Ominous demands

Published May 18, 2024

THE cash-strapped government opened talks with the IMF this week in search of a larger and longer bailout. Nobody expects ongoing engagement with the IMF to be easy, even if the discussions are anticipated to go smoother than before.

However, the reports about the demands being made by the Fund and alternative proposals being put forward by the authorities sound quite ominous for the average Pakistani household and salaried classes. A report in this newspaper, for example, says the government is considering a “move to introduce ‘carbon tax’ on petroleum and similar products”. The new levy will be in addition to the petroleum levy of Rs60 per litre on fuel. The report quotes anonymous sources trumpeting the proposed carbon levy as a means to access global green finance, and cheaper loans and grants from multilateral institutions.

The reality is that the levy is being considered to raise revenues for the federal government just like the petroleum levy that was initially introduced in 2009 to modernise the petroleum supply chain and refineries. Likewise, there are other revenue proposals that aim at further squeezing salaried classes by lowering the highest taxable income limit.

These proposals are part of the government strategy to meet an IMF goal of raising tax revenues by about Rs2tr — above what is expected to be collected by end FY24 — in the next fiscal year. Moreover, pensions above Rs100,000 a month and income from pension funds are also likely to be taxed in the next budget as the IMF wants the authorities to increase the tax-to-GDP ratio by at least 3pc to around 12pc during the three-year life of the next programme. Although the government is reported to have plans to expand the tax net by ‘transforming’ GST into real value added tax, the political will to tax all incomes directly and regardless of their source appears to be weakening. The entire focus seems to be shifting to indirect taxes, which are easier to collect despite their inflationary impact.

The federal government’s current fiscal position is unsustainable and it desperately needs to boost its revenues to reduce future borrowing and pay back its existing debt. Yet it allowed tax concessions of Rs2.24tr during the last fiscal year or equal to 36.4pc of the total FBR collection in FY22. This figure did not cover loss estimates emanating from provincial tax concessions. And there’s no sign of revoking these exemptions to powerful lobbies, including businesses.

With low- to moderate-income households already at breaking point due to the heavy direct and indirect tax burden and their purchasing power eroded by high inflation, it is time the government rethinks its tax policy, and focuses on taxing those who aren’t paying anything or contributing far less than what they ought to.

Published in Dawn, May 18th, 2024

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