Decisions: The good, the bad, and the dangling

LAHORE: In Pakistan, the state only operates under pressure, be it from the International Monetary Fund (IMF), foreign powers, or public outcry and then there are forces at work that make sure sane decisions are delayed to the point where insane ones become the last resort.

Outcome of the decisions taken under pressure is not always ideal. In some cases, the ownership of decisions lies with foreign donors and the state has to reluctantly comply with it. In others, the state appeases the electorate spending funds by borrowing, again a reluctant decision. It at least proves if compelled the state has the capability to take difficult decisions. It also proves the state has the capacity to implement its will when it desires to.

The question is as to why the governments in Pakistan shy away from taking needed decisions at right time. The IMF for instance as a lender of last resort suggests numerous measures for improving the economy to ensure sustainable growth. It recommends austerity. It demands documentation of economy. It asks the governments to do away with exemption (mostly granted to influential sectors). It wants all incomes to be equally taxed and no difference between business or agricultural income. None of these commandments of IMF are insane. The governments resist tooth and nail to implement these recommendations as they fear backlash from the vested interests.

The purpose of all these recommendations is to increase the revenue generating capacity of the state and to provide level playing field to all. It is not possible to run the government affairs without needed revenues. When a government fails to go for transparent measures the donors instead of recommending various measures give the borrowing government a minimum revenue target.

Instead of direct taxes (that would only increase if the economy is fully documented) the governments in Pakistan resorts to indirect taxation, which treats poor and rich equally. The sales tax is imposed on all consumable goods as consumption tax. This is a norm in other economies as well. But the rate of sales tax is much lower than in Pakistan. Whenever the government desires to increase revenue it increases the rate of sales tax by one percent that adds around Rs100 billion annually in revenue. Then the government also increases the rate of federal excise duty that is ultimately paid by the consumers. Even the income tax is collected indirectly as withholding tax at import and supply stage.

The sales tax and incomes tax are also collected on the utility bills by the state. The indirect income tax is calculated by the businesses as cost and is passed on to the consumers. This way a large segment of documented economy also technically becomes non-taxpayer. Another avenue of revenue generation is the petroleum levy and sales tax on petroleum products. The higher the levy, the higher becomes the cost of transport, power generation and agricultural products.

All these harsh measures to increase revenues indirectly give rise to many irregularities. The importers start imported goods at very low price to lower the impact of import duty and 17 percent sales tax. This marginalises the domestic industries that also pay 17 percent sales tax. To remain in competition the local manufacturers also start under-reporting their production and save the 17 percent sales tax. The power thieves bribe the power sector officials to lower their bills and lower the impact of sales tax and income tax. A vicious cycle thus comes into play. The general public is the main victim of all these practices. They pay the full price of each item, whether imported or locally produced, irrespective whether the sales tax was paid or not.

When the rulers think that the masses are losing patience it comes up with different kinds of public appeasing subsidies. Look at the guts of the government that is not generating enough income to operate government functions but is happily doling out subsidies by piling up more debt. None of those that are part of the government would do anything like that if they were trying to run a private sector enterprise facing the same dilemma. They would cut down expenses and do away with all luxuries in the broader interest of the company.

In Pakistan the government functionaries including the ministers, advisers, special assistants are enjoying a lifestyle that suits the rich in the United States. The Prime Minister, President, Chief Ministers and the Governors live even more luxuriously. The parliamentarians enjoy all perks and salaries that are over hundred times the income of a family living on minimum wage of one bread earner. Our rulers are not prepared for reforms that might annoy the vested interests and pave way for their removal from the office before the completion of their tenure.