All eyes on Shabbar

BR Research September 2, 2019

Shabbar Zaidi, the FBR Chairman, is the man to anchor the second year of a five-year match. The first was not good for the captain; and within the new team – FBR chairman is the man. The policies being run at the SBP are predictable; and so is the impact. Economy is a combination of science and art – at SBP scientific methods are deployed; while at FBR – it’s more of an art.

The country never paid tax to its full potential. In the first five decades, the missing tax on agriculture income was the key. While in the past two decades or so, the economy has shifted gears – it is now income tax on services, and real estate are where the juice is. The community is mainly urban; and within Punjab, PML-N got elected numerous times. Sitting on those, votes any try to tax them was halfhearted.

Fresh efforts are now going on; and some say that this kind of resilience by the government is unprecedented. Shabbar is not welcomed by the FBR force, while big formal businesses love him. He is coming from the market, and he knows the secrets of trade to evade taxes, and he can use this in government’s favour while sitting on the other side of the aisle.

The core reason of the reassurance of macro crises every now and then is persistently high fiscal deficit. The external worries are of immediate term and CAD can be in surplus in couple of years – it happened last in FY11, while the economy was struggling and the respite was short-lived. Without getting fiscal house in order, nothing is sustainable.

Expenditure side is a mess and the government functioning is inefficient- and that is required to be dealt with; but this cannot happen in a year or two. Historically, the problem of fiscal deficit started in times of war; but now the overall scheme of numbers is much bigger than defence spending – during FY79-99 defence expenditure averaged at 35 percent of total revenues, and it fell to 19 percent during FY09-19. There were issues after 7th NFC award and 18th amendment, as provinces got the money, but in southern provinces, corruption became blatant. That need is to rethink the model too.

However, there is nothing more important than taxing the economy. There is nothing more important than balancing the tax collection which is skewed towards indirect – increasing inequality, and direct taxes are relying on LSM- discouraging industrialization. Shabbar is tasked with correcting these imbalances through policy interventions. An SME business operating in formal setting is at disadvantage – and that hinders innovation. Shabbar is tasked with resetting the economic transactions – and that can help spur entrepreneurship.

He seems focused on tax policy, and some critics say that his contribution in the collection is zero. But that is factually incorrect based on the first two-month data of this year. The collection grew by 17.5 percent against the target of 31 percent – shortfall of Rs64 billion. The targets are missed; but growth is healthy. More importantly, the mix is improving. The GST and FED on domestic goods increased by 30 percent while collection at imported stage dipped by 18 percent.

That is changing the mix – In FY18, 43 percent of tax collection was at imported stage; and that is going to shift. The economic dependency on imports has to decline, and the taxation has to adjust as well. The challenge he has is how to document the large pools of traders, retailers, professional service providers and so on. The war is on-going and government expects negotiations to finalize soon.

The next area for him to focus is real estate and to formalize the sector for attaining tax potential. Economists and social scientists fear that pressure tactics can work for short time and for sustainable tax collection; the trust deficit between the government and tax payers has to be bridged. For that, service delivery has to be efficient.

Copyright Business Recorder, 2019

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