Pakistan’s taxation and economic challenges and implications for the common people

Pakistan has recently reached an agreement with the International Monetary Fund (IMF) officials to impose Rs. 215 billion in taxes. This move aims to complete the 9th review under the Extended Fund Facility (EFF) and address the country’s external financing gap, which has led to an increased tax burden on the salaried class. While the government has introduced new tax measures to revive the stalled $6.5 billion programme, it raises concerns about the impact on citizens, especially considering the prevailing backbreaking inflation.

Historically, when the interest rate was 12%, the inflation rate stood at 14%. However, the current situation reveals a troubling trend. With the interest rate now at 22%, the inflation rate has skyrocketed to 38%. The intent behind raising interest rates is to control inflation, but it appears that in the current situation, the two have a directly proportional relationship. This raises doubts about the feasibility of conducting business when the interest rate stands at 22% but the profit gains are a mere 5%. Such conditions are not conducive to a healthy business environment.

While wholesale and retail sectors enjoy more freedom, crucial industries like textiles remain deprived of support. It seems that we prioritize nurturing a loan-dependent mindset rather than promoting exports. Under the Finance Bill 2023, all subsidies provided to the textile sector have been abolished. Furthermore, the sales tax refund, which should be returned within 72 hours, often exceeds a period of 250 days, causing liquidity problems for exporters. Neglecting the textile industry, which is the backbone of our economy and contributes significantly to foreign reserves, has far-reaching consequences. Market competitive rates, at the very least, could have been offered under the IMF’s umbrella. Instead, the government appears content with the narrative of “relieving the poor and taxing the rich,” while the salaried class bears an overwhelming burden.

Pakistan’s prosperity relies on increasing exports and establishing equitable tax revenues from the real estate and retail sectors. However, the budget has further burdened the already compliant formal sectors with increased tax obligations. This move will restrict capital formation and hinder growth-oriented initiatives in the manufacturing sector. The tax collection targets seem unrealistic, and the increase in government salaries and pensions will put pressure on the fiscal deficit.

To achieve progress, it is essential for all state institutions to collaborate for the betterment of the nation. In the past, panels consisting of military and political leaderships were formed as coordination forums between civilian and military stakeholders. Initially focused on security planning, these panels have expanded to include other sectors to attract foreign investment and implement the latest technology. The recent agricultural reforms serve as an example. It is crucial to include and expand such forums to other sectors, especially textiles, which are the backbone of our economy. Textiles account for 46% of the total manufacturing sector and employ 40% of the labor force. Prioritizing exports over loans is the sustainable long-term solution for our economy, and concerted efforts should encourage local investors to become exporters.

Both local and foreign investments suffer from a lack of skilled labor. Foreign investors often export services or bring in service providers, while local investors face additional financial strain. Availability of skilled labor would not only facilitate business operations but also save investors time and money. It would create more job opportunities and boost the industry. Taking small steps in the right direction can have a significant impact.

A well-designed strategy is necessary to incorporate new approaches to technology and value addition. Value addition plays a crucial role in increasing the market value of products, an area where we currently lag behind. Bangladesh’s success in the textile industry through value addition serves as an example. To gain a competitive edge in the market, priority must be given to improving value addition. Similarly, more focus should be directed towards transforming agriculture for export purposes. Pakistan ranks 8th in Asia in textile product exports, 4th in cotton production, and 3rd in cotton consumption. These statistics present an opportunity for us to enhance cotton production and quality, while exporting the surplus. Achieving these goals requires collaboration across sectors, with the government’s engagement in the textile industry leading to success in terms of foreign reserves, improved exports, job creation, and the adoption of advanced technology.