The present government has correctly emphasized growth and poverty reduction as the main national economic objectives, as growth without poverty reduction would not be very meaningful in Pakistan’s economic scenario.
Even the IMF has named its latest programme as Poverty Reduction and Growth Facility (PRGF), as opposed to its earlier programme of structural adjustment. IT is essential for the success of these objectives that poverty friendly and growth promoting policies are pursued.
The great economist, Adam Smith, preferred direct taxes over indirect taxes. Direct taxes are based on the ability to pay. Everyone pays directly in proportion to his income and wealth and the very low-income groups are excluded from the tax net. Indirect taxes have relatively greater impact on the poorer section of the society, as it is a flat rate for rich and poor. The rich pay proportionately less than the poor in relation to their income and assets. The poor pay proportionately more. In developed economies, more than three-fourth of the total taxes is derived from direct taxes. In Pakistan, direct taxes are less than one-third of total taxes. Hence, the fiscal policy should put greater emphasis on collection of direct taxes so that taxes do not increase income inequality.
The second disadvantage of indirect taxes is that they tend to be recessionary because the price level increases by the full amount of indirect taxes like the sale tax or the custom duty. In Pakistan’s current situation of serious recession, it is a very inopportune moment to levy a sales tax at the rate of 15 per cent even on retail sales and much more so on inputs like fertilizer and pesticides in agriculture and on electricity which covers all the sectors.
In European countries sales tax has been substituted by VAT, which is a more sophisticated version of sales tax and does not have the same recessionary or inequitable impact. In the VAT scheme, the tax charged from the different stages of production is refunded by the processor at the next stage. However, in case of sales tax there cannot be such a refund.
The government has decided to charge 15 per cent sales tax on fertilizers: urea that is produced within Pakistan and DAP (phosphoric fertilizer) which is mainly imported. The current mix of fertilizer use between nitrogen and phosphate is 4:1 whereas the recommended agronomic optimum ratio is 2:1. The imbalanced mix of fertilizer use at farm level has adversely influenced the crop productivity. The correct fiscal measures would have been to give some subsidy on DAP and leave urea alone without sales tax.
In the Indian Punjab, the average yield per hectare of wheat is 4 tons whereas in Pakistani Punjab, it is 2.5 tons. This closely corresponds to the total fertilizer use and its mix. The total fertilizer use is 163 kg per hectare in India as compared to 129 kg per hectare in Pakistani Punjab. The ratio between nitrogen and phosphorus in Indian Punjab is 2.8:1 as compared to 3.7:1 in Pakistani Punjab. Similarly, the ratio between the price of wheat and DAP in India is 0.65 and in case of Pakistan, it is 0.5. Hence, the Indian farmers have much greater incentive to use DAP (phosphoric fertiliser) than Pakistani farmers. This ratio was much more adverse before substantial rise in support price of wheat from the Rabi of 1999-2000. We became also self-sufficient in wheat from that year.
It seems, though one would not like to impute motives that the IMF is insisting on GST on fertilizer in order to reduce its use as increase in price leads to decrease in demand for any commodity. It seems, that IMF wants Pakistan to start importing wheat again as it has been doing during the last four decades. Hence, an increase in fertilizer price is definitely inimical to growth and our target of self-sufficiency in basic food grains. Keeping in view the drought during last two years, the introduction of such a heavy GST on fertilizer is all the more ill-timed. IT may also be mentioned that the developed OECD countries are giving subsidy to agriculture to the tune of $360 billion, more than 6 times their Official Development Assistance (ODA). India is giving a nation-wide subsidy of about $2.2 billion on fertilizer. Subsidy is the international norm for agriculture. However, if we do not want to subsidize it, we should not impose a hefty 15 per cent sales tax in one step.
The GST on fertilizer is bad for reduction of poverty because the poorer farmers will be forced to reduce their consumption of fertilizer rather the rich farmers, who have better capacity to buy more expensive fertilizer.About 80 per cent of farmers in Pakistan are small with less than 12.5 acres, which is considereded a subsistence holding. The crop yield of small farmer will decline and the existing poverty level of more than 40 per cent in the rural areas will definitely increase.
The international experiences on poverty reduction show that poverty is more effectively reduced by adopting poor-friendly economic policies rather giving them direct assistance. The poor needs to be helped to help themselves rather than spoon-fed.
The government has launched many laudable programmes for poverty reduction like Khushhal Bank, Khushhal Pakistan Programme, the Food Support Programme, better and greater distribution of Zakat and higher allocations for primary education and basic health care which will directly help the poorer sections in the society. However, GST on fertilizer, will negate these programmes and intensify rural poverty.
The government also intends to impose GST on electricity against which no lesser person that the chairman of WAPDA, has raised strong objection. We are already surplus in electricity and increase in its price will lead to reduction in use and hike in pilferage. The resident representative of the World Bank, has recently stated that utility rates in Pakistan are the highest in Asia and this is a strong discouragement for local and foreign investors. By charging GST on electricity, we will be choking whatever little investment is taking at present as well as add to the miseries to the small consumers. GST on electricity, will have across-the-board effect on all sectors of the economy, specially agriculture and industry.
The Finance Minister, Mr. Shaukat Aziz, has correctly stated that Pakistan should follow “the best international practice”. The research by the author shows that for agricultural inputs subsidy rather than sales tax is the norm, and imposing 15 per cent sales tax on inputs in one step has never been practiced in any country. The resident mission of the IMF in Pakistan should indicate major developed, and more so the developing, countries which charge 15 per cent sales tax on fertilizer, pesticides and electricity as a poverty reduction measure in order to establish the credibility of their advice for imposing such a tax in Pakistan.