Consumer nightmares

LAHORE: Avoiding a sovereign default had been one of the most important task of the coalition government since its inception. After striking a deal with the International Monetary Fund (IMF), the government is now trying to stop the rot impacting consumers.

However, this is proving to be another herculean task.

Looming threat of default has been avoided; but at a huge cost by accepting the IMF conditions. However, there was no way out.

The economic reality demanded a sharp increase in petroleum products rates. In the absence of new avenues of taxes, petroleum levy was an easier way to generate the needed revenues.

Power rates had to be increased as the cost of power distribution was higher than the cost at which power is purchased by the state.

Scarcity of gas had to be compensated through import of highly expensive imported liquid natural gas. Masses would benefit on domestic revenue generation.

The government is week, and cannot go for alternate ways to increase revenues without hurting the consumers. It could not confront influential vested interests that oppose fair taxation.

Moreover, with the ongoing political polarisation in the country, vested interests would have joined hands with the opposition to create more troubles for the rulers.

We have not eradicated inefficiencies in the power sector that cause the cost to rise by 30 percent. This 30 percent is distributed from top to bottom. Improvement in efficiency is not possible through current human resources in the power sector.

The Federal Board of Revenue (FBR) remains the most inefficient tax collector in the region as it has failed to increase the tax to GDP ratio even to the regional average. FBR staff is the largest rent seeker in Pakistan.

Taxes that we have officially imposed must take the tax to GDP ratio to 18 percent from the current 9 percent.

But the tax to GDP ratio remains stationary because revenue officials look the other way on blatant tax evasion against some rent.

FBR has recently been achieving the revenue targets fixed in the federal budgets by the government. But these targets are fixed in consultation with the FBR.

Mere increase in tax collection compared with previous year is a farce. It does not increase the tax to GDP ratio. Revenues continued to increase in recent years because of regular rupee devaluation.

The increases mostly come from imports. The government also imposed regulatory duties on several items in addition to regular duties, and that increased tax collection.

Some additional collections come from special taxes on high earning corporate sectors. Some come from increases in tax rates.

The number of taxpayers remains less than two percent of the population. Traders and transporters account for around 30 percent of the GDP. Tax collection from these segments is less than 6 percent of total revenue collection.

No government dares to force these two segments of the economy to pay taxes according to their income.

These sectors remain undocumented and pay taxes if any on the income that they want to declare. There are no questions asked on their tax returns.

The manufacturing sector pays over 60 percent of tax collected by FBR. As far as income tax is concerned, around 80 percent of the tax comes from 100 companies including commercial banks, state run enterprises, telecom companies and multinational pharmaceutical and food processing companies. Salaried class contributes around 12 percent in the income tax collection.

The remaining 8 percent comes from millions of traders, over 70,000 private limited enterprises and transporters.

Income tax must triple if the genuine income generated by these 8 percent is fully documented. There would then be no need for any IMF programme.