Tax policy with a holistic approach

Published February 22, 2021Updated February 22, 2021 08:02am

Under the reforms taking concrete shape, the tax regime that uses the tax policy as a tool to maximise revenue at the expense of investment and growth is being revamped. This follows tariff policy announced recently to ensure that tariffs would be used as an instrument of trade policy rather than revenue generation.

If implemented in letter and spirit, these reforms would meet the long-standing demand of businesses who complained that tax policies are revenue-driven rather than growth-oriented. Sustained appropriate measures would be needed, as demonstrated in the case of construction and real estate sectors, to spur manufacturing which contributes the lion’s share of direct tax revenue and exports.  

The latest package of measures envisaged in the accord with International Monetary Fund (IMF) is likely to keep the room open for industry-friendly tax policies despite rationalisation of corporate taxes to increase revenues by doing away with unnecessary tax exemptions.

Deviating this time from its overarching focus on stability, the IMF accord now strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms. The accord does stipulate slapping additional taxes and increasing electricity rates while rationalising expenditure. The bulk of tax revenues goes for debt servicing, defence spending, circular debt and subsidies on bleeding state enterprises.

The large-scale manufacturing (LSM) needs continued support. Though LSM grew 11 per cent in December 2020 and 8.16pc during July-December, the LSM index at 167.2 in December was below the peak level of 170.2 in January 2019.

The tax revenue generation is deeply linked to how equitably the tax revenue is collected and how prudently tax funds are spent for increasing production of goods and services, to meet domestic demand as well as to create trade surpluses for exports.

‘Of the nearly Rs3 trillion worth of relief, barely Rs200bn was spent on direct cash transfers to the poor during the lockdown to shield them from hunger’

The narrow production base, unable to meet domestic demand and with limited export potential has created boom and bust cycles, adversely impacting tax revenues. The mediocre productivity in the real economy is the core issue in growth-oriented tax collection potential.

The tax policymaking and administration is opposed to being separated under a proposal finalised by the Federal Board of Revenue (FBR) that envisages the establishment of an autonomous Tax Policy Unit (TPU) under the Ministry of Finance. As the tax policy issues will no longer be dealt with by the tax-collecting agency, the TPU is expected to give balanced recommendations.

Similarly, a Tariff Policy Centre (TPC) under the Ministry of Commerce has been set up to formulate tariff policies designed to provide time-bound strategic protection to the domestic industry during their infancy period and to promote competitive import substitution. The protection policy will be so phased as to make the industry eventually internationally competitive.

The success of tax policies would also depend on early completion of Special Economic Zones. And more investment is needed to develop the required human skills and physical infrastructure to support manufacturing.

In the recent past, the policy focus was on shoring up the financial sector rather than commodity-producing sectors. The FBR has therefore requested the government to include senior representatives from the ministries of commerce, production and industries in the TPU for better coordination and effective policymaking.

The TPU will include almost all stakeholders including FBR members, engage fiscal and economic experts from academia, think tanks and private sectors to ‘present holistic proposals for mobilising revenue generation with greater autonomy.’

While stimulating private investment is imperative especially for greenfield projects, capitalism needs to be socially inclusive. The issue has been appropriately raised by an analyst as follows: “Of the nearly Rs3 trillion worth of relief — Rs1.2tr monetary and Rs1.8tr financial breaks —barely Rs200 billion was spent on direct cash transfers to the poor during the lockdown to shield them from hunger. The rest 93.4pc was directed to support private businesses without tying concessions to job creation, fairer pay scales and revenue generation.”

 The PTI’s current policy of keeping the local government (LG) system in limbo is also retarding social progress. The Punjab government has repealed the Punjab Village Panchayats and Neighbourhood Councils Act 2019. It envisaged strengthening democracy at the grassroots by dismantling the existing district and union council system.

A media report quoting PTI insiders said the KP government is considering restoration of district and union council tiers of the provincial local government system, eyeing something closer to Musharraf’s LG system. The U-turn on LB reforms indicates that the PTI’s unilateral approach to resolving national problems is not the appropriate way of doing things.

The composition of the autonomous tax policy unit with members with diverse interests and with a holistic approach to tackling issues is the right way of doing things.

Similarly, there is a strong need for a national charter of the economy as well as a charter of democracy to put the country on the road to rapid economic and social development.

Published in Dawn, The Business and Finance Weekly, February 22nd, 2021

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