Advisor to the Prime Minister on Finance Shaukat Tarin, while addressing a conference on the Economy of Pakistan and the Role of the International Monetary Fund (IMF) organised by the Institute of the Business Administration, categorically stated that there would be no new tax in the forthcoming budget and that the focus will be on broadening the tax base with more sectors brought into the tax net.
Less than two weeks prior to the budget announcement statements with respect to direct taxes made by the de facto Finance Minister of the country are likely to generate a flurry of unhealthy activities: the influential groups would try to forestall the imposition of a tax, an example being the successful prevention of the levy of a tax on the stock market last year after a successful representation was made to President Zardari, or take cover in the country's black parallel economy, or indeed remit money abroad; the not so influential have normally paid the price and proof of this is evident from the greater reliance subsequent Pakistani governments have placed on regressive taxes for revenue generation, like the Federal Excise Duty on items such as cement.
Excise duty is imposed on items whose consumption needs to be reduced. These include cigarettes, alcohol and arms and ammunition. Thus one would hope that Tarin would henceforth focus on defending his tax policies after the budget announcement and not before. Be that as it may Tarin did note that he had 'no problem in saying that we will tax everybody.'
While this maybe good news for the public as it would mean that the rich and the influential people, particularly those engaged in the farm sector, the real estate sector and the stock markets, would pay taxes on their large incomes, which, in turn, would reduce the pressure on the government to increase sales tax, yet the public has heard such laudatory sentiments before and no government, including military dictatorships, have yet succeeded in taxing these influential people.
Services sector constitutes over 50 percent of the GDP, while its contribution in the revenue pie is hardly 17 percent. Tarin knows how to attract customers. His prize scheme for attracting deposits in HBL was so successful that it made other deposit takers as well as other creditors raise such a hue and cry to successfully force the then Finance Minister Ishaq Dar to put a stop to it, albeit on flimsy grounds.
Tarin needs to replicate the same as finance minister. He needs to issue sales tax-numbered receipt books to businesses and conduct a weekly draw of receipts deposited by receivers in a prize scheme. This interesting inducement will entice clients of service sector companies to force the businesses to issue receipts which can be deposited with a view to winning a lucky draw.
The prize money could be a fraction of the sales tax collection just like in the Prize Bond scheme. At present, sales tax collection is three percent of the GDP. If it triples, the total revenue collection could touch 16/17 percent of the GDP. At the same time Shaukat Tarin stated that he would end the harassment of taxpayers by the Federal Board of Revenue (FBR).
While holding no brief for corrupt FBR officials it is relevant to note that many a tax payer defines harassment as the insistence of the tax official to the payee to reconcile his income/profits with the taxes he pays. To ensure that the two be reconciled most countries employ auditors who randomly select tax payers for audit.
In Pakistan, the payees have invariably accused the auditors of harassing them; and yet the government's Letter of Intent submitted to the IMF did accept the necessity for the reintroduction of such audits. It is therefore imperative that while harassment must stop yet the auditors must be allowed to continue to perform their due role.
Tarin also identified budgetary support of over 200 billion rupees per year for autonomous organisations like PIA, Pakistan Steel and Pakistan Railways which is a drain on our resources. This is tantamount to our tax rupee being used to underwrite inefficiencies, which must stop. While this may not be the time to sell the family silver given the global recession as well as the liquidity crunch in Pakistan today yet the government must delink losses of these institutions from extending commensurate support from the budget.
This would require three decisions. First, not to interfere in the hiring and firing process or in other words the organisation must be empowered to downsize its staff if required; second, senior positions in autonomous organisations must be filled without pressure or favour and purely on merit. And, finally tariffs/price/user charges be allowed to be determined by the management to ensure full cost recovery.
In addition, the circular debt which has assumed alarming proportions with respect to the energy sector needs to be dealt with on a sustainable basis. At present, the government has opted to issue Term Finance Certificates (TFCs) but care has to be taken that the debt does not recur. A multi-targeted programme is critically needed as this debt is posing grave risks to country's economy.
Nepra recommends electricity tariffs based on the statistics of the best performing disco as a benchmark. The discos where losses are higher are paid the difference as a subsidy from the Budget. But subsidy amounts to government support for inefficiency or reward for failure.
Tarin noted that the government will no longer provide any subsidy on power, a step which may help end inefficiencies. Out of 17 million consumers, 11 million are classified as life-line consumers. There is an alarmingly high incidence of misuse under this head. The tariff structure therefore needs a change. We must end subsidising consumption from production without any further loss of time.
Pakistan needs to spend around $16 billion a year over the next 10 years on infrastructure and social sectors to become an economically viable state. However, we spend $8 billion, or even less. This continuous shortfall is primarily due to the fact that the country is operating as a security state. It is needless to say that the implosion from within has now become a bigger threat to the country's existence than the danger emanating from our eastern front.
While the public is fully cognisant of the fact that resource constraints would continue in the next fiscal year yet it is imperative that a definite increase in priority be placed on education, health and energy sectors mentioned by Tarin as a reflection of the government's resolve to deal with the root-cause of terrorism in the country today.