Talking Tax Reforms: Fault Lies With Parliament

By Amir Zia
Sunday, April 24, 2011
The News

The government needs to boost growth, increase revenues and stop wasteful expenditure if it wants to end the low growth and high inflation cycle in which the country has been caught for the last three years.

Finance Minister Dr. Abdul Hafeez Shaikh hit the bull’s eye when he held parliament responsible for blocking the much-needed tax reforms, while meeting with officials of the global lending agencies in Washington. Ironically, he had to retract those remarks, which created an uproar in parliament and made many honourable lawmakers fume with rage. But even if the Pakistani media misreported the finance minister’s statement by design or default, it reflected a fact about the country’s depressing tax culture, which one cannot hide or deny.

Yes, tax collection has long been a thorny issue in Pakistan, where only the salaried class and the organised corporate and industrial sectors form the backbone of direct taxpayers. The liquidity-flushed agriculture sector, the money minting retail outlets, the middleman, the vast services sector and the informal economy remain, by and large, out of the tax net. The real estate sector infamously thrives by under-reporting transactions and a majority of private businesses finds ways to evade taxes and duties by under-invoicing in this Islamic republic.

No wonder, the tax-to-GDP ratio in Pakistan hovers at a slim 10 percent against more than 15 percent in Sri Lanka and 18 percent in India. Pakistan’s small tax base is reflected by the fact that there are less than three million registered taxpayers in a country, having an estimated population of more than 170 million. The active taxpayers, out of these three million, are not more than 2.7 million.

Who is responsible for this state of affairs?

Of course, the powerful vested interests, who resist and oppose every reform. Parliament and the political parties — which ideally should be vehicles of change, improvement and the rule of the law — remain their main strongholds. The ruling elite effectively blocks any moves aimed at creating a fair and equitable tax system.

Agricultural tax remains a taboo though apparently provincial governments are empowered to collect it. The reason is understandable - our parliament and provincial assemblies are dominated by tribal chiefs and landlords, who jealously guard their self-interest. The government’s effort to impose tax on retailers, represented by political parties with an urban base, has been confronted by shutter power. Value-added tax was shot down. The proposal for reformed general sales tax (RGST) is being bitterly opposed. Do we have any fresh ideas to raise revenues other than to milk the ones who already pay taxes?

The politics of expediency — mastered by our mainstream parties — are not letting the country and its people achieve their potential. It is the narrow vested interests and not the national interest, which dictates policies.

A leading Pakistani economist, who once used to work for an international lending agency, summed up the guiding principle of the country’s ruling elite and successive elected governments aptly in these words; “they steal for themselves and beg to run the government”.

But the problem in today’s world is that money is hard to get without conditions. The global lending agencies, foreign donors and the world powers refuse to provide a free lunch. They want Pakistani rulers and the rich to share the burden by paying taxes and removing untargeted subsidies. They want the government to put its house in order by stopping the financial hemorrhage caused by the public sector companies, which wipe out a staggering 300 billion rupees annually in subsidies aimed just to keep them afloat. Subsidies on fuel and electricity also remain a massive drain on the country’s meager economic resources.

The problem for Finance Minister Shaikh and his team stems from the fact that their political bosses are not prepared to take those measures, which are the critical need of today. The minority government of the Pakistan Peoples’ Party (PPP) is being kept on a tight leash by its allies and the opposition. They all have one thing in common — hostility to reform, change and an unwillingness to sacrifice their interests.

The half-measures, which came in the form of ordinances in March to mobilise more than 50 billion additional resources in the wake of last year’s devastating floods came as too little and too late. They provide short-term relief and a recipe to marginally slash the yawning budget deficit. This trick will not rescue the economy from its present morass.

The message, which came loud and clear during the spring meetings of Finance Minister Shaikh and his team with officials of the IMF, is that they have to go for the promised reforms if Pakistan wants support of the global lending agencies and the world powers.

A new programme from the IMF will remain out of the question and the resumption of the existing stalled standby arrangement linked to practical steps, which include the key condition of enforcement of RGST to broaden the tax base and the removal of untargeted subsidies.

The government needs to boost growth, increase revenues and stop wasteful expenditure if it wants to end the low growth and high inflation cycle in which the country has been caught for the last three years. The problems of a low tax base, the power sector’s massive losses and controversy about passing on any increase in international fuel prices to the consumers are certainly not new ones. Who is stopping the ruling elite from resolving them? Of course, the IMF, the World Bank, the United States, the West, India or Israel cannot be blamed for the government’s inaction and the ruling elite’s failure.

The fault is with those state institutions, including parliament, which are unable to rise up to the challenge and lead the country from the front.

One should perhaps sympathise with Hafeez Shaikh and his team, who may know the panacea for the present ills, but are incapable of taking the right step at the right time because they carry no weight within the ruling party and share a bed with those allies and opponents who serve narrow vested interests. It appears a fail-fail situation for everyone!