KARACHI: Pakistan Business Council (PBC) has said that the International Monetary Fund’s previous programmes have suffered from short-term, front-loaded, mainly quantitative targets to manage the twin deficits without sufficient regard to their long-term qualitative impact on the reform agenda.

“It is time we restore the sanctity of long-term plans and deal with fragmentation and silo-working of various ministries as well as the centre and provinces,” PBC chief executive Ehsan Malik said in a letter to Finance Minister Muhammad Aurangzeb, who embarked on a journey to Washington to explore the construct of the 24th IMF Programme for Pakistan.

Two glaring examples of short-term quantitative (but not backed by qualitative) targets are tax revenue and tariff-based measures to control the energy circular debt. “A smarter way would be to set targets that result in sustainable progress on the reform agenda instead of relying by default on the easy options of extracting more from those who are already contributing more than their fair share,” he said.

In the absence of the Federal Board of Revenue’s (FBR) capacity and capability to broaden the tax base, front-loaded tax revenue targets have, not surprisingly, led to higher taxes on those already contributing a disproportionate percentage of taxes relative to their representation in the economy. At the same time, wholesale, retail, services, transportation, parts of construction and the undocumented real estate sectors have been left outside the tax net. The formal sector has suffered from the twin effects of higher taxes on business and brain drain of quality talent due to elevated tax on its salaried employees.

Says front-loaded IMF tax revenue targets overburden those already contributing more than due

Ehsan said a more innovative way to measure sustainable progress on taxation would be revenue from new taxpayers coupled with relief provided to the overtaxed sectors to encourage investment, scale and retention of quality talent in the country. The net impact over time would be a sustainable increase in the tax-to-GDP ratio.”

Restructuring the FBR, infusing it with technology and appropriate talent, redesigning the fiscal policy to promote investment and formalisation of the economy will not immediately impact tax revenue. Targets should be phased in line with the capacity to tax in a fair and broad manner. Short-term tax collection targets have not served Pakistan well, he added.

Some of the measures to support equitable taxation, such as removal of double taxation of inter-corporate dividends are often misconstrued as contrary to IMF’s wishes. This is strange as most countries in the world don’t penalise group formation, scale and competitiveness by levying multiple taxation of inter-group dividends. Neither do they penalise success through super tax.

He said the fiscal policy needs to be aligned with the industrial, trade and investment policies and should support the growth of the formal corporate sector, not penalise success. Also, when levying new taxes such as capital value tax and super tax, due consideration should be given to the likelihood of driving local investors abroad. “When local investors move abroad and some surrender their Pakistan nationality, foreign investors are hardly likely to be attracted to invest in Pakistan,” he remarked.

Lastly, he added that the solution to the Rs1.7 trillion of taxes claimed to be pending court decisions is not to deny independent appeal processes. Instead, the FBR should be held accountable for exaggerated tax notices and the harassment, delays and legal costs of its actions.

The short-term tariff-led approach has rendered the productive sector uncompetitive in exports, resulting in negative consequences on the external account. That surely is not the IMF’s objective. Therefore, the PBC chief suggested that the government engage the IMF to move away from the short-term tariff-based approach.

The IMF supports the State Bank of Pakistan in targeting a positive policy rate with reference to headline inflation, which includes food and energy. IMF-imposed energy tariff targets drive headline inflation, which then keeps the policy rate high, forcing the government to borrow more and further impacting inflation.

Published in Dawn, April 14th, 2024