The addition of Special Facilitation Investment Council (SFIC) to the already existing hybrid organization and implementation models, namely CPEC, NDMA, NHA, NLC and NCOC (defunct), signifies an explicit indictment of the quality and efficiency of the political governance to establish its writ and competency in running the economy for the last 30 years.
In the latest move, the ability, capacity and foresight of Planning Commission, Board of Investment, Ministry of Commerce and Ministry of Industry in attracting foreign investment through a coordinated medium-term sectoral plan is called into question.
To be provocative and at the risk of committing an ‘economic blasphemy’ upfront, it is suggested that a similar hybrid council/authority is crucially needed to expand the tax base, specifically for services sector under a war footing. The rate at which tax base (specifically income tax) and documentation of services sector has expanded in the last 30 years is pathetic as revealed by the following back of envelope exercise on few numbers floating in the literature.
This article will concentrate on Wholesale and Retail Sector (WRT), which constitutes 30-35 percent of the services sector.
As per estimates, the number of retailers was 1.25 million in 2006-07 that increased to 2.00 million in 2011-12. This gives an average yearly growth rate of 12 percent during the 5-year period, when private consumption rose by a massive 130 percent.
Assuming that the growth in private consumption was slower in the later years and applying half the previous growth rate in number of retailers namely 6 percent per year, the estimates of number of retailers currently stand at 3.2 million. Also assuming that the number of wholesalers increased at half the rate of retailers, the current estimate is 0.32 from 0.22 million in 2006-07.
Thus, back of the envelope current estimates of the size of WRT is 3.5 million. The flip side of documentation is provided by the trend in installation of POS in the country. Although not an accurate indicator of documentation in the WRT sector, it is still a useful proxy for the rate of expansion in the tax base of WRT, assuming that most of them are in working and monitored condition.
During 2015-2020, the number of POS increased by 10,000, on an average of 2000 per year. During 20-23 they increased by 62,000 at the rate of roughly 20,000 per year. If the eventual target is to document 50 percent (affectively leaving out the rural areas)= 1.75-0.11(already installed)=1.64 million, of the 22-23 WRT size, and increasing the yearly rate to 40,000, it will take 40 years to reach the target of 2022-23, ignoring any concurrent future increase.
It is worth mentioning that resistance to installing POS in the WRT is not the multiple GST or high rates, as these are recovered from the consumer the moment they are levied, but the ability of the POS system to lead to the estimates of WRT sector gross/net taxable income, even under single digit GST, which the WRT sector would have to pay as registered filer, directly from their own pockets (inability to shift its incidence) under the ‘Ability to Pay’ principle.
From another angle, currently there are 3.5 million registered income tax filers (leave alone the active tax payers, which fluctuate every year), constituting 1.48 percent of the population of Pakistan, compared to 4.8 percent in India. No wonder India is a magnet for foreign investors with stable currency.
Using various fiscal gimmicks in the last 30 years such as presumptive/withholding tax, filer/non-filer distinction, electricity bills, shop size criteria and flat absolute tax has failed to make a dent in I-tax revenue or enviable jump in income tax filers even close to the Indian percentage which is even low by international standards. Moreover, these fiscal gimmicks are not direct taxes and are easily passed on to the consumer (with higher burden falling on the lower/middle classes).
For example, many owners of WRT outlets in cities have a basement for goods in their residential houses, to complement the upfront small size of outlet to understate sales, income and thereby poor tax compliance. Recent propagation by the Gurus to replace income tax for WRT sector by low rate of Turnover Tax also depends on functional and wide spread POS system. Given the above progress, it might easily take another 40 years to effectively implement this tax.
Why is the resistance to documentation and poor tax compliance in general and specific to WRT sector? There are many economic-social-cultural-religious reasons known to the readers. Only two are highlighted here. As a society we are caught in an ‘egg and chicken’ syndrome.
The potential tax payers want to first see the egg in the form of widespread and efficient social services, before they are tax compliant, while tax collectors first want to own a chicken in the form of primary budget surpluses before they start investing in social services.
No doubt, the GOP has remained a wasteful and inefficient spender of tax money since last 75 years and the current spending and debt pattern doesn’t augur well for ‘Chicken’ to appear anytime soon, even with growing indebtedness and emergence of new ‘trump’ cards.
