EDITORIAL: The World Bank has evaluated the ‘Pakistan Raises Revenue project’ as moderately satisfactory. Three observations are critical. First, the project’s total cost was estimated at 1.6 billion dollars with 400 million dollars IBRD/IDA concessional funding.
It was approved on 13 June 2019; exactly a month after the 6 billion dollar Extended Fund Facility programme was approved by the International Monetary Fund on 12 May 2019. The timing of the two clearly indicates the synchronicity between the two multilaterals in ensuring the success of the two programmes.
Second, the expected closing date of the programme is 28 June 2024 with a scheduled release of 400 million dollars which reveals that the evaluation was undertaken by the department that approved the loan with an inherent bias in favour of the implementation progress and not by the independent evaluation office of the World Bank, which would only select the project for evaluation once it was completed.
And finally, the IDA’s project appraisal noted the following disturbing elements of the tax structure that have been consistently highlighted by Business Recorder in the past as well as at present due to lack of any notable success in implementing structural reforms in the tax system: “The tax system is regressive due to its reliance on indirect taxes…the collection of most income taxes through withholding agents. The withholding regime is also problematic because of the administrative burden it places on businesses that are obliged to withhold taxes, and because it distorts economic actors’ incentives…tax evasion is pervasive because of low tax compliance and legal loopholes…foreign remittances within specified limit are tax exempt and widely used to repatriate illegally exported capital. Low taxes on real estate also offer opportunities for tax evasion and money laundering. The tax system is complex because of overlapping jurisdictions with different laws, exemptions, and frequent policy changes.”
The moderately successful rating is also baffling because of the fact that while the 2019 IDA project appraisal report noted that “Pakistan’s revenue performance has improved significantly in recent years, rising from 9.5 percent of GDP in FY11/13 to 13 percent in FY17/18,” by 2022 the tax to GDP ratio had declined to 10.4 percent.
Tax expenditures, however, increased from 1.3 percent of GDP in 2016 to 2.7 percent in 2022 putting a further strain on revenue generation efforts. In a World Bank report titled “Strengthening Government Revenues” dated September 2023 the gap between tax collections and tax capacity estimated at 22 percent of GDP was highlighted.
There is thus overwhelming evidence of the continuation of an unfair and inequitable tax structure that requires urgent structural changes – changes that so far remain pending in spite of the insistence in the ongoing IMF programme to implement structural benchmarks.
To date, the Caretakers have focused on administrative measures, notably upping the electricity rates to achieve full-cost recovery and to realise the budgeted revenue from the petroleum levy, which comprises of 30 percent of total non-tax revenue in the current year (a misnomer as the levy is in the sales tax mode).
The general perception, that the economy is faring better than before, premised on a strengthening rupee vis-a-vis the dollar and a buoyant stock market is misplaced as these two indicators ignore the nearly 40 percent of Pakistanis falling below the poverty line, inflation was a high of 29.2 percent in November with the sensitive price index during the week ending 21 December at 42.6 percent, and July-October large-scale manufacturing index in the negative territory with obvious negative repercussions on employment levels.
The poor are getting poorer and the recipients of budgeted federal expenditure, comprising of less than one percent of the total population of the country, are widely seen as the influential beneficiaries of government largesse.
There is mounting evidence to suggest that the Ministry of Finance has little capacity to either slash current expenditure (allowed to rise by a whopping 52 percent in the current year’s budget against the budgeted amount in 2022-23) or raise revenue by widening the tax net and instead continues to raise/widen the ambit of indirect taxes whose incidence on the poor is greater than on the rich.
The current state of the economy does not bode well for investment, local or foreign, and therefore the focus at the present moment in time has to be on belt tightening at the level of the government (federal and provincial) while implementing meaningful tax reforms.
Copyright Business Recorder, 2023