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Taxation measures

Updated June 14, 2019

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The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.

THE budget is a tough one. But it was expected to be. Our deficits — fiscal, trade and foreign currency — had to be addressed. Some of this is part of the IMF conditionality, but even if we had not gone into an IMF agreement, this budget had to address underlying issues. If the state does not have the money to spend, it will have to raise more money and reduce expenditure, both, to make ends meet. If we do not have enough dollars to pay for our import needs, imports will have to be curtailed and we will have to try to raise exports to get more dollars.

Taxes were expected to rise. And they did. Whenever taxes go up and/or expenditures are curtailed, there are always winners and losers. However much one might drum up patriotic fervour, higher taxation will always be welcomed by very few, if any. Similarly, when expenditures are cut, those who benefited from the said expenditures will get hurt.

Read: Budget 2019-20: Tax-heavy budget fails to arrest growing fiscal deficit

All of these people and groups will speak, and they should. And the government should listen to them. There are genuine concerns being expressed by people and the government has an obligation to listen. But the government also has to be clear about its priorities. These priorities have to be about moving Pakistan towards a sustainable and equitable growth path, at least in the medium if not the short term.

Higher taxation will not be liked by people, but they will understand why it is necessary and needed if the government ensures that the path to sustainable development, in terms of policies and their implementation plans, are clearly communicated, and the government ensures that the process and policies are seen as being fair, equitable and effective. Both of these are problematic.

The government must explain how its stabilisation plan will lead to sustained and equitable growth.

We have seen stabilisation efforts happen in Pakistan a number of times. Each time, taxes were jacked up and expenditures tightened. Most of the time, we managed to achieve some stability for the economy. But, every time, we failed to move from stabilisation to a path of sustainable and equitable growth. The economy has remained elitist. It has mainly worked for some groups but for most Pakistanis it has not. It has not worked for the less fortunate and the more vulnerable sections of our society. Will this time be different? Can the government convince the people? If they do not try and/ or are not successful, people will rightly remain sceptical. The lesson from history is quite clear and emphatic on this count.

The scepticism is also warranted because the pain of the past is usually forgotten by the government that comes in next. The prime minister keeps saying that people are not paying taxes in Pakistan. This is very unfair to the many who have been paying their full liability, and it is unfair even to the poor who, though they did not have to pay income tax, have been paying all sorts of indirect taxes throughout. How do we trust that the ‘sacrifices’ the people are being asked to make now will matter?

The other side of this is that the government needs to give us a plan of how stabilisation will lead to sustained and equitable growth. This is very important, but has been completely missing. We do not have such plans. These plans are not a part of the budget, but PTI should have shared with the people how stabilisation will transition to growth. The finance adviser made the statement a few weeks ago that such a plan would be shared soon, but it has not happened as yet. Again, scepticism on this issue, especially given our history of failed attempts, is warranted. The PTI is not doing a service to itself and the people by not sharing its plans for a transition. The fear is that they might not have such a plan. This would be quite damaging.

And there is the issue of equity as well. People who are in the tax net and/ or who have been paying their taxes feel, quite strongly and rightly, that the state, due to its elitist structure and other reasons, does not tax all people as it should and does not give benefits as it should. Historically, it has left large segments of the population out of the income tax net: traders, agriculturalists and most service providers. It has given rebates and subsidies to other powerful groups (sugar, automobile and textile lobbies etc). It has also given amnesties to those who have looted the country, and continues to do that. It has created rules and regulations, on foreign remittance transfer, real estate ownership and transfer, and even import/ export, to facilitate the more powerful groups. And there is no evidence that any of this is changing. For example, why was a health tax not imposed on tobacco even in this budget?

Explain all of this to those who have been honest taxpayers — who, by default or design, by desire or necessity, have been paying through all regimes: tough and not-so-tough.

And now, we are back to the tough regime again. Income tax rates have gone up and the income exemption threshold has been reduced. This, when there has been inflation of 10 per cent odd already, and about the same is expected next year. The sales tax regime has also been extended to many more products and services. Prices for electricity and gas have been rising and are slated to go up further. What should people hope for?

Read: Take-home salary to take a hit thanks to new income tax brackets

If the PTI wants the people to really believe that all this is for their good, it needs to address some of the concerns mentioned above. Otherwise, people will be quite right in thinking that they are in the hands of clueless drivers and navigators who have no idea of where they are going and where they are taking the rest of the nation as well.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.

Published in Dawn, June 14th, 2019