EDITORIAL: The IMF (International Monetary Fund) may ask the government to enhance the tax collection to reach 13 percent by the end of the upcoming Programme from the existing 9-10 percent.

It is, therefore, truly important to see how successfully finance minister Mohammad Aurangzeb acts upon the imperative of enhancing taxation.

It is important to note that the way things have been in the recent past (in the last couple of years), the focus has grown to taxing the already taxed.

There is, for example, a super tax of 10 percent on corporate on top of a 30 percent income tax, while the taxation on banking is around 50 percent. Then the salaried people are overburdened; someone earning Rs500k per month is paying 35 percent income tax.

The purchasing power of individuals is eroded due to falling real income. The threshold of paying tax is approaching, and some fear that if any further tax is introduced in the upcoming budget, people will take to the streets.

The good news is that the finance minister was of the view that the salaried tax should be reduced, and the corporate tax should be rationalised by ending these super taxes, etc.

These were his views before he assumed his current role. It would be interesting to see how astutely he performs or navigates the challenges during such testing times.

The issue is that the state cannot have a holistic approach to taxation due to skewed fiscal federalism. In top tax-collecting countries (in terms of GDP), around half of the taxes come from the state and city levels.

And significant tax collection relies on non-federal sources in developing countries as well. However, the situation is peculiar in Pakistan where the major share of expenditure is with provinces, while the tax collection and debt liabilities rely on the federal government.

There is enough room for fiscal rationalisation amongst provinces. They don’t have any incentive to generate taxes or to reduce current expenditure.

The land tax, agriculture income tax, sales tax on services, and a slew of municipal taxes have a much larger room where the tax net can be broadened in an effective and meaningful manner.

Then, provinces must take some austerity measures to reduce unnecessary expenditure. However, it is unlikely to happen.

The IMF may not push hard on NFC award revisit, and that is simply not possible under the current political situation. It may ask for removing duplication of resources by the federal government, which has already been devolved to provinces.

But that won’t be enough, and taxes are bound to increase where the onus will fall on the federal government. And there is room in the federal jurisdiction to enhance taxes as well.

A salaried person earning Rs50k per month is paying income tax, while a small retailer (earning more) is virtually out of the tax net. Then any formal company earning over Rs500 million per month is paying super tax (on top of income tax) while big retail chains and the likes are effectively paying much less.

Then individuals working in the formal private sector are paying 35 percent tax on income while professionals like doctors, architects, lawyers, and others pay little or nothing.

And these gaps have persisted for a long time. However, lately, the widening of the gap in days of falling disposable income is testing the limits of honest taxpayers.

Any further increase in rates could become counterproductive. This can push marginal private-sector employers and employees to opt for informality. The informality is already on the rise.

In the last year or so, the consumption of goods like tobacco, juices, and other products where indirect taxes are higher is being replaced by illicit and smuggled products. A large chunk of the private sector is already informal, and now the government is pushing the rest to move towards it.

The pie that the government is squeezing is shrinking fast. The approach needs to be changed. The taxation system should be simple.

The rates should be lowered, and progressivity should be less, and exemptions and waivers should be ended.

All these loopholes are for the rich and influential people to exploit to protect and preserve the elite capture. However, it’s easier said than done.

The IMF wants taxes, and the vested income groups’ interest wants implicit impunity. Then provinces are not coming on board to tax undertaxed sectors in their jurisdictions.

Thus, the government may impose even higher taxes on the existing base. But they should know that this could lead to a violent implosion.

Copyright Business Recorder, 2024