THE use of discretionary powers in the name of Statutory Regulatory Orders creates distortion in the economy and mostly, unfairly favours powerful lobbies to the disadvantage of common citizens.

The SROs issued at will by the Federal Board of Revenue and at times by the ministry of commerce to serve specific interest of the powerful few usually change the tax and tariff structures approved by the parliament through different acts and finance bills. Mostly, the SRO culture causes loss to the economy. In last four years, the direct annual financial losses of such SROs are estimated at an average of about Rs170-180 billion per annum; indirect impact remains un-quantified.

According to minister of state for finance and revenue Saleem H. Mandviwalla, tax exemptions granted to certain sectors of economy in four years since 2008-09 surpassed the total amount of money borrowed from the International Monetary Fund during the period. In other words, had these sectors been provided level playing field, their contribution to the national economy would have been sufficient to avoid loans from the international lending agency as last resort.

Interestingly, most of the IMF conditionalities – removal of tax and tariff anomalies and exemptions for expansion of a fair taxation system remained unfulfilled. The government did not extend value added tax or reformed general sales tax regime to all sectors of economy owing to political compulsions and instead kept on granting more tax exemptions to more sectors.

In a written statement before the upper house of the parliament, Senator Mandviwalla said the government borrowed a total of $7.878 billion between 2008-09 to 2011-12 that worked out to be Rs600 billion according to exchange rate prevailing at the time of IMF loan disbursements. In contrast, total tax exemptions cost the government a total of Rs718.8 billion during the same period, 84 per cent on account of SROs.

He said the tax amounts waived off in fiscal year 2008-09 amounted to Rs131 billion. This included Rs41 billion under income tax, Rs17.5 billion in sales tax and Rs72.5 billion in customs. In fiscal year 2009-10, such exemptions and waivers increased to Rs154 billion, including Rs46.5 billion in income tax, Rs27.4 billion in sales tax and Rs80 billion in customs.

The exemptions and waivers further went up to Rs164.5 billion in fiscal year 2010-11 that included Rs46.5 billion under income tax, Rs25.3 billion under sales tax and Rs92.6 billion under customs. In 2011-12, such losses increased to Rs208.2 billion, including Rs69.6 billion in income tax, Rs24.3 billion in sales tax and Rs114.3 billion in customs. In first six months of the current fiscal year, customs duty exemptions alone stood at Rs61.3 billion although waivers on account of income tax and sales tax are yet to be quantified.

That in itself is an explanation as to why tax-to-GDP ratio has remained stagnant at or around nine per cent over the last 10 years and in fact fallen down from around 13 per cent in the 1990s. This is despite the fact that government studies suggest the economy had the potential to generate taxes in excess of 20 per cent of GDP. The 15 per cent tax-to-GDP ratio target set for 2014-15 under the seventh National Finance Commission Award remains a pipedream.

Not surprisingly though, the minister told the Senate that attempts to have reasonable estimate of quantum of tax evasion have not been successful because of “non-availability of veritable information, huge size of unorganised sector and non-documentation of the economy”. Therefore, any such estimate will not be free from fallacy as it will be based on incorrect statistics.

An exercise carried out by a committee led by deputy chairman planning Dr Nadeem-ul-Haque for rationalisation of tariff regime has made little impact, owing obviously to opposition from influential groups, more powerful than technocrats of a PPP-style civilian government who tend more to grant favours to friends and contributors. Stock markets, textiles, fertilisers, agriculture inputs and automobiles are just a few examples.

No wonder then, that multiple tariff rates and tax exemptions granted through SROs continue to remain in place, causing not only loss of revenue but adding to the cost of doing business and encouraging corruption and promoting inefficient businesses to flourish on rent-seeking and competing out efficient, professional businesses. In return, consumers face the brunt of expensive, yet low quality products.

Fumbling with import conditions for second-hand cars in the recent past is also a case in point where local manufacturers cried foul instead of competing with imports through quality and price. So is the case with agriculture sector that portrays a doomsday scenario in case of allowing agri-products from across the border and holding back a political decision on opening full access to Indian products. Similar inefficiencies have already paved the way for Chinese products to take over Pakistani markets and yet nobody called for correcting weaknesses.

But parliament itself cannot be absolved of its responsibility of exercising its powers to question the executive authority of the government to issue SROs at will and on political considerations. Except for a recent discussion on the culture of SROs by the Public Accounts Committee of the National Assembly, the parliament including the opposition has seldom taken up a stand as to why its powers had been encroached upon by changing the finance bills they approved every year. The lack of accountability by the parliament has encouraged the malfunctioning executive to cut deals outside the parliament.

The least the new government can be expected to do at the beginning of the coming financial year is to repeal the SROs and respect the parliament’s right to approve level playing taxation and tariff systems for all.