EDITORIAL: The government is desperate to fill the growing fiscal gaps. The space to finance a continuously high fiscal deficit (over 7% of GDP in 5 of last 6 years) is shrinking fast. Something must be done.
A wise and sustainable way is to reduce the government size (federal, provincial and government-owned institutions and agencies) and to tax the untaxed – real estate and land, retailers and wholesalers, professional consultants, and others.
However, the federal government lacks the will, capacity, and requisite laws to do so. That is why the burden has slowly been increasing on those who are already within the tax net. Businesses operating in the formal segment are paying high rates of tax, including super tax and all.
Employees in the formal segment are paying tax on salaries through their nose. Already, these steps have an economic manifestation with the corporate talent drying out as people are leaving for jobs abroad while big businesses are siphoning the wealth outside Pakistan and capital formation (human, financial and technological) is on a decline.
And even today, the steps being proposed are to somehow tax those who are already in the net. The cabinet committee on economic revival (CCER) is mulling over the idea of imposing wealth tax on movable assets. The initial thought was to have this tax to bring untaxed wealth of real estate and agriculture into the net.
However, income tax on agriculture and tax on land (immovable asset) are outside the ambit of the federal government, given provinces are responsible for the collection of these taxes, which handicaps Federal Board of Revenue due to legal challenges.
That is why the federal government is thinking about taxing the movable assets – such as bank deposits, mutual funds holdings, gold and jewelry, business capital, automobiles, etc.
There was a proposal by the reform and revenue mobilization commission (RRMC) under the previous government on taxing the reserves of corporates and minimum value tax on domestic assets. That idea was assailed by this newspaper and other commentators; it was eventually shelved. Now the caretakers are coming up with another proposal, which could face a similar resistance.
The tax is to be imposed mostly on declared assets where the holders have already paid the fair (or rather more than fair) share of income tax, and now on top of it, the savings in PKR (which are already depleted due to extremely high inflation) will be taxed. That is not fair and would be a self-defeating exercise as it would further fuel the informalization of the economy.
The national saving rates in Pakistan are already too low and one of the main problems of continuously high current account deficit is the gap between savings and investments. Any rational proposal should encourage savings. However, any form of wealth tax — which is regressive in nature — is to further reduce the savings. It would be better to consume today, rather than pay tax on savings (accumulated wealth).
The savings in the informal sector are likely to remain out of the ambit of any such tax while those in the formal one are to be further cornered. The marginal saver would have the incentive to consume or move the savings from formal to informal sector. That will choke the economy further and exacerbate the twin deficit problem.
The government needs to stop thinking along these lines. The fault line in the economy is under-taxing retailer and wholesalers around 20% share in economy), agriculture, self-employed professionals and real-estate. All these constitute more than half the economy. Policymakers simply cannot keep on imposing the burden of the lesser half on the better half.
That will challenge the formal economy and banking system. Already, the onus of government debt financing is falling on the formal banking system where 60 percent (50 percent excluding OMOs - open market operations) of assets are held by sovereign debt. Any wealth tax will push the depositors to move out, which will cripple the system like a house of cards.
The space is shrinking to do these or any other form of shenanigans. It’s about time we fixed the house by taxing the untaxed, trimming the fat off the government, and stop cutting the flesh of the good tax-compliant private sector operating in the documented realm.
Copyright Business Recorder, 2023
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