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IMF and tax reforms

May 22, 2019

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THE government has agreed to a $6 billion IMF bailout package. I pray it realises that intervention by outside donors are a stop-gap solution to what has become a chronic problem.

Pakistan, for all intents and purposes, does not have a tax base. Only one per cent of the population pays income tax. While even high-income countries do not manage to collect the full total of their potential tax revenues, Pakistan’s collection rate falls significantly below countries in comparable circumstances. The Federal Bureau of Revenue will miss its original revenue collection target for the 2017-2018 fiscal by 162 billion rupees!

The government needs to address these challenges. It has to tackle the large informality in the economy, low spending in human capital, and poverty. The ever-increasing debt is ballooning. Human capital will suffer the most as a bailout package will cut fuel subsidies, raise taxes and tighten expenditure on social welfare programmes thereby increasing poverty.

The first step to put our financial house in order is to get the political and business elite — notorious for tax dodging — to pay their fair share and stop passing their burden on to the poor. The tax amnesty scheme is one such example. Immovable property is a sector where a significant amount of untaxed money is parked, owing to the difference in fair market value and the collectorate rate fixed for properties.

The federal and provincial governments must immediately prepare finance bills to tax the rich and mighty through an alternative minimum tax of 2.5 per cent of net worth and property tax according to the size of the house/office. Along with these two measures, bridging the tax gap of nearly 70 per cent in the collection of income tax, sales tax, customs and agricultural income tax can wipe out the entire fiscal deficit in 2018-19. This is not possible unless the federal government in consultation with the provinces introduces a harmonised sales tax on goods and services.

The FBR needs to immediately accomplish the following: scanning and X-raying every incoming and outgoing container; recouping lost custom duty by tracking down under-invoicing; and a severe crackdown on smuggled goods.

A strict internal monetary cleansing is the only way to ensure Pakistan has no further need for outside donors.

Muhammad Azam Shaikh

Larkana

Published in Dawn, May 22nd, 2019