Pakistan today is a country wherein each day begins with revelations of bad governance that shock its citizens. Yet the country's in-power politicians are focused only one thing: holding on to the power they have; quick and well-designed remedial action to undo the exposed maladministration in state institutions is their lowest priority as proved by the by-election in NA-122 constituency. Recently, there were revelations of flawed practices being in vogue not just in state offices but in thousands of the country's primary schools, secondary and higher secondary boards of education, colleges, universities and even hospitals, which shows the depth to which governance abilities (or tendencies?) of the Pakistanis have fallen because of virtually zero accountability.
These revelations come on top of those that revealed the serious financial weaknesses that have developed in PSM and PIA - entities that the government proposes to privatise. Don't the politicians know that, to get a fair price for the taxpayers' wealth invested in state-owned enterprises (SOEs), they must be re-structured and revamped so that they don't appear sick units?
Or are we to believe that, in order to sell the SOEs to the politicians' favourites, the strategy is to swiftly turn the SOEs into sick units so that they can then be auctioned at the lowest price? Isn't this what was done to both PIA and PSM over the past seven years? Can we now privatise them at a fair price? The answer is: that's the cost of politicking that the nation must pay.
While this display of governance flaws goes on with its hugely damaging impact on the perception about the country's sovereign risk, the government's sole focus is build-up of exchange reserves with borrowed money which the country's Finance Minister cites as a "commendable" achievement. What has been the economic benefit of these reserves remains a mystery.
The question is: "will the build-up of exchange reserves reduce (even in the medium term) the fiscal imbalance that Pakistan confronts?" Is fudging the fiscal deficit figure the route to bridging the fiscal gap? Is over-reliance on imposition of indirect taxes (highly questionable given the fact that these taxes impact the rich and poor alike) bridging the gap fiscal gap?
The challenges posed by slowdown, especially of the export sector, are forcing the government to portray a deceptively attractive profile of the economy. The government justifies increase in indirect taxes on the basis of the bottlenecks in increasing the number of taxpayers; how desperate it is, was exposed by its (luckily, rebuffed) proposal to tax inward foreign remittances.
Presently, the most controversial indirect tax is the 0.6 percent WHT on banking transactions, which the FBR had claimed was the route to identifying non-filers of tax returns and bringing them into the tax net. Over the levy of this tax, there were countrywide strikes that finally forced the government to look for a "negotiated" and less unfair method of imposing this tax.
For those willing to surrender the controversial WHT for the July- August period and file the relevant tax returns, the continued non-functioning of IRIS - FBR's system for filing electronic tax returns - remains a problem because the last date for filing these returns expired on October 8, while huge unreported data has been piling up with the withholding agents.
As for the number of non-filers exposed by hiking up the WHT on banking transactions, in September, this scribe had asked the FBR to reveal their number but the FBR didn't respond. Now press reports suggest that FBR suspects that banks concealed a portion of WHT deducted from non-filer, but with incomplete data on deduction of WHT, it can't proceed further.
Was it not necessary that, at the outset, FBR devised a fool-proof strategy that could ensure that banks won't be able to do what the FBR now blames them for? Isn't (allegedly) this tax enriching the banks at the expense of their accountholders? Has this mess served to increase tax revenue, let alone bridging the expanding rich-poor gap? Will the FBR answer these queries?
Given its preference for indirect taxation, FBR isn't doing enough to train and expand its field formations to widen the tax net, which foretells further rise in the number and rates of indirect taxes. Apparently, none in the FBR read the report of the Organisation for Economic Co-operation & Development (OECD) released in May, which highlighted the negative impact of indirect taxes.
In the OECD states, over-reliance on indirect taxes expanded the income gap to its highest level in three decades, with the richest 10 percent of the population earning 9.6 times the income of the poorest 10 percent. By end-2014, this gap touched its peak - the top 1 percent owned 18 percent of the household wealth, and the poorest 40 percent owned just 3 percent of it.
The Secretary-General of the OECD was of the view that a tipping point has been reached, and "inequality in OECD countries is at its highest since records began", and "by not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth" - warning that our finance minister simply ignored.
Even if the FBR believes in its flawed convenience-driven indirect taxation strategy, did it develop the capacity in its field formations to check and verify that indirect taxes collected by businesses were being surrendered fully to the FBR, and without a significant delay, because otherwise these taxes could only help enrich the tax collecting entities and increase economic inequalities?
FBR insiders believe that banks' non-reporting of the WHT deducted on banking transactions could amount to billions of rupees once their supplied data is cross-checked with account holders' statements of account - reconciliation that the withholding agents, ie, banks are mandatorily required to file on the 15th day of every month, but didn't file as per this requirement. Not surrendering the full amount of indirect taxes recovered from customers is a common practice, and also the flawed reason why, each year, the government resorts to imposition of more indirect taxes instead of developing the machinery to ensure the full recovery of these taxes from its collecting/withholding agents. It is this flawed system that is pushing up the poverty line.
Economic inequalities are Pakistan's harsh reality where petty and mega crimes, extortion, and target killing became a 'profession' for thousands of its illiterate, unskilled youth. Reason: overreliance on indirect taxes instead of redistributive taxes to generate the resources for arrangements to contain the decline in educational attainment and skills among the lower income groups. The tragedy is that the IMF backs the flawed policy of ever-higher indirect taxes that increase poverty.
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