As the government has not been able to increase tax revenues rapidly by taxing the income of the people within a largely stagnant economy with slow rise in incomes, it has opted for taxing the consumption of the people in a big way.
Sales tax has hence become the primary tool of the government for increasing revenues under pressure from the IMF despite the fact that 40 per cent of the people live below the poverty line of a dollar day. And now sales tax is to enter the agricultural sector in a big way, beginning with GST on all agricultural inputs.
Under the three-year deal between the government and the IMF through which Pakistan is to get $1.3 billion during that period, the revenues have to be expanded and expenditure cut to keep the budget deficit at 5.3 per cent this year, and bring that down to 3.2 per cent at the end of the three-year period. This is possible only if the revenues increase steadily and sales have been identified as the sure-fire tool for that to the dismay of the masses.
The government and the IMF perceive that the even when the income of the people is low, and too low for one half of them, they have to live, eat, drink and spend on other necessacities of life. That is where sales tax comes handy. And that comes with a hefty 15 per cent rate from the earlier 10 and 12 per cent and that too applicable to a very limited sector, and 18 per cent payable now by those who are not registered with the sales tax department.
The result is a over 200 per cent increases in sales tax revenues within four years. Sales tax revenues in 1997-98 were Rs 60 billion, and the same expected this year is Rs 185.2 billion. The rise in this revenue has been too steep within the last three years.
Compared to that, income tax revenues in 1997-98 were Rs 97 billion and the target for the current year is Rs 150 inclusive of wealth tax - an increase of 50 per cent in 4 years if the target is met.
Now the IMF wants sales tax to be spread much further, and all agricultural inputs brought under it. And that is a part of the Poverty Reduction and Growth Facility which is to get Pakistan $1.3 billion over a three-year period.
That means full sales tax will have to be paid on fertilisers, pesticides, even seeds and tractors and other agricultural implements. While the government has given a blanket commitment to levy the GST on the inputs it has not specified the details.
But what is certain is that it will raise the cost of production, and make foodgrains, sugarcane, cotton, vegetables fruits etc, far more costly. And that in turn will raise the cost of the inputs of the factories like textile mills sugar mills, fruit and vegetables canning industry,etc. All that will hit the exports in a big way unless the exporters are given export rebates generously. But under the World Trade Organization regime the subsidies have to go in full by the year 2005.
The IMF has identified agriculture for levying GST as it is the largest sector of the money, making a contribution of 25 per cent to the GDP, unlike industry which has a 17 to 18 per cent share in the GDP.
Although this move has been afoot for long time,the agriculturists have not realised the full significance of the levying of GST on agricultural inputs. When they do there is bound to be a major uproar in the farm belt.
When farmers become alive to the full impact of the GST on their inputs they will ask for far higher support prices for their products, beginning with wheat and cotton. But under the agreement with the IMF support prices as a whole are to go and there is to be absolute de-regulation of the agricultural sector and lifting of the ban on free movement of wheat within the country.
Additional blow to them as well as to other electricity consumers in the country will be the levy of GST on power consumption. So far the power bills show the 15 per cent levy and the same is then shown as adjusted, which the government says is a subsidy. In fact, it is non-levy of this tax.
But now the government is committed to do away with the “subsidy” and levy the 15 per cent tax which will increase the cost of living - production and sales all around. And it will be a second blow to the agriculturists depending on tube wells and other equipment. And they are bound to protest.
The chairman of Wapda, Gen. Zulfikar Ali Khan, is vehemently opposed to levying GST on power. He wants the people to be provided with cheaper power, particularly industry. But it is the commitment to the IMF which matters far more to the government than the plea of Wapda chief.
Wapda and the KESC can bring down their rates for power if they reduce their hefty power theft and loss rates. But that is easier said than done. Under the PRGF, too, Wapda and the KESC have to bring down their systemic losses, which such theft and loss of power is called technically, but such commitments had been given to the World Bank and the Asian Development Bank, which have been helping Pakistan with large power development loans over the years, but to no avail.
The IMF and the government feel that is easier to tax the people far more than check corruption or crime, including the massive theft of power to the extent of one-third of WAPDA’s output and far more in the KESC with its chronic ailments.
Now there is a move to increase the list of items importable from India. Among them can be some agricultural products. But Food Minister Khair Mohammad Junejo opposes that move strongly. He says many agricultural items in India are heavily subsidised. He says sugar, fertilisers, seeds, wheat and several other items enjoy heavy subsidies in India, but not in Pakistan. Prices of many of these items are half of what they are in Pakistan, he says, if in such a situation Pakistan expands its agricultural trade with India that would harm the country, he asserts.
Smuggling of many items from India came down after there was a RS 20 difference between the exchange rate of the Indian rupee and the Pakistan rupee against the dollar. That made Indian goods costly in Pakistan, but now that difference has narrowed and if Pakistan rupee becomes stronger smuggling of goods from India to Pakistan can increase.
If in such a context Pakistan imposes heavy GST on all agricultural inputs as well as levies 15 per cent GST on electricity consumption cost of production in Pakistan all around will go up and Indian goods would become far cheaper.
India too is bound by the WTO laws, but how many of them it will implement and get rid of its subsidies and rebates, and cheaer supply of power to the agricultural sector remains to be seen. The pull of the small farmers on the government in India is very strong, particularly in the Punjab and neighbouring areas.
In spite of the rigour with which sales tax is collected a study by a Lahore academic institution says that out of Rs 100 due to the government as the GST it gets only Rs 55; from the evaded Rs45,Rs 28 goes to the businessman, RS 11 to the taxation officers and Rs 6 to the middle man or income tax adviser.
May be instead of looking for new areas to levy GST and increasing the cost of living, production and exports the government ought to collect much of that evaded 45 per cent sales tax amount, which could raise its GST revenues to at least RS 250 billion, if not more.
Anyway, when the agriculturists wake up to the reality of the GST on their inputs they will raise a hue and cry and ask for relief regardless of the government’s commitment to the IMF? How the government copes with such a situation in a difficult election year remains to be seen.
As the people see it there are too many taxes, and demand for paying too much taxes from those who are asked to pay and too little relief or benefits in return for such heavy imposts. What we have is not a benefits-based taxation system but a corruption - ridden system that maximises its levies, while a great deal of that is evaded by the smart among them in collusion with the corrupt or obliging taxation officials, who are to be reformed now, if that can be done.
The issue in Pakistan is not only the fast spread of the GST but also the heavy rate of 15 per cent. GST-wise Pakistan is one of the heaviest taxed countries. In the US the rate is 8 per cent and it is a state tax. In Japan it used to be 3 per cent and in East Asia the rate is between 3 and 16 per cent.
If the rate was less than 15 per cent the opposition to it might have been less and evasion far less. The government and IMF should have a rational approach to the GST instead of using that as a heavy fiscal hammer, as is done now.