There is no middle class in Pakistan now, as confirmed by a minister!

Jun 22 - 28, 1996

The stock market came crashing down as the fresh levy of taxes of approximately Rs 41 billion took the steam out of the Stock Market on the day it opened after the announcement of the budget. The budgetary measures have kept the stock market cautious showing that the confidence of the investors has been badly shaken. The industrialists are nervous and have not yet come out of the shock of the budget. The FPCCI chief has termed the budget as anti-people and anti-trade. The highly export-oriented leather industry feels that the non-withdrawal of the 5% regulatory duty on import of raw and wet blue hides and skins is a complete departure from the policy of zero-rate regime for export-oriented industries in general and the leather and leather garment industry in particular.

Nervousness is not limited to the industrialists but is quite extensive. The exporters feel that the refund of duty drawback is not speedy and since tax is to be refunded after a few certifications, it will not take just one month. It will block the funds which the industry could utilize in its production processes and if it has to get it done speedily, it will promote corruption. Obvious results will be creation of liquidity crunch which will demand additional credit and additional financial cost. The manufacturing sector which does not operate with its own funds or which does not roll back its own profits into production, will thus come under severe inflationary pressure.

The imposition of 5% sales tax on circulation of newspapers and the increase in general sales tax on newsprint from 12 to 18% will, according to the PNPO, curb the freedom of the press. The price of 'pan' (betel leaves) has increased from Rs 270 per kg to Rs 310 per kg as a result of the imposition of 15% General Sales Tax and 18% regulatory duty. The new price of 'pan' at the 'pan shop' around the corner may now be fixed at Rs 4 instead of Rs 2 prior to the announcement of the budget.

The worst hit are the third and fourth quintile of the socio-economic stratum which have been wiped out as a result of withdrawal of their income tax exemptions on house rent, car allowance and entertainment allowance. There is thus no segment of the society which has not been hit hard by the budgetary proposals, aimed at pleasing the IMF, but negatively impacting productivity.

Imposition of taxes

Imposition of taxes has direct as well as indirect impact on the cost of production. The treasury benches, consisting of landlords, still hold the view that the impact is very small. It may be recalled that they had pronounced similar feelings last year, but the truth of their statement has been belied by the Consumer Price Index (CPI) which has gone up by 11% during the 11 months after the announcement of the last budget. This only shows that the cumulative impact of their rationale is beyond their own comprehension. Contrary to their thinking, the impact of the withdrawal of exemptions will be heavy. Obviously, the tax-payer will have to bear the combined effect of reduction in his income, the payment of direct taxes and of the indirect taxes which will be passed on by the manufacturers, traders, transporters and above all, the corrupt bureaucracy. The past government had the nerve to adjust the salaries with respect to the rate of inflation but the present government does not recognize the 12% inflation or even the rise in CPI and hence has made to mention of increasing the salary of its employees.

Management of the economy

The prime minister in defending the budgetary proposals was the opinion that the common man has no acquaintance with the jargon of the budgeting and the jugglery of words, and also that he only wants a better living. She, perhaps, has the rural dweller in mind because the urbanite in Pakistan, barring those whose statements count, knows more about the budget than anybody anywhere. This is because he is used to the federal budgets, the provincial budgets, the mini-budgets, the declared budgets and the undeclared budgets, which when announced erode his meagre income every so often. The common man may now be defined as one who has been denied the value of the rupee that could get him two breads in 1992-93 but now he can get only one.

The past gap between income and expenditure was 8% which the past government did not have the courage to balance by levying heavy taxes on the masses. The fact of the matter is that it was the time when there were no dictates from the IMF or the World Trading Organization to have an open market economy, nor had the New Economic Order become part of the Agenda for Prosperity. Every effort was made by developing countries, including Pakistan to rely on the foreign aid commitments. The aid commitments fell from $3.439 billion in 1989-90 to $ 1.897 billion in 1992-93. It was at this time that Moeen Qureshi pronounced the warning regarding bankruptcy. The commitments were revived in 1994-95 but were tied up with conditionalities.

The economy of the country was not appropriately managed from the day the aid commitments wavered and no one but the bureaucracy should be blamed for that. The bad management of the economy is reflected by the weakness of the rupee which has been sliding downward ever since it was floated at the instance of the financial institutions. Upward or downward revision of the currency is, by all standards, the yardstick of the strength of the economy. The weakness of the economy is depicted by the nine times down-gradation of the rupee, causing a net devaluation of 9% within this year. Its stability is still nowhere is sight. This, together with the rise in the prices of petroleum products by 7% has escalated the price of all the commodities and raised the rate of inflation to over 12% and the CPI by 11%.

As if this was not enough, the government seems committed to levy sales tax to raise Rs 26 billion, to respond to the IMF conditionalities to reduce the deficit to 4% of GDP. Accordingly the standard rate of General Sales Tax (GST) will be raised from 15% to 18%, and those liable to the rate of 20% to 23%, leaving the items of everyday use to be levied at the rate of 5%. The small units in each industry will now pay a 4% turnover tax on sales upto the level of Rs 1 million. The broad-basing of the sales tax at the import and manufacturing stages will generate revenue of Rs 12.3 billion and in order to generate additional resources of Rs 13.5 billion, it has been proposed to levy the GST.