Another reason is the axiom of ‘Keep up with the Joneses’. The service sector, including WRT sub-sector, is fully aware of the consistent inequities in the government’s expenditure and revenue pattern.
The agriculture elite capture of subsidies, tax expenditure/exemptions supplemented by the international/support prices is a rational justification to ‘keep up with the Joneses” by avoiding income documentation through political leverage, similar to constitutional leverage used by the agriculture elite.
Why the need for a hybrid authority and another explicit admission of complete lack of political will and failure of FBR and MOF: a) Since 1988, commitment to enlarge the tax base has appeared in every IMF program, but has been avoided due to fear of losing urban vote bank (namely WRT mafia) and using geo-political, geo-strategic, geo-economic and geo-climate strategic trump cards.
Given the lack of trust of multilaterals and other friendly donors, the time is not far when every tranche will be released after verifying the quantitative targets (in terms of number of POS) set for documentation of WRT sector.
As experienced in the past one year, creditors are no longer in a mood to wait for an another 40 years to expand the tax base after being patient for the last 30 years, b) Given the complete lack of consistent political will, and political clout of WRT sector, any future political government for the next 5 years would have to be forced (not nudged) to expand the tax base on war footing; and c) the enormity of the task, endemic administrative slack and exaggerated operational bottlenecks.
Thus an authority similar to a hybrid of NCOC and polio program is needed to size, operationalize and monitor the documentation of this sub-sector and economy as a whole. Even if PBS (Pakistan Bureau of Statistics) is an active partner of this hybrid authority, security risk to enumerators is far greater than faced by the polio workers as ultimately it will directly hit the take-home income of WRT sector.
The pay-off in terms of sustainable economic management via restoring confidence of foreign investors, lower deficits and stable currency will be far greater than the recently established SFIC.
The authority should be a time-bound temporary arrangement with a life of 3 years. A stylized time frame is as follows: The first year should be spent on formulating a documentation plan, that should include sizing (census) of the WRT sector in collaboration with the PBS.
Based on census profile, only 50 percent of the sector be selected (1.64 million), based on the principle of ‘best bang for the buck’ and one may add another filter ‘limited time” to the above principle.
The first year would also include planning for the likely operational bottlenecks (e.g., infrastructure of WIFI/grid-independent communication system for selected smaller towns and cities, given the volatility in electricity supplies) and mitigation strategies for the potential resistance by the mafia.
Enlarging the mandate of this authority to include some elements of ‘Benefit’ principal of taxation to dilute the resistance of WRT sector will have to be at the political cost of pound of flesh routinely demanded by the national and provincial legislators.
The operational exercise constituting registration and installation of POS can begin in the second year. Whether to start the registration sector-wise or geographically, it is suggested that similar to collection of property taxes, it is better to start geographically in each province simultaneously, starting with smaller city in each province, say with 0.5-1 million of population, depending on the sizing/census results.
The advantage in beginning with smaller cities to install POS is that they can act as a pilot for monitoring ‘resistance’ planning and remain manageable in operationalizing the POS system. This sequencing can also provide initial rough estimates of net gain in revenue to calibrate with GST as well TT slab rates.
Gradually, medium and finally large cities/metropolitan areas can be added as operational exercise proceeds and the authority moves up the learning curve. The third year can be devoted to monitoring the smooth functioning of the system and removing glitches before handing the system over to the FBR and MoF.
Ideally, the documentation of WRT sector should start after reducing the level of tax expenditure drastically in the economy, imposing agriculture I-tax, privatizing SOEs and radical institutional reforms, but unfortunately the economy cannot wait (given its stubborn and rent seeking political structure) another 30 years for this to happen as short-run stabilization of fiscal accounts will lead to exit from boom and bust cycles and hopefully to economic sustainability.
Moreover consistent ‘willingness to pay’ taxes in the long-run is crucially dependent on equitable burden and benefits of the fiscal system.
The above 3-point agenda of the authority will not only increase the tax payers by more than 50 percent in 3 years, but provide a working model for transitioning to sustainable local fiscal systems, as envisaged in the constitution.
Ultimately, local viable and sustainable fiscal systems are the only tool, option and sustainable guarantee to meet the demands of explosive demographics and reduce dependence on foreign loans and indebtedness. The sooner it is realized the better for the economic survival and health of the nation.
Copyright Business Recorder, 2023
Comments
Comments are closed.