Saddam Hussein
Anti-documentation traders across Pakistan, observed a shutter-down strike on July 13, 2019, in protest against recent budget, which they term as predatory. They perceive these measures as not business-friendly and sponsored by the International Monetary Fund (IMF). The day long shut-down gobbled up economic activity worth PKR 50 billion – according to traders’ own rough approximations late that evening.
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In parallel, the traders are also wary of the novel taxation measures – undertaken by the Federal Board of Revenue (FBR) – Pakistan’s central tax authority. Traders primarily put forward two demands i.e. withdrawal of zero-rating facility for five export oriented sectors and the condition of any transaction exceeding PKR 50,000 to be done through Computerized National Identity Card (CNIC). The strikers also urged for simplification of tax system, withdrawal of additional taxes and stoppage of harassment of traders in the name of tax collection.
However, it is conceivable that a few groups with vested interests just want to circumvent the documentation process and continue to operate in the black economy. While continuing to enjoy spoon-feeding and pocket unjust profits in noÂcompetition-environment via government’s retreat on zero-rating facility.
FBR seems to be following a carrot and stick policy by giving the message that its doors are always open for dialogue, at the same time pronouncing that government will not be blackmailed by anyone. In the same spirit, FBR held numerous consultations with traders, chambers and other relevant stakeholders and are still open to have more sittings in this regard. Pakistan’s huge fiscal deficit is partially related to the fact that it has one of the lowest tax-to-GDP ratios in the world, at around 9% in 2018. Throughout its history, Pakistan has confronted the tax-collection imbroglio. Large-scale tax evasion by the affluent and tax mobilization strategies that rely on regressive taxation disproportionately affect the poor and salaried classes.
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The biggest sectors of the national economy -large agri-business, real estate, banking and finance – all well represented in the established structure of power, are taxed far below their potential. On the other hand, the bulk of the tax burden is placed on ordinary working people through indirect taxes on fuel, electricity and everyday items, coupled with income taxes on salaried workers and import tariffs. Agriculture accounts for one fifth of GDP but yields only 1 % of public revenue; services accounts for more than half of GDP but generates only a quarter in taxes.
Additionally, hundreds of billions in tax revenues are also lost through the issuance of SROs (Statutory Regulatory Ordinances) by tax authorities for tax concessions, waivers and exemptions to powerful industrial and financial interest groups.
In this backdrop, to attain any tangible economic success Pakistan needs to completely overhaul its taxation system on a progressive basis and integrate it with an economic plan for growth in domestic production. This can only happen through the convergence of political will and widespread backing for clamping-down powerful tax evading business interests. This requires a rigorous countrywide effort to document the economy and assets. Tax policy needs to be separated from administration in order to equip, empower and capacitate tax collection officials and systems. The authority for granting tax exemptions and waivers need to be returned to parliament and provincial assemblies, making tax administrators directly and democratically accountable to the people. Moreover, FBR needs to initiate some reforms which include the simplification of tax laws, filing system and appellate system. Tax codes also need to be simplified for a layman to understand and ensure one-window facility in its true essence.
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In the existing conditions of economic crunch, the first thing to look for is short-term revenue goals. Unfortunately, it’s primarily the poor and salaried class that has to bear the brunt in this phase. Although reforms to increase sustainable revenues have been initiated, it will take some time to witness the outcome of long-term goals.
A negative perception of revenue authorities seems to be a crucial factor in the operation of the tax machinery. Among the common people, not seeing any palpable improvements in quality of life over the last decades has led to a mistrust of the apparatus.
In order to restore this ‘lost’ trust, the current government can run public awareness campaigns operating at the grassroots. This campaign needs to be specifically targeted towards confidence building in the new political atmosphere.
The new approach seems to be a shift in emphasis from the ‘hardware’ to ‘software’. Physical infrastructure was, for always, the axis of the development policy for all the previous governments in Pakistan. While the sitting government speaks about human development, environmentalism, devolution, government and bureaucratic reforms. On the implementation front, we will have to wait and see, as it takes minimum two years for policies to show some results.
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In a crux, it is imperative to take urgent measures which can put in place a new social contract between citizens and the government. Of course, citizens must realize their responsibility towards paying taxes. Nevertheless, it remains the government’s duty to make the tax compliance process less cumbersome so that it does not result in excessive transaction cost to the tax payer. The key lies in the smooth and consistent outcomes of the proposed measures while softening the economic brunt on common folk, as the reforms mature into progress.
The author Saddam Hussein is a Research Fellow/Program Officer at Center for Research and Security Studies (CRSS), Islamabad. He tweets @saddampide
