EDITORIAL: The pledge made repeatedly by the Advisor to the Prime Minister on Finance Shaukat Tarin subsequent to the successful completion of the sixth International Monetary Fund (IMF) review that the withdrawal of the 330 billion rupee tax exemptions would have no impact on the general price level has been challenged by a Business Recorder exclusive news item, revealing that exemptions referred to include sales tax exemptions extended to items of general use, including pharmaceuticals. The source of news is the Federal Board of Revenue (FBR) that has reportedly prepared a draft of the money bill for cabinet approval and, as is usual, has relied heavily on the low hanging fruit to generate the amount through higher tax collections agreed with the IMF.
Sales tax is an indirect tax whose incidence on the poor is relatively higher than on the rich. In countries where per capita income is high and the social security payments adequate heavy reliance on sales tax/GST makes economic sense. However, in a country like Pakistan where poverty levels have been rising, a trend exacerbated by the ongoing pandemic and the severely contractionary fiscal and monetary policies supported under the ongoing IMF programme, any further rise in sales tax would be disastrous with serious political implications for the ruling party as well as push hundreds of thousands of households below the poverty line.
FBR reliance on the low hanging fruit is nothing new and reliance on sales tax as well as on withholding taxes in the sales tax mode (constituting more than 70 percent of all direct tax collections today) require urgent structural reforms. Sadly, the usual practice for governments, the incumbent as well as its predecessors, is to simply identify the amount by which revenue needs to be raised in any given period of time while the details of which taxes are to be raised and/or which exemptions ended is left to the discretion of the FBR. That this is inappropriate is borne out again and again as FBR bureaucrats have invariably relied on the low hanging fruit to generate the amount specified rather than undertake any meaningful structural reforms.
The money bill ending the sales tax exemptions is on the Cabinet’s agenda today and one would hope that the cabinet members will look carefully into each proposed exemption withdrawal and provide the necessary guidance to the FBR. This is critical as FBR traditionally absolves itself of all responsibility for raising taxes/ending exemptions by pointing out that: (i) in a money bill all its proposals have to be first approved by the cabinet followed by parliament, which explains why the IMF insisted on a money bill instead of; (ii) an ordinance for which only the government of the day is held responsible.
To conclude, if the cabinet approves the money bill it would ring in the New Year with a massive rise in prices with socio-economic implications on households as well as political implications for the government. Prime Minister Imran Khan’s assurance that 30 percent of all food items would be subsidised, through targeted subsidies, with an expansion of the Ehsaas programme, is unlikely to change these harsh ground realities given that the widening budget deficit due to a raise in subsidies is a highly inflationary policy. Thus to counteract a rise in prices due to a raise in sales tax to 17 percent on most items by extending subsidies is a flawed policy from an economic perspective and one can only hope that this is understood by the cabinet members as they debate the money bill today.
Copyright Business Recorder, 2021