THE government has set itself a very ambitious revenue target for the coming fiscal year. More than that, it is generating serious momentum for changing the prevalent tax culture in Pakistan. For this, one must appreciate their intent and goal. As of now though, there are some glaring issues that threaten to make our current exercise not as fruitful as it could be in three years’ time.
By (rightly) emphasising the broadening of the tax net, I feel some of the tactics may make the execution of the strategy and achievement of the goal impossible. There is a fine balance the government must try to maintain whereby it does not end up killing the goose in an effort to get more of the golden eggs. I am, of course, talking about slumping business confidence and the reduced number of transactions taking place in the economy. This risks prolonging the recovery time which we can ill afford.
So far, the tactics have mainly been about the stick. Yes, the recent amnesty was a big carrot, but the real carrot has to be in incentivising those in the tax net and those joining the tax net. We must rationalise taxes and make the tax code simpler.
The examples of the East European countries and Ireland may be ones to study and emulate. These countries introduced flat tax regimes which resulted in investment and employment being generated in a major way. There will be some who criticise such a regime for being regressive, but there is no point in having a progressive regime that encourages evasion and corruption, inevitably leading to indirect taxation and inflation, which is the worst thing for our poor.
The PM needs to grab a scalpel and trim the extra economic fat.
A flat tax regime simplifies the code. Currently, our tax code is deliberately a mess as it allows the taxman to be in control. This is the kind of major tax reform that will positively jolt the economy and our local investors overnight. This will lessen incentives for bribing tax officials and hiding economic activity.
We have just seen the impact of offering a lower rate in this year’s asset declaration scheme. Non-filers became filers in a substantial way. There will be naysayers from within the FBR arguing about how this will lead to a reduction in government revenues in the short term, resulting in problems with the IMF. However, this brings me to the most important reform act, one which inexplicably has been missing from this government’s agenda so far.
As we all know well, our governments have been living beyond their means. What has made matters worse is that much of this debt-financed, deficit spending did not contribute much to our productivity or competitiveness as an economy. This begs the question. When our government is bankrupt, then why is the main focus for fixing this on businesses and the common man of Pakistan? Why are we fixated primarily on increasing the tax-to-GDP ratio and not simultaneously decreasing government expenditures which are approximately 23 per cent of our GDP?
During these tough times, when our armed forces are still in a state of war readiness, we see them take a cut in defence spending this year in real terms. We see the prime minister set an example personally in the Prime Minister House. We see ministers take a pay cut. Yet a budget deficit of over 7pc is predicted, that too provided the FBR can miraculously achieve their massive target from a slowing economy. This frankly beggars belief.
The prime minister needs to grab a scalpel and cut the fat off the governments by slashing current expenditure and letting go of state-owned black holes such as the Steel Mills or PIA. This will free up resources for his government to spend on PSDP, the Ehsaas programme, health cards, education, and our dire malnutrition issues. It will also signal to the people that the government itself is also taking upon itself some of the pain. Fixing these state-owned black holes in a sustainable manner is a pipe dream. Even Malaysia is revisiting its Khazanah model.
Whenever the public sector is in control of an entity, the threat of patronage and corruption will remain, especially in developing nations such as ours. Reducing the deficit through expenditure cuts will mean less pressure on taxpayers, less loans to bridge the gaps, and a quicker return to a moderate interest rate regime — thus lowering our debt-servicing burden and increased economic activity.
So far, the prime minister has shown great resolve and will. However, for him to deliver on his promise of making this IMF programme our last, he must cut the fat, simplify and rationalise the tax code to expand the tax net, and improve the ease of doing business. Only then will the current pain be worth it in two to three years’ time.
The writer is a business development consultant and a start-up entrepreneur.
Published in Dawn, July 16th, 2019