A crisis of contradictions

August 06, 2020

LAHORE: Economists are at loss how to evaluate the performance of a directionless economic policy. Sometimes it is based on International Monetary Fund dictation, sometimes the direction is...

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LAHORE: Economists are at loss how to evaluate the performance of a directionless economic policy. Sometimes it is based on International Monetary Fund (IMF) dictation, sometimes the direction is populist, and some policies are based on political considerations.

All these policies are contradictory in nature. If government goes by the IMF way it has to make compromises on many political issues (the IMF policies ask for fair taxation, transparency in contracts, and elimination of inefficiencies). Vested interests are badly hurt if actual IMF advice is followed. Removing power sector inefficiencies deprive a large number of beneficiaries of billions of rupees they earn though inefficient system.

The state is so helpless that it cannot even force the power utilities to recover even the billed amount both from private and public sectors.

It is worth noting that private sector dues are higher than the public sector power dues. Influential segments in the society owe these dues and no government including the incumbent dared recover those dues. Ordinary consumers have to pay their bills on time otherwise their connection is cut. Power theft is institutionalised and the bribe collected from the power thieves is distributed from bottom to top to ensure ownership of corrupt practices.

Failure to plug holes in the inefficient power system is costing exchequer dearly. In the same way failure to privatise loss making public sector companies is taxing the ability of the government to accelerate development work. Failure to tax agricultural income and eliminate tax exemptions has hampered the ability of the government to collect direct taxes. The IMF is definitely not pleased with this situation. In order to placate IMF this government tried to increase tax revenue through indirect taxes.

In the last two years it has slapped indirect taxes worth over Rs1,000 billion. It is another matter that even after the collection of these indirect taxes revenues have not increased in past two years.

The revenues are at the same level as they were when this government assumed power. This is because ever since this government came into power the economic growth has not only stalled but reversed.

Our total GDP has in fact declined by over $60 billion to around $270 billion other programs. The total allocations against these public appeasing measures are around Rs300 billion.

This government first burdened the people of Pakistan with additional indirect taxes of Rs1,000 billion and then announced public appeasing measures worth Rs300 billion. It is a well-known fact that indirect taxes are totally paid by the consumers.

The businesses are not impacted by these taxes. They simply add these taxes in their costs (rightly so in case of sales tax and excise) and pass on the impact to the consumers. However the tragedy in this regard is that even the bulk of direct taxes (income tax) is also collected indirectly as withholding tax at import and supply stages. In many cases these taxes are considered as the final liability of the taxpayer.

Now these businesses incorporate the indirect income tax paid by them in their cost and charge the consumers for it. This is criminal because the income tax is the liability of the one who paid it and not the consumer. Secondly this collection of income tax from the consumers unduly inflates the price of the service or item. If the government improves efficiency of tax collecting machinery there would be no need for indirect taxation.

The governments in Pakistan failed to address corruption, inefficiencies and incompetence in governance because instead of confronting the vested interests the governments compromise on transparent strategies for their survival. Moreover the members of every ruling party ensure the appointments of their favorite police officers, sub-divisional officers, and other officials that are involved in public dealing. This way they get undue concessions for their political supporters even if they were involved in criminal act.

This tendency to accede to the wishes of ruling party MNAs and MPAs eliminate the chances of fairness in governance. The income tax officers have vested interest in informal economy because it provides them with opportunity to exhort speed money from tax evaders. The traders remain untamed in the last 33 years and have refused to come under truly documented system by using their shutter power.

All governments in Pakistan are afraid of confronting the traders. The encroachments all over Pakistani markets are patronised by the relevant anti-encroachment staff that get small rental on daily basis from each encroacher. Only those that fail to pay are apprehended.

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