interest rates lead to high savings instead of pushing investment.
The writer is a staff member
