ISLAMABAD: Economists at a roundtable conference organised by the Pakistan Institute of Development Economics (PIDE) while stressing the need to rationalise tax structure of the country have said that overall, the federal government relies heavily on indirect taxes, resulting in the overwhelming collective revenues.
They said the tax mix was not ideal, and there was a need to reconsider functional assignments and the experience of general sales tax (GST) on services.
They further said the provincial tax efforts also were contributing to burdening the economy instead of relaxing, adding that the indirect taxes, such as customs, federal excise tax, and sales tax, outweigh direct taxes, creating distortions and discriminatory resource allocation. The effective tax-to-GDP ratio, which considers compliance cost, scrapping non-economic taxes, and tax expenditure cost, is calculated to be 14.23 percent for 2019. To address these issues, it is recommended to upgrade both tax policy and authority with a focus on “Doing Taxes Better” to achieve higher taxes and higher growth.
The participants, unanimously, agreed that the distinction between a filer and a non-filer must be abolished. They advocated for universal tax return filing, simplification, and the establishment of a reasonable threshold. Income tax should be universal and not segmented.
They said that essentially, Pakistan needed to work on creating a clean system of documentation where filing should not be solely based on the rate differential but should be made mandatory for all items. Additionally, income tax should not be segmented; it should be universal and cover agriculture income tax on the sales tax side, they recommended.
Instead of having too many revenues, the withholding tax (WHT) regime needs simplification. The economy would benefit from reducing withholding to improve efficiency. The process of refund adjustment should be made easier, and the Federal Board of Revenue (FBR) should prioritise streamlining the online refund process to minimise economic costs.
Dr Nasir Iqbal, Associate Professor and Chief of Macro-Policy Lab, PIDE said the roundtable conference, “Fixing Fiscal Policy,” aims to unite policymakers and thought leaders to foster collaboration and develop local solutions in the fiscal framework of Pakistan. “By bringing together academia and policymakers, we seek to chart a visionary path of fiscal policy in Pakistan for the future, transcending from short-term approaches and firefighting,” he said.
Dr Nadeemul Haque, vice chancellor (VC) PIDE said three things needed to be focused on for the fixation of fiscal policy. “First, the role of the government is crucial in ensuring effective fiscal management. Second, taxation and expenditure must be carried out in a transparent manner with accountability. This includes how to collect taxes, how to spend them, and where to allocate funds. Lastly, debt management is also an important aspect that requires attention,” he said.
Dr Ashfaque Hasan Khan, Principal of the School of Social Sciences and Humanities of the National University of Science and Technology (NUST) said that to address economic challenges, it is important to immediately reset the role of the government from being an active player to a facilitator. This would involve eliminating the current regulation-based regime and transitioning towards a rule-based economy. The use of a regulatory guillotine would help in the elimination of unnecessary no-objection certificates (NOCs). A rule-based approach, coupled with monitoring and evaluation, would ensure a more efficient and effective economic system.
Dr Ashfaque Hasan Khan made a comment on the presentation and stated that “within the constitutional limits, without improving the NFC Award, we cannot adequately address our fiscal issues.”
Speaking on the subject, “Role of Government and Economic Stagnation”, while presenting the detailed presentation, Muhammad Shaaf Najib, research fellow PIDE said that interest payments account for a significant portion of the targeted tax revenue, amounting to 77.5 percent. The total federal liabilities, including interest payments, pensions, and grants to provinces, stand at Rs9,512 billion. These liabilities exceed the targeted tax revenue, indicating a lack of a sufficient revenue base to support the functioning of the civil government, subsidies, and development spending. As a result, all development expenditure is entirely financed through debt. The remuneration of civil servants involves a basic salary and significant monetary and non-monetary benefits. The total reward is significantly higher than the base reward stated in the contract. However, the cost to the government for senior civil servants is much higher than the benefits they provide.
They said that significant government intervention in economic activity/market, both as an active economic agent and through a regulatory regime, has been a prominent feature in the economy. PIDE research suggests that the government has a footprint of over 60 percent of the GDP and there are more than 200 state-owned enterprises (SOEs) at the federal level, many of which are loss-making entities.
The Privatization Commission has been inefficient in dealing with these issues. The government’s presence is hindering competition and market growth. On the regulatory front, the large size of the government is evident with over 120 regulatory authorities in Islamabad alone, according to the PIDE research. This abundance of registrations, licenses, certifications, and other permissions (RLCOs) has resulted in a high cost of regulatory sludge, which accounts for 45 per cent of the GDP in only 24 activities.
Dr Khalid Mahmood, Senior Research Economist, PIDE on “Taxation and Tax Administration” stated that taxes often take the spotlight in media discussions; however, the tax policy in Pakistan is marred by arbitrary revisions, mini budgets, and IMF conditionalities. Additionally, tax administration inefficiencies require attention. The round table conference aims to explore long-term reforms for a modern tax policy. Consequently, it is evident that tax collection primarily burdens the unprivileged while benefiting the privileged class. The implications of the tax structure include exploitative tax composition, complex tax principles, excessive withholding regime, high compliance cost, fragmented tax system, and hindered growth, as well as low fiscal resource mobilisation. Furthermore, Pakistan's tax-to-GDP ratio has been declining, indicating a lack of tax efforts, policy, political will, and tax morality.
Speaking on “Pakistan’s Debt Management” Dr Haider Ali, Lecturer of Economics at PIDE highlighted that Pakistan’s debt profile has worsened in recent years with a significant increase in floating debt in recent years. “With increasing expenditure, our debt has continued to increase.”
He identified numerous questions that we need to find answers to devise an efficient debt management policy for the long run such as how much debt is sustainable. What is the prudent composite of debt? And whether we have an effective debt utilisation framework in place or not?
Mohsin Mushtaq Chandna, Director General (Debt), Finance Division mentioned that Pakistan’s external debt saw an increase in the last decade when Pakistan turned to the global bond market to raise foreign reserve funds. The CDNS in recent times has dropped due to various policy decisions such as restricting institutional investment in saving schemes.
Distinguished participants included senior economists, researchers, and fiscal experts from various institutions across the country, such as the Ministry of Planning, Development and Special Initiatives, P&D Balochistan, QAU, SZABIST, the US Embassy, ADTMA, P&D Punjab, IIUI, NUST, and COMSATS.
Copyright Business Recorder, 2023