The continuous fiscal and current account deficits have forced the policy makers to rely more and more on external and internal borrowings. The new elected government is going to inherit this legacy from the so-called experts-cum-technocrats. In reality, the persistence of large fiscal deficits remains one of the primary causes for the rise in public debt and a major source of macro-economic imbalances.

By relying heavily on import-based taxation, Shaukat Aziz started facing a dilemma in managing the huge current account deficit. No serious effort was made by the PML(Q) government to use taxation as a catalyst for industrial growth and the sole emphasis was on showing higher figures for revenue collection through inequitable and regressive taxation which proved to be counter-productive for the economy.

The collection of taxes at source and import stage at exorbitant rates testified to a myopic outlook that resulted in shifting of entire burden on the consumers. Due to lopsided policies and regressive tax measures, new industrial activity did not pick up fast and in spite of the unjust withholding taxes, the FBR miserably failed to improve the tax-GDP ratio which remained stuck around 10 per cent of the GDP since 1992.

The burden of ever-increasing presumptive taxes (which are nothing but indirect taxes), levied under the garb of income tax, shifted incidence of taxation from income earners to consumers and clients. They distorted the whole tax system and the short-term revenue-oriented measures failed to overcome the ever-increasing fiscal deficit.

The focus on import-based revenue collection pushed current account deficit to over $7 billion. The country faced the highest-ever deficit the of $6.878 billion during the FY2006-07 In FY2005-06, it was $5.683 billion and in the first seven months of FY2007-2008 reached $7.51 billion. It crossed seven billion dollar mark nearing about 4.2 per cent of GDP, demonstrating that there is a direct link between irrational tax policies and widening current account deficit.

The presumptive taxes were levied in the federal budget 1991 when the fiscal deficit was just Rs80 billion. In FY 2006-2007, the fiscal deficit rose up to Rs373 billion proving beyond any doubt that irrational taxes (if even collection touched Rs843 billion mark) did not solve our fiscal problems, rather forced us to borrow more money from external and internal sources. A deeper analysis of the amendments in tax codes over the last five years shows that the time-honoured canons of fiscal laws—stability, simplification, flexibility and fairness were grossly violated just to show higher figures of collection to foreign donors.

Big commercial importers (who do not want to pay taxes) and powerful contractors (who get contracts by bribing officials) are passing on their tax burden to ordinary people, courtesy presumptive taxation in income tax law which increased the revenue from Rs40 billion in FY1991-92 to Rs843 billion in FY2006-07.

The right to levy taxes on goods and services always vests with federating units within their territorial jurisdictions (Canada, USA and India are notable examples). In utter violation of this principle, the federal government levies such taxes under the garb of income tax. This is one of the worst examples of “federal highhandedness” where the victims are the poor people of the less privileged provinces.

The constitutional responsibility of distributive justice and social equality was altered, just to show higher collection of taxes. The presumptive taxes on goods, contracts and services have not only been retained, but many more receipts like rental income and interest on deposits and government bonds etc have been added through Finance Act 2006. The new government needs to analyse all these changes and equitably distribute taxation rights between the federating units.

An estimated 90 per cent of income tax is now indirect tax-- taxes deducted or collected at source constitute full and final discharge of liability. Even wealthy property owners have been given unprecedented benefit of five per cent tax on gross rental income, which they can easily in-built in rent agreements with the tenets. The rich and the mighty who do not pay taxes, are the real culprits.

The new government should do away with the exemptions and concessions in tax laws (whole of Second Schedule in the Income Tax Ordinance, 2001, most of the items of Sixth Schedule of Sales Tax Act, 1990 and innumerable SROs relating to Customs and Excise).

There should be a level playing field for everyone. The fiscal deficit can be eliminated within two years if a comprehensive programme supported by well-designed work plan, scientific approach and multi-dimensional strategy, is adopted for tax reforms and resource mobilisation. It is hoped that the new government would reverse the policy of ad-hocism for sustainable economic growth. A fair and equitable tax system is the need of the hour.