Federal Finance Minister Dr Hafeez Sheikh and Secretary Finance Dr Waqar Masood Khan claimed at a press conference in the aftermath of the promulgation of the three presidential ordinances that all government institutions were on-board with respect to the new tax measures and the inflationary impact would be no more than 2 percent.
The levy of taxes levied under the three ordinances was considered unlikely to be approved in parliament which is why the government tabled it in November but never put it up for passage. Dr Sheikh, however, specifically mentioned that the armed forces were on-board. Given that senior members of the armed forces, with income above 30,000 rupees per month, would have to pay 15 percent income tax surcharge would assure the public that no group is exempt.
Other salaried individuals liable to pay this tax were not taken into confidence. Critics may well argue that the civil service recently witnessed a whopping increase of 50 percent in their pay and therefore the 15 percent income tax surcharge would be easily payable by this group; however the major thrust of this tax would fall on those employed by the private sector, who are already suffering as unlike the bureaucrats and members of the armed forces, they live in rented houses, not government-owned houses with the rent controlled, and have to pay the full amount on utilities used. Thus the charge that the government opted to tax the already taxed is legitimate.
Inflationary pressures would be no more than 2 percent in the aftermath of the three ordinances is a non-issue when inflation is touching 16 percent. This assurance would, without doubt, be met with scepticism for two reasons. First and foremost past experience suggests that the monetary authorities have been tackling the demand side, while the fiscal side has failed to counter supply side shortages created by the powerful cartels, to keep prices within reasonable limits.
Limits, defined not as market interference but to ensure that there is no profiteering due to artificial shortages; or that real shortages are not created due to the government policy to provide relief to local consumers through subsidies with neighbouring countries, allowing their market to set prices, thereby leading to smuggling from here. In this context, it is relevant to note that a Business Recorder survey revealed that fair price lists notified by the government are routinely not being adhered to by the retail sector due to abolishment of magistracy at the local level.
Without implementing a comprehensive and well-thought out policy that seeks to increase the tax to Gross Domestic Product (GDP) ratio, ad hoc tax measures contained in the ordinances would be an event and not a process. One may disagree with Chairman Agri Forum Ibrahim Mughal's contention that the price of kitchen items for example flour, rice, eggs, goat meat, beef and chicken would go up, but it would indeed be a source of grave concern if the contribution of the agricultural sector to the GDP is reduced by 4 to 5 percent which may, in turn, compromise the growth targets set by the government.
And, more disturbingly that those who would pay the bulk of the cost of the tax on farm inputs would be the subsistence and poor farmers. There is a general consensus amongst economists that the government must strive for the introduction of a farm tax on income so that the tax is dedicated to the income of the rich farmers. In other words the government must not regard the indirect tax on farm input as an alternative to a direct tax on the income of the rich farmers.
Dr Sheikh blamed successive governments for their historic and collective failure to mobilise domestic resources which, he claimed, resulted in dependence on foreign loans and excessive borrowing from the State Bank of Pakistan. No one can dispute the veracity of this charge. But then Dr Sheikh's challenge is to change the mindset of his parliamentary colleagues to set an example by themselves paying income tax and be willing to vote a cut in their perks and privileges. After all, politicians in the leadership in the European countries have shown the way how austerity is achieved. People of Pakistan are ready to sacrifice, if pain is shared by the leadership as well.