Two flawed policies

The Finance Minister, Ishaq Dar, continues to come under considerable criticism from all sources, including the business community - the PML-N's critical political support base - and post 2015-16 budget traders/wholesalers have ratcheted up pressure on him to withdraw the 0.6 percent withholding tax on all banking transactions - a group that contributes roughly 18 percent to the country's Gross Domestic Product. Is this charge appropriate and if so why is the Prime Minister continuing to support Dar given that he may be compromising the party's re-election bid?
The most pressing question today is whether the 0.6 percent withholding tax on all banking transactions levied in the budget fro the current year, a tax that is being resisted by not only a major and powerful PML-N support group comprising traders/wholesalers but also by an increasing number of independent economists, can be supported from an economic perspective? Till the end of this month the tax would be levied at 0.3 percent with the Finance Minister and his appointed Chairman of the Federal Board of Revenue (FBR) insisting that it is not going to be withdrawn or negotiated downward. The two men have launched a partially successful campaign in favour of the tax by accusing traders of opposing the tax because it aims to bring them into the tax net. The traders as tax evaders unwilling to pay the taxes due on their high net profits is a charge that many Pakistanis may well espouse based on the perception that a: (i) very small number of income tax payers in this country with the bulk consisting of the salaried while the rich farmers are exempt under the constitution, the rich traders do not file returns and therefore do not pay income tax, and the industrialists employ all legal loopholes not to pay their due taxes; and (ii) the argument that filers would pay a lower rate while non-filers would pay a higher rate or in other words the focus is on enhancing documentation of the economy.
This logic has two fundamental flaws. First, a tax levy must not generate revenue under that particular levy while reducing the overall collections through reducing collections under another levy. The 0.6 percent tax on all banking transactions has led to two disturbing factors in the economy already, notably (i) the rise in the currency in circulation (it has more than doubled since end June 2015) and (ii) the decline in bank deposits doubled during July-to-date compared to the comparable period of last year. This effectively implies that our cash economy has increased as a consequence of this tax in marked contrast to the stated objective of this tax, and this would account for lower and not higher total tax collections.
Secondly, the implementation of this tax is to be undertaken by banks who are required to look at all those who have filed their returns compare it with the list of filers on the FBR website, and then levy it on those not on the list. One would hesitate to support this measure of the FBR for the reason that it is not the job of the bank and a private bank at that to distinguish between filers and non-filers and then to tax them. This job is clearly that of the FBR. But what is more disturbing about this is the fact that there are many legal non-filers, or those allowed not to file their returns, who would be compelled to pay this levy as their name would not be on the list of filers. This element of the levy challenges the oft made Finance Minister's claim that he highly values those who remit money to this country to the tune of 16 billion dollars a year. Clearly he values the income from this source as that alone has allowed the economy to stay above the danger mark but then inexplicably proceeds to penalise them.
Emigrants who live and work abroad but remit money to this country are legally allowed not to file returns but the banks would be liable to charge the levy on withdrawals above 50,000 rupees as their names would not be on the FBR uploaded list of filers. There is no data on whether the hundi/hawala system has become more active after the levy of this tax however one may well assume that this is so. It is very unfortunate that the concerns frequently voiced by several political parties of allowing dual nationals to stand for public office in appreciation of their contribution to remittances misrepresents the beneficiaries of such largesse: the true beneficiaries would be those dual nationals who would materially benefit from holding office in this country while those large numbers who remit money for their families in Pakistan would be taxed at 0.6 percent on all banking transactions.
Nadra identified 3 million potential tax payers during the tenure of the PPP-led coalition government and even though there were some issues with respect to the list, including the fact that many belonged to the farm sector and were not eligible to pay taxes, yet one would hope that the federal government takes the initiative and refines the list. If Dar/FBR can argue that traders are evaders and must be proactively brought into the tax net then so must the rich farmers on their net income (not gross as there they begin to refer to their rising input costs); and to fall back on the constitution as being the impediment to the levy of farm tax is ridiculous given the fact that the PML-N government not only violates the constitution routinely (it has called a CCI meeting only twice or thrice since it came to power while as per the constitution the CCI should have met at least 8 to 9 times) with its ministers rarely attending parliamentary sessions.
One would also suggest to Dar/FBR to withdraw the provision exempting Pakistani nationals living abroad from double taxation; given over 200 billion rupees are banked in Switzerland and a similar amount invested in the UAE real estate alone it is time for the country to follow the US route and compel all our nationals abroad to pay a tax to this country irrespective of what they pay in their country of residence. This would also temper accusations of money laundering against leaders of political parties and their children.
The Dar-led Finance Ministry is engaging in unprecedented levels of borrowing from internal and external sources - loans and through issuance of government bonds/sukuk with a rate of return much higher than the international rate. Higher loans have implied a rising interest bill sourced to rising borrowing levels by the government domestically and from external sources. Domestic debt rose from 9,571 billion rupees in June 2013 to 12,260 billion rupees by June 2015 with bond issuance a major source of borrowing - from 1,782 billion rupees in 2013 to 4,482 billion rupees last year.
Commercial banks were the major purchasers of low-risk government paper leading to crowding out of private sector loans resulting in lower economic activity with its consequent negative impact on tax collections. Unfunded debt, from savings schemes, was yet another source of revenue for the Dar-led Finance Ministry - and reliance on this source rose from 2 trillion rupees in 2013 to 2.4 trillion rupees in 2015. Dar also claims that the government is successfully embarked on long term as opposed to short term more expensive loans. This is not verified by data on the State Bank of Pakistan website: short term external debt was no more than 0.8 billion rupees in June 2013, 69.3 billion rupees in June 2014 and 52.7 billion rupees in June 2015.
It is unfortunate that the IMF Mission Chief for Pakistan's ongoing programme is not only accepting manipulated data, a deficit that is compromising growth, but also appears to be focused on total revenue collections rather than on the source of revenue which is strengthening the hands of the Finance Ministry to the detriment of domestic economic activity. At the same time the Prime Minister continues to praise Ishaq Dar's accomplishments at all fora based on manipulated data and appears to give little importance to the country's rising indebtedness since he came to power.
One would urge the Prime Minister to allow a truly independent panel of experts to determine the effectivity of the taxation measures in place today, and be wary of appointing a set of experts whose criticism can be muffled by dint of being a member of such a monitoring committee. The need of the hour is an independent committee to evaluate the true impact on the economy of the flawed tax measures as well as the marked rise in reliance on external and domestic debt; but this may not be possible as long as the Federal Bureau of Statistics is under the administrative control of the Ministry of Finance.