Home articles Rethinking revenues

Rethinking revenues

Riaz Missen
THE government is confronting high revenue shortfalls and risks indulging in that pretty old habit of targeting the inelastic demand products ie kitchen items to make up its losses. High taxes on inelastic demand products, most of them being essential goods, cause cut on the purchasing power of people in presence of high inflation and little employment opportunities. Consumers are already on receiving end at a time economy is passing through liberalization phase and subsidies are being gradually withdrawn but regional trade is at halt due to tension with India. Free trade, though subject to regulation, ensures in time supply of quality products when domestic market confronts shortages due to one or other reason. Essential goods becoming costlier consumers opt for low quality and substandard products. Where there is left no option for them, they have to compromise on quality education and healthcare for their children.
Flooding of market with unspecified standards products is gross violation of consumers’ right to quality products. And becomes certain and sure at a time when the regulatory system is almost non-existent and there is no viable mechanism to check smuggling and illicit trade. Though the revenues witnessed growth by four percent during the tenure of Nawaz government but the same can’t be attributed to the efficient working of the federal revenue body. Removal of some subsidies and concessions to certain industries and a curb on SRO culture had done the wonders. Additionally, a new source of revenue was opened up as the Health Ministry pressed on the revenue authorities for the implementation of the FCTC (Framework Convention on Tobacco Control) recommendation that Federal Excise Duty (FED) on tobacco industry be increased gradually so as to discourage smoking among youth.
The more the FBR sticks to this habitual course, the more it becomes vulnerable to losing sustainable sources of revenues. And it does not need a mega science to understand the connection between such an ill-advised policy and the unwanted outcomes. Subjecting inelastic demand products to heavy taxation disturbs the budgetary equation of consumers. Their looking around for alternates encourages production of counterfeit goods. Smuggling is another way for profiteers to satisfy the newly raised demand of particular products. In both of the cases, the law-abiding manufacturers confront a dilemma: either to pull out of the market or to downgrade quality of products to sustain profits. A country anxiously awaiting foreign direct investment can hardly afford such counterproductive revenue system. Pakistan recently witnessed a sharp decline in revenues from tobacco industry after a few years of growth when Federal Board of Revenue unmindfully raised federal excise duty on cigarettes. The things usual happened: smuggled and counterfeit products flooded the market soon, reversing the benefits of price hike. How youth would have been attracted towards cheap and substandard products, made them available through smuggling and illicit trade, and whether more children have not been turned to smoking, is anybody’s guess but federal revenue authority suffered billions of losses as profits of the lawful industry sharply declined. It has become abundantly clear that depending too much on inelastic demand products is not without a cost for the health of people as well as the national exchequer, the both. The World Bank has come up with a $5.5 billion “Pakistan Revenue Mobilization Project” as a solution to the ailing revenue system of Pakistan focusing on simplification of revenue collection process other than merger of Inland Revenue and Customs departments.
The World Bank project aims at doubling the revenues up on its completion by changing the recruitment and performance evaluation criterion so as to enable the revenue body to reach 75% of taxable individuals and entities. By adding state-of-the-art equipments and imparting specified skills to FBR employees, the World Bank project is expected to raise the tax-to-GDP ratio to 26% of GDP from the present 13%., without increasing the number or ratio of existing taxes. The FBR has actually been constrained by political considerations from moving on to uncharted waters. Reforming the revenue body can help the country realize a Rs 10 trillion potential, which can of course be utilized for the uplift of teeming millions wanting basic necessities of life like healthcare and quality education. Devolution of subjects like agriculture, commercial property and services to the provinces, also marred the prospects of the federation to tap these growing sectors of the economy. The provinces collect from these subjects amounting only .22 percent of GDP. The government needs to focus on tax evading businesses rather than burdening the existing taxpayers. It is possible only through strengthening mechanisms, enhancing capacity of revenue collectors and bridging the loopholes in the revenue collection system. Actually, the existing taxpayers are overburdened due to high rates of indirect taxes (GST, Excise duties etc.). Not only the rich have contribute to the national exchequer only 12% in the form of income tax (indirect tax) but also the successive regimes have downgraded tax rates for them during last a ‘democratic’ decade.
— The writer is political analyst based in Islamabad.