The government has succeeded in convincing the International Monetary Fund (IMF) to grant the Stand-By Arrangement (SBA) an extension of nine months. The question is: does this reflect the persuasive skills of our economic team or is it reflective of continued US-led international community's support at the Fund's Board - support not for the way our economy is being handled but out of concern that any leverage with Pakistan on how to conduct the war on terror may be lost.
The persuasion skills of the current economic team, led by Dr Hafeez Sheikh, can at best be described as poor. The only party that appears convinced that the Reformed General Sales Tax (RGST) is critical to improving the country's macroeconomic performance is the PPP. Considering that the SBA was signed by the incumbent government, one can, of course, legitimately argue that the PPP government's support for the RGST was implicit at the start of the SBA; and was explicitly stated in the letter of intent (LoI) submitted by the government as a prerequisite to the SBA approval by the Fund board; and pre-dates the appointment of Dr Sheikh.
Multilaterals and bilaterals, including the newly appointed American Ambassador, are convinced that the RGST is critical to meeting our resource needs. However, here too the convincing was done well before Dr Sheikh appeared on the scene. At the risk of ruffling the feathers of our foreign friends, both in the American Embassy and those safely ensconced in Western embassies and multilateral offices, as well as those who return to the country only to hold high office, there appears to be a lack of local knowledge in their insistence that the RGST is critical to the economy and therein link disbursement of pledged assistance to its implementation.
Local knowledge tells us three major alternatives to the RGST, so renamed by Dr Sheikh in a futile attempt to convince its domestic detractors that it is not the value-added tax (VAT) that was agreed with the IMF as noted in the LoIs. First and foremost, our Finance Minister must be aware of the fact that the existing sales tax as well as excise duty is in the value-added mode. Or in other words, it is levied at each stage of value-addition. The problem with the existing sales tax regimen is that there are numerous exemptions and it is not uniform (ranging from 15 to 24 percent) while the problem with excise duty from the perspective of the provinces is that it is not a component of the divisible pool and hence the revenue generated from this tax is for the use of the federal government alone.
Domestic resistance to the RGST can, therefore, be easily overcome by abandoning the use of the term RGST, a misnomer as every one understands it in any case, withdrawing the relevant bill from parliament where it is unlikely to be presented now in any case, and instead issuing statutory regulatory orders (SROs) with respect to reducing exemptions. In addition, the threat to expand the ambit of excise duty could be used as a leverage to get provincial support for amendments through SROs to the sales tax.
Secondly, it is very well known that those exempted from income tax consist of the Who's Who of Pakistani elite. Hillary Clinton, the US Secretary of State, did endear herself to the Pakistani common man when she urged the PPP-led government to begin to tax the elite before seeking foreign assistance. The government, in its own defence, argues that farm tax, which exempts more than 90 percent of the rich landlords, sitting in our national and provincial assemblies, is a provincial subject as per the Constitution; true, but analysts point out that the sales tax on services is also a provincial tax as per the Constitution - a tax on which the federal government has negotiated with the provinces. Thus there is a need to focus on taxing the income of the rich landlords and the moveable and immovable assets held in foreign countries by Pakistani nationals. This would provide immunity to the President of Pakistan on whose behalf all taxes are collected but would include the senior leadership of all major political parties except those who no longer hold Pakistani passports. It is unfortunate that the IMF's focus remains on the RGST and not on income tax.
And, third, plugging the massive leakage from the Federal Board of Revenue (FBR), estimated at between 400 to 500 billion rupees per annum, would generate over 5 billion rupees for the exchequer (greater than the amount of assistance estimated in the current year). These corruption estimates were made public by former Finance Minister Shaukat Tarin a year ago (in November 2009). His proposals included the need for more effective oversight, strengthening the powers of the Auditor General of Pakistan and greater vigilance on the part of government.
Recommendations of a study, undertaken by the FBR's Director, Training and Research (Inlands Revenue), released a month or so ago argues in favour of a merger of the anti-corruption wing of the National Accountability Bureau (NAB) and Federal Investigation Agency (FIA). The new agency, the report proposes, must be tasked with investigating financial crimes, money laundering and forensic auditing. The idea in itself is a good one, however, with both the NAB and FIA under the executive, perceived by the general public to be complicit in many of the multi million dollar scams reported during the past two-and-a-half years, Tarin's suggestion of empowering the AGP would certainly prove more effective in eliminating corruption. The FBR report also proposed eliminating political interference with appointment of top officials of the FBR. One would like to add that political interference with all state-owned entities with respect to appointments must end.
To conclude, there are solutions to the current economic impasse that the country is in today. The full blast of this impasse is being felt by the vulnerable (those earning less than a dollar a day) as well as the lower to middle income earners, who are paying income tax as well as sales tax. The latter group of income taxpayers is the group targeted by Hafeez Sheikh to pay the cost of the floods through his money bill, not yet approved by parliament, envisaging a six month increase in income tax of the already taxed. It is unfortunate that a man who was supposed to have the necessary expertise in economics to turn the economy around is relying on flawed policies of the past to steer the economic ship. The fact that the ship has hit yet another sandbar, therefore, should surprise no one.