The Standing Committee on Finance chaired by Fauzia Wahab has reportedly proposed a range of revenue generating measures for the forthcoming fiscal year that include a 10 percent tax on the sale/purchase of property of 259 square yards or more as well as developing a data bank of those bank accounts with more than one million rupees to track wealth.
The former would fuel collections under indirect taxes, whose incidence as a percentage of income on lower-income groups is higher than on the rich in this country; while the data bank would be a recipe for capital flight in a country where the taxpayers are increasingly resisting payment of taxes honestly, given the failure of the state to provide basic necessities to its people, including law and order, energy, and other basics, which have begun to be regarded as legitimate grounds.
There is a consensus in Pakistan that our tax-to-GDP ratio of less than 9 percent has historically not only been appallingly low in the regional as well as in the international context, but remains so to this day. There is, therefore, an urgent need to raise this ratio if the budget deficit is to be brought down to sustainable levels. The problem in achieving this rather simple objective lies in the failure of successive governments, including the incumbent, to render the taxation system fair, non-anomalous and equitable. To ensure fairness in the tax system requires the government to place a heavier reliance on direct taxes (tax on income) as opposed to indirect taxes (customs, excise as well as the proposed 10 percent tax on sale/purchase of plots of 259 square yards or above). To guarantee a non-anomalous tax system would require ensuring the same tax rate on economic activity engaged in generating similar output, irrespective of its ownership or in other words, the private and the public sector must be allowed a level-playing field. And a tax system would be equitable if all sources of income are taxed equally. This implies that if say the net income of one million rupees has been generated by a factory unit then the same tax must also be levied on a farmer with the same net income. The emphasis must be on net, which would exclude the cost involved in generating that income.
It is significant to note that the Standing Committee on Finance's recommendations took account of all these reform measures. The question however, is whether these suggestions, that have been the outcome of many a report/study undertaken by multilaterals as well as domestic economists over a span of decades, would ever be implemented? The possibility appears almost non-existent given that both the Prime Minister and the Finance Minister have repeatedly stated that there will be no new taxes imposed in the forthcoming budget - a commitment, made in light of the fact that this is going to be an election year, is most likely be honoured.
In this context, it is critical to note that in the current fiscal year, the foreign assistance inflows have fallen short of the budgetary target by a whopping 3.3 billion dollars; or in other words, only 1.2 billion dollars of foreign inflows has been disbursed to date, which would imply a budget deficit that may well escalate to over 7.3 percent that was inherited by the current government. The fact that Pakistan is no longer in the International Monetary Fund programme that lent comfort to other donors (multilaterals as well as bilaterals) in terms of the economy being on the path of reform, accounts for pledges not translating into disbursements. And the ongoing global recession is unlikely to convince the West to release pledges to a country where reforms have been few and far between. Additionally, the United States has massively reduced its releases under the Kerry-Lugar bill, as well as Coalition Support Fund contingent, on the opening of the supply route to Afghanistan. Even if the government of Pakistan agrees to open the supply route, analysts claim that the only immediate outcome would be an invitation to attend the Chicago summit and the disbursements from the US would almost certainly be delayed till the next fiscal year
The forecast for the next fiscal year is dire until and unless corrective measures with regard to tax reforms are implemented forthwith. One can only hope that economic considerations are allowed to take precedence over political considerations.
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