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January 13, 2018

Collection of direct taxes must to increase fiscal space


January 13, 2018

LAHORE: Manufacturers and service providers recover the extremely high rates of sales tax from the consumers, while the government does not have any fiscal space to provide relief to the common man.

The inability of the government to raise direct taxes is the main hindrance in this regard. The law to nab tax evaders is there, but government lacks the political will to enforce the law.

Pakistan’s fiscal deficit is because of four major issues. The first is the failure of the government to deliver in accordance with the expectation of the people.

The second relates to the inability of the government to implement its plans and policies.

The third is the reluctance of the elite to share the burden of the poor. The elite unfortunately keep self-interest over and above the wellbeing of those living in poverty. They desire and get concessions that further burden the poor.

The most important of all the issues is the scepticism and suspension between the donors and government of Pakistan. The trust deficit between the international donors and the government has turned the loans to Pakistan expensive and subject to quarterly performance targets.

This keeps the government in fire fighting mode. It may provide temporary relief but does not allow any government the opportunity to devise a long term plan.

There is no doubt that there is a huge gap between the commitment and outcome. However, even if the commitments are largely honoured, the country remains under economic stress as is evident from our recent successful completion of the International Monetary fund (IMF) programme.

The government could not put the country on sustained growth path because the requirements of IMF were for short term improvements.

Further assistance from IMF or World Bank depends upon the nod from the United States, which we can get only if we toe the lines dictated by the White House. It seems difficult to get that nod in the current circumstances.

We would have to live within our means to ensure sustained economic growth. This would require squeezing of concessions granted to the elite, withdrawal of these concessions and implementation of policies transparently.

The situation has further deteriorated during the ongoing fiscal making it impossible for the government to provide relief to the poor in the next budget. Though the government claims that fiscal deficit this year would be in the range of five percent of the gross domestic product (GDP), it was not the case.

We must remember that in the last year of the Pakistan Peoples’ Party (PPP) government, the fiscal deficit was around five percent. When the Pakistan Muslim League-Nawaz took over, it paid all the circular debt dues worth Rs500 billion before June 30, 2013, which shot the deficit to 8.2 percent of the GDP.

This time around, the circular debt is above Rs550 billion and this is the PML-N government’s last year of the tenure. Will it clear the circular debt within this fiscal? If so, the fiscal deficit would shoot to around eight percent of the GDP. Inflation too is expected to rise sharply in the short-term because of the decline in rupee value against dollar and the increasing fuel charges. The energy charges are also on the rise.

It is during such situations that the poor need government’s help. With debt servicing charges consuming a major chunk of the budget and very slow increase in revenues, the poor would face an uphill task to make both ends meet.

The dependence on loans, particularly high mark-up domestic and commercial loans, nullifies meek increase in revenues that need to shoot up by 100 percent to ensure sustainable growth. Every economist is convinced that tax potential in Pakistan’s economy is much higher than being collected currently. The government has to muster the will to collect direct taxes to increase revenues.

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