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EDITORIAL: The $3 billion nine-month-long Stand-By Arrangement (SBA) approved by the International Monetary Fund (IMF) documents echoed the usual refrain as in previous approvals – programme or mandatory quarterly reviews for the past more than three decades: “efforts need to continue to build a more progressive, simple, efficient, and fair tax system which should generate adequate space for critical development.”

The focus as reflected in the 23 June budget approved by the IMF, however, remains on generating revenue rather than on any major reforms in the tax structure that would achieve these salutary objectives.

This is reflected by three major disturbing ongoing factors: (i) indirect taxes whose incidence on the poor is greater than on the rich account for 60 percent of all budgeted collections by Federal Board of Revenue (FBR).

And 70 percent of all direct taxes (accounting for only 40 percent of all taxes to be collected in the current fiscal year) are in the indirect tax mode as they are sourced to tax withholding on sales/purchase of items and services and inaccurately parked under direct taxes (a trend that the Auditor General of Pakistan urged the FBR to desist from in its last report); (ii) the remaining 30 percent of budgeted direct tax collections envisage a 2.5 percent rise in personal income tax for business income and wage earners in the 2023-24 budget.

While this is a tax on the ability to pay principle, yet the lower to middle to upper middle income earners are severely compromised at present with almost daily business output contractions/closures, leading to large-scale unemployment due to inordinately high input costs, including cost of borrowing as well as tariffs.

In other words, the 30 billion rupees additional revenue envisaged from this raise will be at the cost of productivity which registered negative 0.5 percent in the outgoing year; and (iii) widening of the tax net remains largely a pipedream. Or, in other words, those sectors that have been outside the tax net remain so to this day.

There are three obvious examples. First, farm income tax for constitutional reasons remains outside the ambit of the federal budget; however, with the bulk of the beneficiaries represented in the countries provincial and national legislatures, it is increasingly critical for provinces to impose a farm tax on income at the same rate, at least, as that imposed on the salaried class, which would go a long way in spreading the perception of equity; the government, however, has in the 23 June budget increased the advance tax on sale and purchase of immoveable property (largely urban) from 2 to 3 percent and projected a revenue of 46 billion rupees and an annual tax on second homes at 1 percent over and above the standard rate on the value of the property, which is opposed as it legitimises the non-filers.

There is more potential to generate revenue from this sector, which requires greater regulation as it is well known as a major source of parking tax evaded and laundered money in the country.

Second, on the construction sector, for reasons associated with massive influence in the corridors of powers, the advance tax has been raised on builders and developers but projected to generate a mere 15 billion rupees which is grossly insufficient, given the extent of wealth owned by the country’s developers/builders.

And finally, traders/wholesalers and retailers remain outside the net with enough political clout to compel the incumbent government to backtrack on an attempt to bring them into the tax net.

In addition, basing the bulk of annual revenue collections on indirect taxes is not the only source of concern to the multilaterals. They also focus on elite capture through the grant of exemptions and here the government has agreed to rationalize exemptions for fertilizer sector alone.

Multilaterals, including the IMF, and bilaterals have long been urging Pakistani administrations to tax the elite. In 2010 Hillary Clinton, the then Secretary of State, criticised Pakistan for not taxing its rich more and expecting developed countries’ assistance, stating that “it is absolutely unacceptable for those with means in Pakistan not to be doing their fair share to help their own people while the taxpayers of Europe, the United States are all chipping in to do their part.”

What is extremely disturbing is that 13 years later the tax structure remains as unfair and inequitable as ever but what political parties fail to realise is that the capacity of the general public to bear the cost of elite capture through paying the bulk of indirect taxes is no longer possible today.

The element of raising utility rates which the IMF argues is needed to focus on aligning tariffs with costs that implies passing on the buck to the consumers for sectoral inefficiencies has placed a further unbearable burden on the common man.

Structural reforms in the tax structure are critical not only from the perspective of the general public’s perception of what entails a concept of equity but also because elite capture is no longer economically or politically viable.

Sadly, the budget 2023-24 indicates that while the Fund may be aware of all the lacunae in the system, it has yet to insist on far-reaching reforms that are assuming ever-rising urgency.

Copyright Business Recorder, 2023

Comments

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KU Jul 25, 2023 01:56pm
Why shouldn't the IMF insist on tax reforms or urgency? The government, which is going into elections, has announced Rs. 51 billion fund for parliamentarians for development work in their areas, it has announced perks and privileges, including new cars for the public sector, and more of the same for other public sector schemes. In these uncertain economic times, who in their right mind would throw around money that is certainly not going to reach its objective, and will not be audited.
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Johnny Walker Jul 25, 2023 03:12pm
IMF is being taken for a ride. Again.
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Ather Nizami Jul 25, 2023 07:59pm
This is very unfair on the part of the govt that do not collect tax from the rich and the richest people the business class and the agriculturist class.It is very surprising to learn that the govt has allocated RS.61billion to the parliamentarians as a bribe or for election campaign and Rs.2.3 billion for the purchase of most expensive cars to be given to the Commisoners and deputy Commisoners from the tax collected from the salaried class and others, instead this amount should have been spent on the welfare of the general public at large.This is a very sad affair. Regards.
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