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Pakistan’s taxing problem

There’s a lack of political will to take tough economic measures

Written by Ejaz Haider |
November 22, 2010 5:12:32 am

Scenario: The Government of Pakistan’s kitty is empty; the economy has been growing at an average of 2.75 per cent over the last two fiscal years and post-floods rehabilitation and restructuring has put a further $10 billion burden on the government. If nothing is done by early 2011,the government won’t even be able to pay salaries. It needs to raise taxes.

Problem: The proposal to reform the taxation system and implement VAT (value-added tax) could not work out because of several constraints,so the government settled for GST (general sales tax). That caused uproar and the government had to rethink the GST and placed the bill as RGST (reformed general sales tax) on November 12 before both houses of parliament.

Problem 2: If the government thought the opposition and its allies would be more amenable to RGST,it was wrong. The opposition Pakistan Muslim League-Nawaz is up in arms,saying it is “criminal to support this [RGST”. The allies,Awami National Party (ANP) and the Mutahidda Qaumi Movement (MQM),are equally vociferous in opposing the RGST.

The bill has been sent to the committees but if the government cannot at least get its own allies on board,and soon enough,it will face the humiliation of the bill being defeated in parliament,not a savoury political or economic scenario that.

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So,how does one reform the tax structure,especially at a time when the government needs to raise money? It also makes eminent sense,given that Pakistan’s tax to GDP ratio is 9 per cent and declining. I tried reading a few papers,and the mathematical models boggle the mind. Given parliament’s collective IQ,it is difficult to see how the members can understand anything about tax reform beyond the mantra of “Oh! We are not going to let this happen because it works against the interests of the great unwashed!”

But this is precisely the irony. These men will use the ruse of representing the “will” of the unwashed to promote the vested interests of the washed. Democracy doesn’t always merchandise good wares.

Pakistan has a robust economic team. But the trio — the finance minister,the Deputy Chairman Planning Commission and the Governor of the State Bank — is unelected. Their economic proposals must negotiate the tricky political terrain.

Previous efforts to reform Pakistan’s taxation system have failed. A December 1986 letter from the Chairman of the National Taxation Reforms Commission to the then finance minister said: “…the three basic maladies from which Pakistan is suffering at present are tax evasion,smuggling and corruption. These are inter-related and one feeds on the other.”

It could be today’s report. Then too we heard about “a complicated and archaic system of tax laws” which needed to be reformed. The Commission “recommended to the Government to begin to prepare to implement a VAT in the medium term” and noted “that the actual sales tax collection (1982-84) was a shade over 10 per cent of the true potential that could be realised if there were no exemptions”.

But even when corrective attempts were made,like implementing GST in the ‘90s,which is supposed to have inherent incentives for producers within a chain,the rent-seeking bureaucracy,in collusion with vested interests,queered the pitch,resulting,among other things,in backward shifting of taxes and breaking the GST chain. The formal sector got penalised; the informal got incentivised.

The issue,however,goes beyond what needs to be proposed or done. Many studies,some absolutely first-rate,have shown the way forward clearly. But how does one implement the good ideas?

Now even bloggers,most of them opposed to anything this government does,have jumped into the fray. The government is getting it from all sides and time is running out for it.

GST will have an inflationary effect,is the cry. Sure. But if the government doesn’t go for reforming the taxation system,it will have to continue borrowing from the State Bank. No one can deny the inflationary effect of that!

In fact,the government has to do more. It needs to go back to the budget and slash non-salary current expenditure. Depending on how brutally that is done,it may save Rs 20 to 30 billion. Similarly,it needs to figure out how to plug the colossal losses caused each year by public sector enterprises. In FY09 WAPDA (Water and Power Development Authority) alone dented the budget by Rs 218.5 billion and PIA by Rs 25 billion. Obtaining some room on this front alone can easily free up to 2 per cent of the entire GDP.

But off-loading public sector enterprises has its own political and legal implications. And in any case,none of the other reforms precludes reforming the taxation system; the government has to undertake all the measures. That,right now,seems like a Sisyphean task.

The writer is Contributing Editor,‘The Friday Times’,Lahore

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