EDITORIAL: The shortfall in Federal Board of Revenue’s (FBR’s) collection for the first eight months of the ongoing fiscal year, Rs 240 billion to be precise, does not come as a surprise.
Import curbs, high and persistent inflation and the hawkish monetary policy that is suppressing aggregate demand have contracted the economy, squeezed production and reduced incomes, so it’s only natural for tax receipts to shrink as well.
The more worrying part, especially in light of the mini-budget and imposition of Rs 170 billion in taxes, and the fact that interest rates will stay high at least for the duration of the IMF (International Monetary Fund) bailout programme, is that the Board does not have any way of meeting this shortfall as the fiscal approaches the last quarter.
It’s tool of choice remains indirect taxes, mainly because of its inability to expand the direct tax net, which means lower income groups will mainly bear the burden of higher taxes necessary to keep the EFF (Extended Fund Facility) running.
This is clearly an unsustainable situation; and one, it must be mentioned, which would not have arisen if successive governments hadn’t pandered to the interests of their core constituencies, shielding them from the taxman, while ignoring necessary reforms.
The agriculture elite that dominates parliament no matter which party is in power at any time, and traders who lobby for them in exchange for special favours, continue to enjoy the twin pleasures of eating off the fat of the land and evading the tax net only because of the privilege of power.
That explains why no administration ever bothered to reform FBR which, incidentally, was also a key demand in almost all the IMF’s structural adjustment programmes that we entered into and abandoned.
Yet now the time when ordinary Pakistanis alone could be milked for taxes and the shortfall rolled onto the next fiscal year has come to an end.
The country will probably default without financing from international friends and institutions, and that financing will not be forthcoming until tax collection improves dramatically. And the only choice that the government has left in this matter is between upsetting powerful constituencies that form its core base by dragging them into the tax net and alienating ordinary voters by slapping additional indirect taxes and risk turning high inflation into hyperinflation.
It must also immediately initiate FBR reforms, making sure that it builds capacity while also rooting out corruption that has become synonymous with its name.
The process of reforms is going to be painful, no doubt, but authorities and the people alike will soon get to know that there has been plenty of taxable income out there all along. And the reason we’ve had one of the lowest tax-to-GDP ratios in the world is that special interest groups close to governments have always been protected from taxes that everybody else is expected to pay.
IMF’s managing director, Kristalina Georgieva, made a similar point when the Fund was recently unimpressed by the government’s usual tricks to jack up tax revenue.
Pakistan needed to tax the rich and provide relief to the poor, she said, echoing textbook remedies for problems that exist only because the system has always been twisted from the very top to suit the rich and powerful.
However, now that we’ve reached the end of the road, it is hoped that the government is not going to waste any more time to take all the necessary steps that have been avoided for so long.
It must enact legislation that will enable taxation of high earning sectors that enjoy legal cover and initiate reforms that will ensure improved and transparent tax collection.
Otherwise, it will just keep missing collection targets and eventually fail to get the lending that is needed to keep the economy afloat.
Copyright Business Recorder, 2023
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