THE finance experts of the federal government have this year favourable environment for the framing of a traditional budget due to a combination of factors. There seems to be no scarcity of resources, thanks to the generosity of big powers, international financial institutions, accelerated economic growth and fast moving inflation. In order to reward Islamabad for acting as a frontline partner in the war against terror, the United States, the World Bank and the Asian Development Bank and other western powers have made a commitment of more than $3 billion annual assistance for five years.
The two banks have given indication of additional aid if the government comes up with viable infrastructure projects. In addition, the United States pays rent for strategic assets being used by the US armed forces in connection with war on terror. The exact rent amount is not officially disclosed. Press reports however have hinted that it is around $500 million.
The GDP growth rate is forecast between 7.4 and 7.8 per cent during the current year. This should reflect itself in increased revenues. Simultaneously, inflation is running at about 10 per cent annually. These two elements — the GDP growth and inflation — should contribute straight away 17-1 per cent increase in tax revenue collection. It is in this background that the World Bank is reported to have suggested a target of Rs880 billion for tax revenue collection.
While the rise in oil prices has brought distress to the consumers in general, it has been a bonanza period for tax revenue collection. Government ministers and other functionaries talk loud about the decline in petroleum Development levy and call the loss a subsidy but remain silent about the enormous additional amount of taxes collected on POL products on account of price increases. These increases are collected in the shape of import duty, excise duly and sales tax which showed a rise of 24.8 per cent during the first half of the current fiscal year according to the Governor, State Bank.
Oil is the strategic component of developing economics. As such it should now cease to be treated as mobilizer of tax revenues, a practice of the imperial era when oil exploration, refining, marketing and its price fixation was 100 per cent under the control of imperial powers which used to exercise this control as mechanism for mother country’s development.
The situation has basically changed but oil continues to be used in all countries, more so in developing countries, as mobilizer of tax revenues because it is easier to collect revenues through administrative steps, rather than through exact accounting and assessment.
However time has now come to assess whether the practice has now become outdated and instead of facilitating development it has started obstructing the process. Oil needs to be looked upon as a lubricant of economy, a magnet for investment and a stimulant for competition. With globalization of economies and tariff walls crumbling prices of POL products have assumed critical importance in the pricing of all products and have thus started affecting both overall exports and imports.
Manufacturers of industrial goods and producers of agricultural products in Pakistan claim that prices of POL products which constitute as much as 10 per cent of the cost, are highest compared to neighbours and other competitors and affect Pakistan’s position in international trade. It is because of this reason that our imports are rising faster than our exports.
During the current year, our imports are expected to be higher at $18.5 billion than projected and exports are estimated to be lower than targeted at the beginning of the year.
Thus the government functionaries responsible for federal finances are in a happier position than they were ever before. But this position is being utilized for enhancing their own personal images, instead of remedying the intrinsic imbalances.
We see Mughal style generosity in announcements of special bounty packages, outside the assemblies and budgets, for provinces, cities, towns and other government and private entities.
In view of the comparatively comfortable financial position of the federation what should normally have happened is that the financial situation of the federating units and local bodies should have been improved through devolution of financial powers.
All these units carry the responsibilities of maintaining law and order and improving social indicators but are starved of resources. The three smaller provinces have been, over a long period, financially in distress. On top of that they receive development loans from the centre at exploitatively exorbitant rate of interest.
The latest indication of generosity given by the federation is to increase the share of the provinces in the central pool of taxes by two per cent over a period of five years at the annual rate of 0.5 per cent. Consider this increase against the background of a decade of postponements of proper National Finance Commission awards and the fact that provinces depend on centrally collected tax revenues to the extent of 90 per cent for their budgets. Consider how much financial autonomy the proposed enhancement in federal transfers would confer on the provinces. The raise may not be enough even to accommodate the proposed increase in pay and perks of government employees which is firmly on the agenda.
What is desirable is to constitutionally enable the provinces and local bodies to raise resources on their own commensurate with their responsibilities. For this, the minimum that needs to be done is to effect reversion to the units what was their own.
At the time of the establishment of Pakistan, levying of sales tax was the prerogative of the provinces. Due to the emergency situation surrounding the birth of the new state it was taken over, as a temporary measure, by the centre. What started as a temporary step became perpetuated.
With the economy claimed to be booming and the treasury full to the brim, the emergency and its consequential effects should now end. The sales tax should revert to the provinces. To make this levy judicious under the present circumstances, it should be divided into two sectors, like the excise duty — central and provincial— the former limited to imports and related services and the latter to domestic products and related services.
Time is also right for correcting another long over due imbalance. It is the imbalance between direct and indirect taxes. While the burden of indirect taxes falls mostly on low income groups, the burden of direct taxes is mostly borne by the rich. The share of indirect taxes in the aggregate tax revenues comes to 68 per cent and that of direct taxes to 32 per cent. If the element of directness of some of the direct taxes in the shape of with holding tax is segregated, the share of indirect taxes in the aggregate tax revenues rises to 76 per cent and the share of direct taxes declines to 24 per cent.
This iniquitous aspect of the tax regime operates not only between the two broad groups but is operative within each group. This affects most adversely the lowest decile of income and the least the highest decile of income. A right mix of direct and indirect tax revenue collection is 50:50 which distributes the burden in equity.
It is time to take initiative to address this iniquitous aspect of the taxation structure by expanding the list of income tax assessees and improving the mix of direct and indirect taxes. The list stays frozen for the last two decades at 1.1 million assessees despite the expenditure of billions on tax reforms.
Simultaneously, the rate of federal sales tax be brought down to a reasonable level to provide relief to consumers in general. Equally important is the participation in selection, planning and execution of development projects of the people for whose benefit they are undertaken. These very people are at present getting alienated for the reason of non-participation.
