Taxation matters

With Budget 2017-18 right around the corner, all eyes are focused on what the taxation policy for next year will be. Punjab Chief Minister Shahbaz Sharif has said that the next provincial budget would be pro-people, pro-farmers and pro-industrialists. The magical equilibrium that the CM has promised is rarely achievable. Finance Minister Ishaq Dar has not differed much from this narrative. Such statements are largely made for political purposes. It is the fine print of the country’s taxation policies that will be worth watching more closely. It is easy to make headlines by stating no new taxes have been added, but the reality is that tax collection each year must be increased as an imperative. The federal government has already announced a targeted collection of around R4,000 billion in taxes for next year, almost a 15 percent increase from this year. This increase itself will not be enough to narrow the budget deficit. The additional money will be found by increasing taxes in various sectors.

Stop-gap measures will continue as the government gains favour from one sector while disadvantaging the other. The problem is not the imposition of new taxes, or increasing existing taxes, but that there is a need for structural reform of the tax collection system. This is the crucial issue that no government has tried to address. The current government’s overreliance on withholding taxes has come under severe criticism. No functional tax system can decide that it will put the collection of income taxes on the backburner. The announcement of new taxation measures on previously untaxed sectors is quickly followed by the announcement of tax amnesty schemes, which meet the fate expected of them. This year, it was the property sector; last year, it was the retail sector. The government might find a new sector for next year. What we do know is that Chinese investments in Pakistan are set to get tax-exemptions, which should raise an eyebrow or two. Foreign investment and foreign goods entering a country are high-tax items, whatever the exceptional nature of CPEC might be. The super-tax imposed on foreign companies has also come under criticism for making investors pay additional amounts for security. Another major concern the government needs to address is that there will be no mini-budget in the middle of the next financial year. Poor fiscal planning has been confirmed in each of the last two years by the announcement of new taxation measures in the middle of the fiscal year. Can we dare hope to see more measures geared towards structural reform in the coming budget?