EDITORIAL: A multitude of tax revenue measures introduced in the FY25 budget are unraveling piece by piece.
The government, in collaboration with the International Monetary Fund (IMF), has imposed excessively high taxes on both salaried and non-salaried individuals, exporters, and various sectors through turnover taxes on almost every transaction, changing the character of tax on income and making it more akin to sales tax except for input to output adjustment in the VAT mode.
Some of these tax rates are entirely unjustifiable and could further erode the trust and social contract between taxpayers and the state. In the present form it is ‘Transaction or Payment Value Tax’ rather than a tax on income.
Additionally, in some instances, the responsibility of collecting tax has been shifted to intermediaries, which is not only problematic but also an onerous imposition under the pain of severe penalties and prosecution.
There is widespread discontent with genuine grievances alongside more dubious complaints. In some cases, the government has yielded to pressures from trade bodies and pressure groups; while in others, who are from amongst the compliant taxpayers bereft of a high nuisance value, the government remains steadfast.
Nevertheless, the overall tax collection is likely to fall short of the target as these measures may be found significantly wanting; not for lack of effort but design flaw.
There is widespread concern that the government would not be able to collect the targeted revenue and would have to resort to introduction of the contingency (mini- budget) agreed upon with the IMF, which would not only rekindle inflationary pressures but also shift the tax burden onto certain segments of society.
Achieving the budgeted fiscal consolidation will be challenging and questions remain about the sustainability of the government debt. It is interesting to note what a former State Bank of Pakistan (SBP) Deputy Governor has said in this regard.
According to Murtaza Syed, both the IMF and the Pakistani government are merely “kicking the can down the road.” This raises the question: what is the point of inflicting so much pain on people if the chosen path does not ensure strong economic growth, which is crucial for a burgeoning young population?
The root cause of the problem lies in the profligacy of the government and an unsustainable structure of fiscal federalism, which cannot be resolved without provinces’ involvement in broadening the tax base and implementing austerity measures in expenditure. Sustainability will not be achieved without bringing untaxed sectors into the system, a feat that is difficult to accomplish without political stability.
This alone would not be sufficient by itself but would have to be combined by a significant reduction the government’s current expenditure.
Currently, the government is more focused on survival, grappling with deteriorating security in KPK and Balochistan, and somehow managing public ire and angst over high inflation and real or perceived sense of political victimization in a major political party.
The country needs serious reforms and equitable taxation. Issues such as the much-needed energy (power and fuel) sector reforms can no longer be put off. Yielding to political pressures is not advisable.
Taxing each transaction within the supply chain on the transaction value rather than the margin of the intermediary is simply outrageous and a non-starter.
The government has already had to admit its mistake in the case of petroleum dealers and back down in the case of wheat flour millers. It would be advisable that this illogical measure be reviewed for all supply chains.
The doing away of the requirement of CNICs of players within the wheat flour supply chain is unwarranted and militates against the declared objective of documentation within the economy.
Acceptance of such demands effectively keeps certain sectors outside the tax net and shifts the burden to those who are already taxed, potentially pushing marginal taxpayers out of the system. This is a worrisome development. Clearly, this is potentially a dangerous situation.
Potentially, the Finance Act 2024 (taxation measures) could damage the coalition government’s reputation, depriving in particular the former prime minister Nawaz Sharif-led Pakistan Muslim League-Nawaz (PML-N) of support from the urban middle class and businesses alike.
Copyright Business Recorder, 2024
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