ISLAMABAD: The total benefits and privileges enjoyed by different vested interests in Pakistan amounted to Rs2.66 trillion, ie, seven percent of the country’s GDP, revealed the UNDP’s Pakistan National Human Development Report.
The report noted that the corresponding cost of social protection programmes estimated was Rs624 billion and if just 24 percent of the privileges of the powerful were diverted to the poor, this would double the benefits available to poor Pakistanis.
The corporate sector is the beneficiary of the greatest privileges, including both industry and the banking sector. Next is the feudal class, followed by high net worth individuals, it added.
The tax privileges that vested interests enjoy in Pakistan, which total Rs1.323 trillion, equivalent to over 3.8 percent of the country’s GDP.
In 2017–2018, the tax system’s total revenue amounted to Rs4.467 trillion.
The report noted that the political economy of inequality relates to the sources, nature, and dimensions of privilege.
Vested interests are able to acquire these through the political process in a democratic system or through patronage in an autocratic one.
This is sometimes referred to as "state capture by the elite".
It involves special and favoured treatment of the privileged in laws, rules, and regulations, along with preferential treatment by public institutions.
The report noted that only 92,919 people are part of Pakistan’s feudal elite, just 1.1 percent of the total number of farmers in the country.
Yet they have an individual farm size of over 50 acres, and own 22 percent of the nation’s farm area.
Each of the richest 0.2 percent of these large-scale farmers owns a farm whose average size is over 400 acres.
They also have disproportionate access to political representation in the National and Provincial Assemblies.
Consequently, most manage to safeguard the tax benefits and special concessions granted to them, and even to obtain new privileges whenever possible.
The most commonly acknowledged benefit that the feudal class enjoys is an extremely low tax rate on agricultural income.
The highest marginal income tax rate per acre is 1.7 percent of the net income generated.
This means that the total annual revenue yielded by the tax, in all four provinces combined, is less than Rs3 billion.
If agricultural income was taxed at the same rate as non-agricultural income, the potential revenue yield in 2017–2018 would have been Rs88 billion.
Therefore, these low tax rates on agricultural income effectively imply a tax break for the feudal class of over Rs85 billion.
The second area of favoured tax treatment is the land revenue system.
The rates per acre are small and have remained unchanged for a decade.
The total national revenue yield from land revenue tax was Rs12 billion in 2017–2018, with an annual growth rate of just three percent.
If these tax rates had been subjected to full inflation indexation, the revenue yield would have nearly doubled to Rs21 billion. This implies a tax break of Rs9 billion.
The water subsidy is large, amounting to Rs46 billion.
The annual electricity consumed by tube-well owners is 9,222 gigawatt hours (GWh).
The resulting subsidy to large-scale farmers (the feudal class) who own most of these tubewells amounts to Rs23 billion.
Light diesel oil (LDO) supplied to farmers also has a low sales tax rate.
There is the subsidy of Rs135 billion on fertilisers.
Large-scale farmers, who account for about one-third of the fertiliser subsidy, benefit by over Rs45 billion.
The corporate sector receives a large number of tax breaks and other concessions.
These are often justified on the grounds that "fiscal incentives" are required to increase production, exports, employment, investment, and the development of underdeveloped areas. The corporate tax on profits was reduced from 35 to 29 percent in recent years, adding almost Rs20 billion to large companies’ net profits.
The "Super Tax" on companies with big turnover has been withdrawn, yielding tax savings of Rs8 billion for these companies.
Currently, this tax break is valued at almost Rs55 billion per year. Cumulatively, this implies a revenue loss to the federal exchequer of over Rs1 trillion.
More recently, the lifetime tax break has also been extended to Chinese companies that invest in the CPEC. Furthermore, many smaller companies engage in tax evasion.
Many industries enjoy lower sales tax rates on production and sales, in line with the Sales Tax Act of 1990.
Perhaps the best example of this is the influential sugar industry, which has a sales tax rate of eight percent, compared to the standard 17 percent.
The magnitude of this tax break in 2017–2018 was almost Rs32 billion.
This concession was withdrawn in the federal budget of 2019–2020.
The way electricity tariffs are set is an example of a favourable pricing formula, with a cost-plus pricing procedure.
This adds an additional burden on consumers of Rs60 billion.
Big banks with a strong clientele have thereby been enabled to enhance their benefits by over Rs46 billion.
The banking sector also enjoys a host of privileges.
Its first tax break was a corporate income tax rate reduction from 58 to 35 percent during the Musharraf era, when banking officials were in leadership positions.
On pre-tax profits in 2017–2018, this implied a tax break of almost Rs90 billion, with the tax rate falling further to just 29 percent.
The Federal Board of Revenue’s tax directory reveals that the richest one percent of the people who file personal income tax contribute over 67 percent of Pakistan’s revenue.
This contribution was an estimated Rs296 billion in 2017–2018.
However, given the average annual income of the richest one percent, their income tax contribution to the exchequer should amount to Rs619 billion.
The report noted that commercial importers engage in considerable under-invoicing, frequently in collusion with customs’ authorities.
They do so to avoid paying the minimum combined tax liability of almost 25 percent of the import duty, the sales tax, and the withholding income tax.
The overall benefit that accrued to large-scale traders and commercial importers in 2017–2018 totaled Rs348 billion. Commercial importers pre-empted almost 62 percent of this amount.
Strongly entrenched state-owned enterprises (SOEs) are another claimant of substantial privileges in Pakistan. Pakistan currently has 204 state-owned enterprises, including 186 public sector companies, eight financial institutions, and 10 federal authorities.
These enterprises play a major role in commercial activities, including in sectors like energy, banking, insurance, industry, promotion and advocacy, trade, and transportation.
Overall, Pakistan’s state-owned enterprises employ 422,962 workers.
In 2017– 2018, their annual revenues exceeded Rs3.4 trillion, with an overall net loss of over Rs191 billion.
Only 10 state-run enterprises are profit-making entities, including the Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), Government Holdings (Private) Limited (GHPL), and the Pak-Arab Refinery Company Limited (PARCO).
The largest and major loss-making state-owned enterprises are the National Highways Authority (NHA), the Pakistan International Airways (PIA), the Pakistan Railways, and electricity distribution companies (DISCOs) in the power sector. To cover their losses, the federal budget provides subsidies of over Rs120 billion.
Copyright Business Recorder, 2021