Coalition partners are quitting the government because, belatedly, they have realised that the regime has caused lasting damage to the economy - a reality also accepted in a seminar at the Pakistan Institute of Development Economics (PIDE) on December 30, wherein our elite economists dwelt on the consequences of the rapidly developing fiscal imbalances.
But the shocker was the revelation by Dr Hafeez A. Pasha (renowned economist and former member of the Economic Advisory Council) that fiscal deficit may touch the unprecedented high of Rs 1.2 trillion (about 8 percent of the GDP), forcing the government to print another Rs 1 trillion (besides the Rs 600 billion printed in 2008), and thus trigger hyperinflation.
Apparently, Dr Pasha has no political leanings nor any axes to grind. Given his grasp over macroeconomics and experience in state administration, he rightly worries about this developing scenario. Finance Minister Dr Hafeez Sheikh too had foretold the same, hinting at the chances of Pakistan defaulting on its debt repayment commitments.
Speakers at a PIDE seminar lamented Pakistan's dismally low tax-to-GDP ratio, and favoured imposing the RGTS to improve this ratio. But the folly of government's exclusive focus on the RGST, instead of remedying other anomalies wasn't discussed although, according to Dr Pasha, India has struggled for the last 15 years to enforce the VAT.
Dr Pasha admitted that even at the technical level, there is no consensus on RGST-related issues. That the PIDE has yet to report to the FBR on the inflationary impact of the RGST. That rationalising the RGST for its integrated implementation - sole guarantee for the regime's viability and sustainability - has yet to be undertaken.
With such preparations, was it wise to sideline the containment of tax evasion, corruption in the Customs Department and in collection of withholding, sales and excise taxes, increasing taxes on higher income brackets to make taxes equitable, raising property tax and making the basis of its levy inviolable, and taxing the untaxed agriculture and service sectors? Was it wise to place all the eggs in the RGST basket?
Given the state of governance manifested by the unabated resource waste and frauds, larger fiscal deficit are inevitable. The solution lies in recovering the stolen wealth, which surely hasn't evaporated. But by ignoring this reality, is it any surprise that the options left now are to borrow more and print more money only to add to the already high money supply and crippling inflation? Three cheers for Pakistan's democracy!
In spite of this performance of the opposition, the government, the bureaucracy, and government's advisors, 'experts' blame this scenario on those who oppose RGST. The fact is that no concrete and credible explanatory effort was undertaken to allay the fears about the RGST, further fuelling inflation; the experts merely kept saying that the overall impact of the RGST would be 0.59 percent.
Such 'experts' ignore manipulations by the market players and their capacity for compliance given the state of documentation. Abrar Ahmed khan, member FBR, said that only 300 big retailers [target 7,000] availed the FBR's 'lucrative' scheme of paying 'nominal' sales tax under a 'special' procedure; it reflects their inclinations and capacity for capacity. The dilemma also poses a question: should sales tax be recovered fully or nominally?
Yet, denying the fears of former member of the FBR, Dr Ather Maqsood Ahmed about tax frauds after enforcement of the RGST, and the compliance ability of the retail sector (taxing which is touted as a justification for imposing the RGTS), Abrar Ahmed Khan asserted that the FBR's electronic return filing system (wherein documentary evidence of income and expenses is verifiable only through audit) is 'fraud-proof'.
Such claims lack credibility. According to Abrar Ahmed Khan's own admission, while the tax machinery is fully equipped to tackle enforcement and compliance related issues, its capacity for proper audit under the self-assessment scheme needs strengthening. Doesn't this continuing flaw encourage high levels of tax evasion and corruption in tax collection? If this flaw continues, what has changed?
A new FBR report too emphasises effective audit and enforcement systems as imperative for success of the RGST regime, besides government's determination, and homework by the FBR in terms of a well-tested automated accounting and reporting mechanisms, capacity building of the tax machinery, and creating awareness among the taxpayers. Have the FBR and the taxpayers readied themselves along the above lines?
After imposing the RGST regime, taxpayer population (including thousands of hitherto undocumented businesses) will multiply; so will the tax refund claims. Is the FBR ready for this challenge? Has the FBR published booklets for taxpayers in provincial languages on how to maintain books of account, levy, collect and pay RGST, and file valid refund claims?
While we don't collect the existing taxes, we want to impose more on a larger population to make up for the massive tax evasion by the high and mighty. Is this what a democratic dispensation, claiming to be truly 'representative', should deliver? Not one politician threatened a long march to force implementation of Shaukat Tarin's austerity plan that could check the on-going waste and corruption.
The IMF too didn't force the government to check corruption, resource waste, and leaks in tax collection, but wants the fiscal deficit to freeze at 4.7 percent of the GDP - a target achievable only by closing state offices, shutting PSEs, and laying-off thousands of workers. Setting targets for cuts in PSE losses and current expenditure, and recovery of funds squandered by state offices could have mobilised resources, not the failed RGST experiment.
Floods damaged the economy after July 2010, but well before that, fiscal deficit was on its way to crossing Rs 1 trillion, courtesy the mismanagement and corruption in the state machinery beginning 2008. The rapid withdrawal of subsidies on oil, gas and electricity supply only added to social chaos. Yet, neither the government nor the opposition parties stemmed the rot.
In this backdrop, fiscal deficit will only rise, state borrowing will keep crowding out the private sector and hurt GDP growth, fiscal deficit will also force printing more money and thus push up inflation, higher losses will force more business closures, increasing unemployment and social chaos, and the state may default on its debt repayment commitments. But for causing this mess, the worst sufferers will be democracy and its blind lovers.