The government has reportedly refused to reduce the general sales tax (GST) on tractors from 10 to 5 percent, according to a Business Recorder exclusive. The rationale provided was that the objective of the earlier reduction in GST was not achieved as the industry did not reduce the price of tractors proportionately as envisaged by the government. Hence the government maintains with a high degree of credibility that as the targeted beneficiaries namely farmers and, by implication, the general public did not benefit from a reduction in sales tax therefore it feels no compulsion to reduce the levy of sales tax.
The industry, in turn, claims that with a massive rise in the cost of inputs, particularly energy and transport costs, there was simply no financial benefit of reduced taxes that could have been passed on to consumers. Given the state of the economy if industry is compelled to pass a sales tax reduction on to consumers, it would suffer losses leading to an operational shutdown; or such is the logic advanced by the tractor industry - a logic that has also been advanced by other sectors.
Various studies undertaken by multilateral and national researchers indicate that from an economic perspective, sales tax is a good tax as amongst all other taxes it has the most favourable impact on growth, investment and savings. It is demand-based and hence has a favourable impact on savings and/or investment climate and on the growth rate. Be that as it may, the regressive aspect of sales tax, defined as a tax with a greater impact on the poor relative to the rich, is largely mitigated by keeping essentials out of the sales tax net. Or, in other words, food items and low quality clothing are generally exempt from a levy of sales tax.
Tractors in this country are largely in use not by subsistence-level farmers but by the rich landlords as well as by those with median landholdings of or around 12.5 acres. While the government's intent in reducing sales tax on tractors may have been to benefit the subsistence-level farmers, yet that was unlikely to happen given that a poor farmer is unlikely to have access to 90,000 rupees - the price that the government expected a tractor to come down to when it reduced the sales tax levy. Another reason is the existence of powerful cartels in this country with tentacles reaching the political/bureaucratic leadership in the country. In addition the Competition Commission of Pakistan, in spite of its rhetoric and raids, remains ineffective in dealing with powerful cartels. In short, any sales tax reduction on tractors must be premised on an analysis that the target beneficiaries would be the subsistence-level farmers which was simply not the case. Thus one can support the government's decision to keep the sales tax on tractors high.
Taxes are used by governments as a fiscal policy tool to mend whatever ails the economy. Thus in the event of a recession the desired fiscal policy is to reduce taxes which, in turn, would put more money in the hands of the general public and thereby raise sales and productivity. In the event of a boom there is a need to mop up excess liquidity and taxes are therefore raised. In Pakistan, we have a massive declining output and high money supply in circulation fuelling inflation. And the government tackled the economy by allowing its expenditure to exceed what was budgeted, not making any marked inroads into raising tax to Gross Domestic Product ratio and relying heavily on borrowing with its consequent inflationary impact. The solution to our economic woes is not to manipulate a tax on any one industry but to reform the entire tax base to ensure that it is catering to the needs of the economy.