Pakistan desperately needs new resource mobilisation to meet financial obligations

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Ihtasham ul Haque

PAKISTAN continues to lag behind the regional economies to substantially increase its tax-to-GDP ratio through direct taxes as the government after government preferred to manage resources without streamlining the flawed taxation structure in the country.
The International Monetary Fund (IMF), which always faced criticism for not honestly and professionally gauging the economy, has for the first time talked about the issue by saying that Pakistan’s tax revenue is not responsive to a planned five per cent GDP growth.
In its latest study, the IMF concludes that tax revenue elasticity of GDP estimated in the short-and long- run is slightly above one per cent over the period 1960-2015. It said that corporate tax as well as general sales tax have a higher elasticity and are more responsive to growth while personal income tax is significantly less responsive.
Independent economists do not see any revelation in the Fund’s study as the direct taxes form a small portion of total tax collection while indirect taxes being passed on to the end consumers are hurting more to the poor, though it is intriguing helping the government to generate most of the tax revenue.
It is good to see that the Fund officials are coming out clearly in their latest study about the country’s tax potential for the first time in last three years ($6.67 billion EFF programme period). However, independent economists and noted columnists are unprepared to pardon the Washington based multilateral agency for extending waivers after waivers particularly on weak revenue collection.
They maintain had the Fund officials taken any serious notice of the declining or stagnated revenues, the government would have substantially enhanced them by also taxing the untaxed sectors including income on agriculture and services.
That’s is why economists like Dr Ashfaque Hasan Khan say that EFF was a political programme and not an economic programme which was conceived by the IMF at the behest of the US State Department to protect US interests in the region. In all the 11th reviews, the IMF approved funding line without taking notice of revenue slippages due to which the GDP growth could not significantly be improved. According to Dr Khan, growth rate remained between 3 to 3.4 per cent and not 4.7 per cent as claimed by the Minister for Finance Ishaq Dar.
Who does not know that revenue is one of the major areas that determines GDP growth rate which has not effectively gone into double digit. Credit goes to former President Gen Pervez Musharraf for increasing tax-to-GDP ratio from less than eight per cent to over 11 per cent that almost doubled annual revenue from Rs600 billion to almost 1150 billion in his first two years. When he started taking more interests in political matters to legitimize and prolong his rule, the revenue collection went down significantly.
Is it not a pity that all the new and previous four amnesty schemes failed to increase revenues as people benefited from them to only whiten their money and did not like getting into the formal tax net. Perhaps that is one the reasons that the informal economy or a black economy has turned bigger than the formal economy, making a mockery of the country’s flawed taxation system that warrants overhauling and restructuring of FBR aimed at substantially increasing tax-to-GDP ratio.
The distortions in the system further created problems when the new withholding tax regime marginalized the operations of the commercial banks in terms of managing new resources for the cash starved PML-N government. Latest reports reveal that the amount of transactions out of the banking system have reached from Rs2000 billion to Rs4700 billion which is further feared to be touching Rs5000 billion mark soon. This all is happening due to enforcing 0.6 percent withholding tax that has not been accepted by the trader community which continues to deal in cash rather through banking channels.
Imposition of new withholding tax regime in the current budget was said to be a double edge sword the objective of which was to collect more revenues and at the same time forcing the people to file their income tax returns. But the people feared if they filed their annual income tax returns, the FBR would open up their previous five years cases, forcing them to pay more tax or get away with it by paying illegally to the tax officers as graft to save their skins.
The government’s move to enhance property tax rate, aimed at recovering additional Rs70 billion from the people, seems to have been back fired as the public and the investors went into the wait and see mode forcing the government to reconsider its decision. So far there is no resolution of the problem and according to a Rawalpindi property dealer; the daily transactions have come down from about 90 to 10-15 in Defence Housing Authority (DHA). “Earlier on each transaction the government used to get roughly Rs70,000 and now only a few thousand are going in the national kitty because over 90 per cent sale and purchase has stopped due to new property tax which needs to be reconsidered,” he said.
The buzz word is the documentation of the economy which unfortunately lacks innovation, and cannot achieve its objective unless it is modified and is implemented in letter and spirit. There is no doubt that the government in the current budget proposals increased its reliance on withholding tax to compensate revenue loss arising out of the concessions to the industry and agriculture sector. Originally the government had imposed Rs204 billion new taxes in the 2016-17 budget the next impact of which is likely to be around Rs150 billion after adjustments of tax concessions to the industrial and non–industrial sectors.
The government should have gone for new options and initiatives to enhance its controversial tax-to-GDP ratio by including new untaxed sectors but it unfortunately preferred to go through the easy way to collect Rs3.62 trillion as revenue which is an increase of 16 per cent over the last financial year. The plan also included recovering additional funds through infamous indirect withholding tax.
Turnover tax was also made part of the budget aimed at documenting the economy. Here the government, no doubt, helped the individual by reducing the limit to Rs10 million from the previous Rs50 million to make him pay a minimum tax of one per cent.
Now when the government seems to be agreeing to pursue the growth path over the IMF’s prescribed the so-called fiscal stabilisation, some tax and non-tax incentives were offered to the industrial and agriculture sector in the current budget.
Ironically, the agriculture growth when went 0.3 per cent negative in the history of Pakistan, the government decided to extend some incentives and concessions to small landholders. IMF officials had been asking the government to contain over eight per cent fiscal deficit by adopting a stabilisation path which means no concessions to the industry. This economic philosophy of the IMF, many believed, halted growth without which there cannot be any industrialisation and hence no provisions to offer jobs to the thousands of unemployed educated youth. The finance minister believes that since fiscal deficit has been contained to 3 to 4 per cent of the GDP, growth can now be aggressively pursued.
The million-dollar question, however, is why the present and all previous governments avoided to tax potential sector, mainly the agriculture income. Whenever the issue came in the parliament both the PPP and PML-N opposed it.
Agriculture is 23 per cent of the country’s total $288 billion GDP and avoiding to tax the rich agriculturists is no doubt very sad and criminal. The World Bank and the IMF had been asking the successive governments to recover tax on agriculture income but no heed was paid. This was due to the soft stand by the IFIs and had they linked this issue with their financial assistance, the governments would have listened to them and levied this much wanted tax.
Late Dr Mehboob ul Haq, the internationally-famed Pakistani economist used to say that the landed gentry earns over Rs600 billion annually but does not pay even Rs10 billion as part of their income tax. It’s high time to ponder over the issue by making agriculture a federal subject, which is currently a so-called provincial subject, and as such a big excuse by the Centre not to take up the issue.

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