Friday February 23, 2024

Replacing hopium with reality- Part - III

Steps like the FBR’s plans to tax retailers have also helped stabilize the economy

February 02, 2024
This picture shows a general view of the Karachi seaport. — AFP/File
This picture shows a general view of the Karachi seaport. — AFP/File 

Pakistan has a talented workforce that can help the country stay on the path to progress. But policymakers keep holding on to hopium, ignoring the stark realities of the country.

In an article published a few weeks ago, World Bank officials wrote a detailed piece on Pakistan’s economy, highlighting the need to build on the crisis that is providing an opportunity for reforms and redefining operations. They also added that Pakistan can well make the present crisis a turning point.

Indicators suggest that measures taken so far by the SIFC show that the trough might be behind us, much to the disappointment of detractors who were wishing for bankruptcy and chaos.

Steps like the FBR’s plans to tax retailers have also helped stabilize the economy. The FBR itself has undergone various structural changes. In 1944, a revenue division was created under the Ministry of Finance to deal with tax-related matters. Later, the FBR became an attached department of the Ministry of Finance.

After the FBR Act 2007, the tax regulator was authorized to manage all tax laws and was responsible for policymaking, but in 2018, the Ministry of Finance was given powers to draft tax policies to split administration from tax policy decisions. At present, tax policy is with the Revenue Division and the FBR operates independently. But will these changes last only till the IMF dictates?

Pakistan’s salaried class contributed Rs158 billion in the first half of this fiscal year, marking a 38 per cent increase from the previous year. The salaried class now ranks fourth in withholding tax contributors after contractors, bank depositors, and importers.

The question: why are the perks of federal government employees (1.92m) not being taxed? Civil servants are not at a salary disadvantage when compared to their counterparts in the private sector. The total cost of a Grade 21 officer is estimated to be 12 per cent higher than an equivalent locally hired UN officer. Non-monetary benefits are much higher in the public sector than in the private sector, with 80 per cent of the private sector workers having no nonmonetary benefits.

In contrast, almost 80 per cent of public-sector employees have more than three non-salary benefits. The World Bank estimates that public-sector wages in Pakistan are 53 per cent higher when compared to private-sector wages. Policymakers continue to ignore the recommendations and findings of the Pay and Pension Commission.

In his article published in these pages, economist Ammar Habib Khan says, “It is estimated that more than 1.6 million marriages happen in the country … it is estimated that more than Rs110 billion is spent on weddings on an annual basis but no event organizer, hall owners or caterer or jewellery and boutiques pay equivalent tax of industry or salaried individuals.

In 2020, a former federal secretary wrote an opinion piece and said: “This [agricultural] sector is almost one-fifth of the economy (18.9 per cent) and generates more than $60 billion or Rs9 trillion worth of gross income annually.”

An FBR report claims that in the tax year 2018, the exempt dividend paid by the corporate sector from agricultural income was Rs43 billion. Based on the Agricultural Census 2010 by the Pakistan Bureau of Statistics, the report claims: “If statutory slab-wise tax rates are applied on average income per farm for the six categories of farm sizes, the estimated revenue forgone due to this exemption comes to Rs69.5 billion annually.”

In 2019, Awami Workers Party (AWP) leaders published a document on their position on the IMF deal. Titled ‘Economy of Debt: Alternatives to Austerity and Neoliberalism in Pakistan', the document mentions: “Today, a mere 5.0 per cent of large landholders in Pakistan are said to possess a massive 64 per cent of the total farmland, while 65 per cent of small farmers hold only 15 per cent of the land (Nazeer 2015).”

In the same year, during a panel session organized by the UNDP at the Lahore Literary Festival, Dr Pasha, as the lead author of [the] UNDP’s latest National Human Development Report (NHDR) on inequality, talked about the gross disparities present in the country. For example, the agricultural and population census shows that 1.0 per cent of farmers in Pakistan own 22 per cent of all farm area.”

If the agricultural income tax was imposed in accordance with the constitution, provinces could significantly reduce the federation’s overall fiscal deficit besides improving the pathetic tax-to-GDP ratio.

On the one hand, we want to be an FDI destination, and on the other, the PTI signals the potential withdrawal of support from the IMF loan programme over political disagreements.

The Annual Quality of Democracy Report 2023 states in its executive summary, “As an organisation consisting of Pakistanis for the betterment of Pakistan’s democracy, PILDAT has advised the decision-makers consistently to do the right thing by the constitution for over two decades. Our counsel and our efforts of capacity building and engagement with political parties have been the same”.

Dr Ikramul Haq adds: “As we head into 2024, Pakistan is struggling with a burgeoning fiscal deficit, stagflation, rising unemployment and circular debt in the energy sector. Setting the economy on the path towards prosperity for the common citizen will require systemic reform. Pakistan’s real fiscal problem is reckless borrowing and ruthless spending, pushing the country deeper and deeper into the deadly debt trap.”

Experts believe the solutions lie in lowering taxes, offering incentives, mobilization of funds by provinces, reduction in expenses, and self-reliance. The real test of the new economic team formed after the February 8 elections will be the handling of burgeoning fiscal deficit, historic high inflation, a discount rate of 22 per cent, stagflation, rising unemployment, huge circular debt in the electricity and gas sectors, and continuous funding from taxpayers’ money of inefficient and loss-bearing state-owned enterprises (SOEs).

To be continued...

The writer is an experienced professional who has held leadership positions in various companies and organizations. He can be reached at: