Pakistan is keen on securing a larger and longer International Monetary Fund (IMF) bailout package — the only thing the country can do when it cannot service all its external debts on time.

There is no option of skipping the IMF and seeking more considerable, longer-term funds from friendly countries that have already rolled over billions of dollars worth of such funds offered earlier. Foreign exchange inflows from exports, remittances, and foreign investment hardly match imports and outward remittances, leaving little or nothing for foreign debt servicing. And foreign exchange reserves are not enough to fully cover even two months of imports.

Given the weak external economy, achieving even modest economic growth requires accelerating domestic demand through the optimal use of production resources. At the same time, it is necessary to ensure that the accelerated domestic demand and the consequent growth in production are judiciously taxed along with fuller taxation of hitherto untaxed or undertaxed segments of income. This isn’t an easy job.

Amidst the ongoing gas and electricity tariff hikes, industries and businesses find it difficult to produce more at affordable costs. The wholesale and retail sectors also find it challenging to supply the produced goods and services through a not-so-organised supply chain to the end consumer.

The PPP-backed PML-N government largely represent the feudal/big business class so it may be tempted to tax the retailers without first taxing agricultural incomes and the real estate sector

At this critical point, any move to bring an additional 3.2 million retailers into the tax net must be made carefully, considering every aspect, including the principles of simplicity and equity. There are 3.5m potential taxpayers in the retail sector, but only 0.3m are currently paying taxes. Taxing these retailers may generate an additional revenue of Rs500 billion and widen the tax base.

The PPP-backed PML-N government largely represent the feudal/big business class. So, it may be tempted to tax the retailers without first taxing agricultural incomes and exploiting the full potential of the real estate sector.

According to the World Bank, full taxation of agriculture and properties (taxing the income from these two sectors and closing all tax exemptions available to them) may yield more than Rs3 trillion in taxes or roughly one-third of the current level of tax revenue.

Taxing retailers without taxing agriculture and the real estate sectors may upset the retailers, already braving dwindling demand amidst high inflation and low economic growth, rise in energy prices and multiplicity of taxes, and growing street crimes in Karachi — the hub of trading.

Besides, the bulk of retailing activity, both via brick-and-mortar shops and e-commerce, takes place in big cities, whereas most of the agricultural income primarily lands in rural areas.

Growing social, economic and political divides have increased geographical sensitivities in recent years. Sparing the agricultural chain of activity (whose primary beneficiaries represent the socio-political interests of rural Pakistan) from full taxation will be counter-productive.

Engineering a tax scheme to collect more property taxes from the middle-class urban population and less from the rural population and urban elite will also not work.

The caretaker government prepared the draft of a simplified retailers’ tax scheme titled Tajir Dost (or Trader-Friendly). The PPP-backed PML-N government is expected to finalise and introduce the same scheme with a few amendments. The IMF will be interested in knowing when exactly the scheme will be launched during its current review of its ongoing $3bn lending programme, which ends next month.

Moreover, it would be naive to think that the Fund will not also be interested in knowing the specifics of the proposed tax schemes for agriculture and real estate before even considering a larger, longer-term loan under an Extended Fund Facility. The Fund would likely demand specific timelines for such schemes, and sticking to those timelines would be crucial.

Pakistan’s new Finance Minister, Aurangzeb Khan, pledged in his maiden press conference last week to rapidly implement comprehensive digitalisation of the tax system to enhance transparency. Will the banker-turned-minister be able to fulfil his promise? That’s a million-dollar question. Much depends on whether he gets a free hand to pursue the right policies and how serious the IMF gets in its demand for transparent taxation.

If retailers are successfully brought into the tax net through a digitalised and simplified Tajir Dost scheme and the projected revenue of Rs500bn is realised, that would be no mean feat. The additional revenue may not be significant in Pakistan’s context — roughly five per cent or even less of next year’s estimated tax revenue. However, the registration of 3.2m new taxpayers would enlarge the tax base, which would be crucial for the country’s economy in the medium to long term.

But, to ensure that taxing retailers doesn’t become a political headache, the government will have to implement the principle of equity and continue taxing agricultural and property incomes with the same zeal. Besides, it will have to cut down its lavish expenses, without which no move to broaden the tax base would be successful. Taxpayers pay honestly only when they see their tax money is not being splurged.

The government will also have to come up with innovative policies to enliven domestic demand and promote domestic trade to avoid slippages in tax collection even after the targeted broadening of the tax base. Expanding the taxpayers’ list cannot automatically lead to higher tax collection. Additional tax collection is possible only when the economy is growing.

The agriculture and services sectors are doing a little better than a year ago, but a solid manufacturing recovery may take more time. What matters a lot in sustaining the growth momentum of agriculture and services and in pushing for manufacturing growth is the restoration of political stability — and a new $8bn-$9bn IMF loan.

Published in Dawn, The Business and Finance Weekly, March 18th, 2024

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