ISLAMABAD: Sustained failure of tax reforms for over 30 years and overall fiscal constraints are increasing risks for Pakistan.
This was stated by a former senior official of the International Monetary Fund (IMF), Ehtisham Ahmed while speaking via Zoom on the topic of “Digital Transformation of Institution and Policies Tools for Resilient and Sustainable Growth” organised by the PIDE on Thursday.
He stated that the sustained failure of tax reforms for over 30 years led to a decline in the tax-to-GDP ratio from 14 percent in 1984 to under-10 percent in 2014, despite a VAT introduced in 1990.
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He added that badly designed split VAT added to the cost of doing business and did not provide information on cheating with weak revenue performance (one of the lowest C-efficiency coefficients in the world). He said the decline in basic public services and outcomes, increases inequalities, both inter-personal and cross regions. Overall fiscal constraints and vested interests pose a major problem, with global economic and climate shocks, he added.
The former official of the Fund stated that under digital solutions for revenue generation focus must be linked to growth strategy, change management given policy, institutional political economy constraints etc.
He said that decentralizing full functional responsibility is hugely problematic without accountable financing for education and health care. Global financial markets are turbulent post-Covid, and increasing interest rates can be catastrophic for a country teetering on the edge of a debt spiral, he added. The badly designed tax instruments led to a dysfunctional system dating to the colonial Government of India Act, 1935 that split the major tax bases which was beginning to be addressed in India and Pakistan doubled down.
The badly designed tax reforms are instruments to add cost of doing business, discourage as well as prevent regional/provincial integration and do not provide information to stop cheating.
He further stated that revenue shares and split bases do not lead to accountability but cutting agreed shares is very dangerous especially since sub-national governments (SNGs) are responsible for the bulk of the Sustainable Development Goals (SOGs). He added that tax reforms must be coordinated with redesigning of inter-governmental transfer system to offset any losses at the SNG level and this could be learned from China, Australia, and Mexico.
He also emphasised utilising the potential for digital transformation and stated that the IMF 2023 POS and e-filing emphasis is not even wrong, but unworkable without major overhaul of policies and administration.
He added that the major work agenda on integrated administration and policy redesign required a new National Tax Administration, manage block chain for asset transactions (real, and financial) satellite imagery and big data as well as better integration of NIC and TIN and coordination with NADRA (not sufficient in isolation).
He also underlined the importance of streamlining payment systems, and treasury single account (TSA) to ensure immediate crediting of sub national revenues and refunds on export.
He also spoke in detail about the reforms undertaken by China and Mexico in terms of tax system.
Copyright Business Recorder, 2024