EDITORIAL: It was of course only a matter of time before the government caved in and accepted all of the International Monetary Fund’s (IMF’s) ‘prior conditions’ to bring the stalled $6 billion bailout programme back on track. Still it did resist the harsh conditions for over a year, because the prime minister thought they would put too much pressure on the economy in a time of already immense strain, yet whether or not this delay achieved anything at all is open to debate. What is pretty certain, though, is the fact that Pakistan’s tax-to-GDP ratio at about 10 percent is too low considering its revenue requirements and reforms have been due for a very long time. There can also be no denying that no particular government, the present one included, has done what is needed to carry out the reforms. So IMF’s demands may seem a little stiff from the Pakistani government’s point of view, but all things considered the lender is justified in demanding upfront initiation of tax and energy sector reforms.
The Rs140 billion worth of new taxes that the federal cabinet recently approved, which should be applicable from July, is in fact more a case of removal of tax exemptions. At Rs140 billion a year, these exemptions had been made out to be clearly too large a drag on revenue. And now that the government is forced to remove them to “have a uniform tax structure,” as Finance Minister Dr Hafeez Sheikh put it, then it must also remove some of the existing taxes that have been imposed for no justifiable reason at all. For example, advance income tax is imposed on all mobile telephone call charges, which means even people from the lowest income groups, who are not liable to pay income tax, have to incur this tax whenever they recharge their SIM cards. The average cook or labourer, whose quantum of income is not large enough to be taxed to begin with, cannot even claim adjustments.
It is the ease of collection of such taxes, in an environment when traditional revenue collection is chronically low, that gives rise to such unfair practices. This is one reason behind the general tendency of a collective revolt of sorts in people against payment of taxes to the government. It must not collect money from people who are not liable to pay certain taxes because of their low incomes. Such taxes amount to extortion and must be repealed while much-needed changes are being made to the tax book.
Another fine example is the imposition of sales tax on imports. In any case this particular tax is liable to be adjusted when imports are sold, whether on as is basis or processed and value-added basis. But when it comes to imports for industry, the sales tax on imported raw material creates unnecessary cash flow problems and otherwise too it just adds to the cost of doing business; with all the usual spillover effects, of course. The government is now in a good position to settle some of these issues. It’s true that it would never have got the ball rolling on tax exemptions if it hadn’t been for all the pressure from the IMF. But now that things are finally moving forward it must also raise issues that are important to truly streamline the evolving tax structure. Now the big question is whether the Fund will have no problem with revoking taxes on people who are not liable to pay them.
Copyright Business Recorder, 2021
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