Tuesday July 23, 2024

Economists urge govt to implement key structural reforms

14 points need to be implemented to fix woes faced by country’s economy

By Mehtab Haider
June 17, 2024
People buy pulses and grains at a wholesale market. — AFP/File
People buy pulses and grains at a wholesale market. — AFP/File

ISLAMABAD: Leading economists have asked the government to implement key structural reforms, as the room for window-dressing and patchwork was diminishing rapidly.

Yousuf Nazar, a UK-based economist, told The News on Sunday that Pakistan needs tough and competent leadership. He suggested 14 points that need to be implemented to fix the woes faced by the country’s economy.

It includes 1. cutting interest rates by 300 basis points. This will save over a trillion rupees. 2. Restructure domestic debt to cut coupon rates and extend tenors. This will save another trillion rupees. Suspend capacity payments on IPPs and request restructuring. Impress upon China that the terms of the current agreements are unsustainable. 3. Cut the government expenditures across the board by 20pc and reduce the number of people employed by the federal government by 20pc as well. 4. Link the financial system to the extent of information on interest paid to the CNIC and increase the withholding tax to 25pc where the amount of gross interest paid exceeds Rs300k per year. Use this information to ask all depositor holders whose interest earnings exceed Rs100k per year by email and mobile phone number. This can be done easily. The distinction between filers and non-filers must be abolished. 5. Withdraw increases in taxes on salaries and new taxes on stationery, pencils, books, pulses, milk, other grocery items, etc. 6. Exempt all publicly listed information technology companies from income tax for 10 years. Cut the highest income tax rate for publicly listed companies (except financial institutions) to 15pc. 7. Impose non-utilisation excise duty on holdings of more than one plot by a family (husband, wives, children under 25). Sale of any plot or house should be subject to capital gains tax at market values determined by an independent agency other than the FBR. 8. Reverse tax measures relating to exporters. (9). Cancel all development expenditures allocated to members of the parliament. 10. Reduce compensation and other facilities paid to members of parliament/Senate by 30pc. 11. Introduce a flat import duty of zero or 10pc on all imports. Zero duty on raw materials and intermediate products and 10pc on all others. 12. Lift all restrictions on the import or export of (agricultural) crops. 13. Deregulate prices of petroleum products. 14. Ban allotment of land for sale or lease for housing societies, government, clubs, public servants, land developers, etc., except through public auctions.

Dr Khaqan Najeeb, former adviser, Ministry of Finance, said the government aims to increase tax revenues by 38pc or Rs3,570 billion in fiscal year 2025. This includes new taxation of Rs1,761 billion, collect another Rs300 billion-plus through tax compliance and sorting stuck-up court cases and let the rest of the amount flow through autonomous growth.

Dr Khaqan explained that those familiar with the IMF pronouncements know that authorities have tried to be in alignment with the thoughts put forward by the Fund. The higher tax rates for non-filers are intended to push voluntary compliance and, if backed by enforcement measures, will likely help increase the tax base. Moreover, restructuring and simplification of taxation on immovable properties and capital gains on securities attempts to refine revenue flows.

The current regime for exporters considers a 1pc tax on their export proceeds as a final tax liability. Based on the principle of horizontal equity, all incomes should be treated equally. Under the budget, it is proposed that income from exports be subjected to normal rates with one per cent tax collection on their export proceeds be treated as minimum tax. Principally this is a move in the right direction and with consultations may be phased into the system. Innovative new businesses, start-ups can always have performance linked indicators with a supportive regime.

Changes in the personal income tax, both on the salaried and non-salaried individuals, have put a burden on them at a time of high inflation and reduce spending money. High taxes on AOPs may be reconsidered as it may deter the formalisation of the economy.

He felt that new direct taxes of this magnitude are never easy to do in a country with a weak tax culture, and thus sales tax exemptions many of which may be inflationary along with excise on several items have been removed. The government, before finalising the proposals, may analyse the impact of sales tax on essentials and health items to see if some of the sales tax measures may be reconsidered. In general, efforts to streamline regulations and extra tax on traders may be a good move but beyond voluntary compliance the state has to ensure taxation based on horizontal equity in areas of trade, agriculture income tax, and property. The point of engagement with the provinces may need to be expedited in this regard.