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Miftah Ismail, the new boss at the Ministry of Finance, seems to be on the spot when he told Reuters in an interview that he plans significant tax reforms in the five months before the government's term ends ahead of 2018 election and touted a policy of greater currency flexibility. Fiscal reforms would focus on widening the tax base, simplifying the tax structures and slashing personal tax rates to encourage more people to file returns. "We have to reduce rates and Prime Minister is very eager to especially reduce rates on individuals," he was quoted as saying by the global news agency. The government would also alter its policy of the last few years under which Pakistan had essentially pegged the rupee to the US dollar and defended its value. "We have decided not to do that," he added. Asked if he would be opposed to the rupee weakening another 5 percent, as the market expected, Ismail said there was a policy of greater flexibility for the currency and he would not be hostile to either weakening or firming of the rupee. Pakistan may return to the international markets for a fresh bond offering but this is unlikely before late 2018. "We will probably not go back to the international markets to issue a new bond until the end of next calendar year so it will not be in this fiscal year anymore," he asserted.
We feel that what Miftah Ismail has said is absolutely true and his policy thrust is in the right direction. The biggest weaknesses of the economy at present are a large budget deficit and widening of the external sector deficit to unsustainable levels. If he could broaden the tax base and bring more people into the tax net, it would be a great service to the economy as previous governments have not been able to do much in this respect. Tax rates on individuals vary in Pakistan but could be as high as 30 percent for salaried individuals and 35 percent for non-salaried individuals. More individuals could be tempted to become taxpayers if maximum income tax rates are reduced to 20 percent or so. Broadening the tax base could even be more difficult. Nobody wants to come under the tax radar willingly. Coercive methods have to be used or incentives provided to increase the number of tax filers. Successive governments have promised to rein in tax evaders and boost revenues but have faced fierce resistance to change. Politicians and businesspeople are believed to be among those dodging taxes. Governments have also largely failed to recover taxes from the agriculture sector and undocumented sector which forms a large part of the economy. Despite all the promises of increasing the share of direct taxes, indirect taxes continue to contribute overwhelmingly to the total tax receipts. However, the principal difference between Ishaq Dar and Miftah Ismail is that while the former was firmly against the depreciation of the rupee the latter sees no harm in using the exchange rate policy as a policy tool to effect equilibrium in the external sector. Asked if he would be opposed to the rupee weakening another 5 percent, Ismail said that "I am a big believer in the free market. We are largely letting the rupee be." The flexibility in the Pak rupee rate and subsequent expectation of narrowing of the trade deficit has given him the confidence to say that we will probably not go to the international markets to issue a new bond until the end of 2018. So far, the State Bank, on the urging of the Finance Minister, had essentially pegged the rupee to the dollar and defended its value. Ismail has said that now the Finance Ministry has decided not to do that. Hopefully, the Prime Minister is also on board and would allow him to take informed decisions independently. Anyhow, the new economic team at the Ministry of Finance seems to have done its homework properly and will do a good service to the country by undertaking the right policies which were, more or less, avoided previously.

Copyright Business Recorder, 2018

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