The other realities

While our politicians, armed forces and intelligence agencies struggle to restore their shattered credibility in the wake of the Osama tragedy, the Finance Minister plans to announce the Federal Budget for FY12 as early as May 28, despite the differences between the government and the various groups of taxpayers.
Our pre occupation with the Osama affair can prove disastrous if it prevents a meaningful debate on the tax proposals being advanced by trade bodies and the government. On the passage of the Finance Bill depends the regime's survival; presenting a flawed bill to the parliament in an anti-regime setting could dislodge the regime.
Ignoring its record of waste and corruption, the government finds hiking the existing tax rates the way out, while, often logically, taxpayers oppose this idea realising little that a lot needs to be put right for which they must pay higher taxes and, more importantly, ensure transparency of the use of tax revenue.
Trade bodies are again pushing for lower tax rates. But will that help repair the crumbling physical and social infrastructures? Should Pakistan go on borrowing from domestic and external sources, become a more vulnerable and high-risk country? Will over-indebtedness bolster business and investment sentiments?
During FY10, external debt servicing cost us $5.787bn; during July-Mar 2010-11 the cost has been $6.946bn and the total public debt is nearly five times the year's total revenue. Besides, Pakistan's security risk profile is discouraging DFI inflows. In totality, this reflects sheer bad governance.
Businesses justifiably blame deficiencies in the infrastructure for inflating the cost of doing business. They point to energy and power deficits, broken road/rail networks, collapsing civic services, and virtually zero security, but by refusing to pay higher taxes, will businesses themselves plug these holes?
Obviously they won't. Then can the cost of doing business be cut while things keep falling apart? With gaping holes in the infrastructure growing larger, the cost of doing business will only escalate. In this setting, the business community's approach reflects the limited vision of a CEO on 3-year contract.
Of the budgeted Rs 463bn, until April only, Rs 131bn were spent on PSD in FY11. What does it imply? Will things improve in FY12? The solution is not seeking tax cuts but expansion of the tax net, simplification of the taxation systems, elimination of tax evasion (especially in the Afghan Transit Trade), and cutting revenue waste.
For FY12, the Ministry of Finance (MoF) has proposed outlay of Rs 270bn under the PSDP while the Annual Plan Co-ordination Committee has proposed Rs 710bn. Given our record of slashing PSDP, will even Rs 270bn be spent and, if so, honestly and diligently, and will they be enough to repair, let alone expand the infrastructure?
The organised sector provided the bulk of the tax revenue but rarely sought state accountability (for instance on the annually rising power shortages) despite the fact that the sector has scores of 'chambers' and 'bodies'; their apathy over the decades allowed successive regimes to indulge in blatant waste and corruption.
Did you hear of a trade body suing the state or its agencies over such misconduct? Most likely not, because these bodies don't consider it their obligation; they only push for tax relieves. Then how could accountability become a sword dangling over the heads of the politicians and bureaucrats?
In all, the tax-cutting proposals (including by the SECP), the logic advanced is the comparative tax rates in the South Asian states. The basis is logical but unless judicious use of tax revenue is assured, can things improve? Can a regime defying the Federal Tax Ombudsman (FTO), Public Accounts Committee and court verdicts assure that?
Did the FPCCI press the state to disclose the punitive and corrective steps taken after the FTO inquiry into the 'missing' Nato containers, or that into the 'pocketing' of the Sales, Advance Income and Withholding taxes? Did the FPCCI confront the state with cases of blatant misuse and waste of the taxes paid by its members?
These demands haven't been voiced as vociferously as they deserve. Nor has it been demanded of the MoF that is coming up with visionless taxation options, to disclose its control over revenue use by state ministries. Businesses' resolve to pay only a bit less for known waste isn't a sign of genius.
Soft accountability allowed the MoF to moot illogical proposals such as taxing gross assets, uniform levy on imports, hiking the withholding tax, and so on. Such measures defy logic; they reflect desperation that hardly befits a self-professed peoples' regime.
Simultaneously, there is no explanation for the federation to abdicate taxing agriculture in favour of the provinces that, as in the past 63 years, won't tax it while this sector will keep benefiting from subsidies. Nor will the provinces tax the real estate sector that has huge potential for taxation.
However, the federation plans to tax assets, which is unfair unless such assets are created out of untaxed incomes. Such a tax could be levied only as 'zakat', provided it is used for zakat-eligible purposes. But, in any case, levying this tax on gross assets (ie without deducting unpaid liabilities there against) is wholly unjust.
A uniform import duty too is unjust; neither is everything equally essential or non-essential, nor do those trading in every imported item enjoy identical efficiency and profitability. The dumb logic offered is that, as a result of this change, increase in duties from some items would compensate for the loss of revenue on others.
'Balancing' economic benefits requires more than simple arithmetic. The Finance Minister and the Revenue Advisory Committee don't realise that (not to appear a 'bhatta' collector) the state should levy taxes justifiable on the basis of fairness and economic sense; sidelining this view will further erode the regime's credibility.
The Finance Minister also ignores the recession's impact that is likely to cut GDP growth to 2.4 percent against the FY11 target of 4.5 percent. To perk-up GDP growth to 4.2 percent in FY12, tax rates must not be altered; the focus should be on expanding the tax net and fuller tax recovery from the existing taxpayers.
Finally, if the government does intend to expand the tax net it must not fiddle with the tax rates because it could make its task doubly tough: recovering taxes from angry existing taxpayers, and identifying and netting new taxpayers. The FBR hardly has the human and technical infrastructure to do both.