The taxation proposals outlined by the finance minister already recognize the apprehensions with regard to inequitable treatment of taxpayers, numerous exemptions, refund of sales tax after six months, tax on tax, harassment by tax officials and ambiguity in the tax structure. The declaration of correct quantum of sales, it is mentioned in the proposals, will lead to problems pertaining to income tax assessments. In spite of the above observations, mitigation measures have not been proposed to ensure a fair deal to the tax-payer, but it is claimed that the ruling party is working on the 'Agenda for Change'. The change for the better remains elusive. All that one can see in the urban areas, whether it is Nazimabad, Lyari, or Raja Bazar, is misery assuming different shapes, perpetrated on the common man so far.

The ministers and advisors have all been recently talking about the benefits of a tax culture. One of the methods recommended for this purpose is to make transactions with only those businessmen who display their Tax Number (NTN) on their commercial centres and shops. This, they consider would be sufficient proof of the fulfilment of their national obligation. They are also trying to assert that the government is trying to transform the economy into a documented one, as if documentation is something new. Documentation has been practiced in this sub-continent among the businessmen as an age-old ritual. It is only the corrupt bureaucracy which has inducted them into maintaining two documents, one for themselves and the other for the revenue departments. The latter is used for the payment of taxes. This is what the income tax practitioners derive their income from.

Lack of correct documentation of the sales and the turnover is a characteristic feature of the economy of the country. The reason is that if it is documented someone in the income tax department will claim a share. This is the only means of concealing the income from whatever source. The imposition of the sales tax without taking into consideration the type of commodity under issue, is a serious lacking on the part of those who are proposing to levy the tax. The case in point is that of imposing a tax on the newspapers and periodicals. There are very few newspapers and periodicals, if at all, that do not file their monthly returns of sales with the Audit Bureau of Circulation which conducts half-yearly audits to determine the newsprint requirement of concerned publications, so that they are in a position to import their requirements. Some of the sales tax paid by this industry could be refunded, but this will tie up its scarce funds for which money will have to be borrowed from the banks at commercial rates.

IMF conditionalities

There are people who think and maybe they are right, that the Agenda is part of the international conspiracy to convert Pakistan into a consumers market for the greater good of the industrialized countries. These countries have, through the World Bank and IMF, paralyzed the industries and brought about a collapse in the the agriculture which till recently was the mainstay of this agriculturally self-sufficient land. The intelligentsia has all migrated to their lands of prosperity and whatever remains may be forced to migrate because of the imposition of heavy taxes on and withdrawal of the exemptions from the salaried class.

It is apprehended that the market-oriented reforms, as per the IMF dictates, may have some cosmetic benefits that may temporarily promote the growth of the economy and strengthen the BOP but the benefit will not reach the common man. Under the garb of foreign investment that may be suggested as the bait to attract other trade and business activities, the country will go deeper down into the debt trap.

The IMF coditionalitites have had to be met in order to make the debt repayment possible. Pakistan has to make the highest apportionment of its budget not on defence but on debt-servicing and, for that matter, the IMF dare not be disappointed. The standby loan granted last December was to meet the large deficit in the balance of payments. The past government is being blamed for, among other things, increasing the debt burden. However, three long years is an ample period of time to avert the impending disaster and reversing the trend. The present government, by continuing to borrow from international agencies like the IMF, is paying the borrowed dollars to repay the loans. A point has now been reached where the $ 2.488 billion loan to be obtained in 1996-97 will utilize a share of $2.1 billion towards debt-servicing and shall have $ 388 million towards development.

Bank borrowings, instead of being contained, have been made more extensive. Instead of striking a balance between the revenue and expenditure, the government functionaries have not been restricted from a free hand on the expenditure on travel, or their perks. Funds will be made available for luxury items like purchase of planes, expensive cars, furniture and office equipments.

The lavish expenditure is to be met by increasing the tax burden on the salaried class which faithfully pays the taxes. This will result only in the reduction of the consumption power of the middle class which will be squeezed out further into the lower quintile of the economic stratum of the country. This observation is supported by the remarks of the federal minister for special education and social welfare who while commenting on the impact of the budget on the middle class said that there is no middle class in Pakistan. The country, according to him has two extremes in the society, i.e. either the upper class or the lower class.

Tax on agriculture

The agriculturists are among the main evaders of income tax and hence are also contributing to evasion by the industrialists who were agriculturists in the not too distant past. The position is complicated by those who levy taxes on different sectors, taxing one and setting the other free. Industry and commerce contribute more to the government revenue in the form of indirect taxes than does agriculture. This sparing the agriculturists and taxing the industrialists and the poor salaried class is a legacy of the feudal system of governance and neither martial law nor the PPP which takes decisions and thrusts them on to the public ruthlessly, have been able to make any substantial change in the system.

The governments, including the one at present, have taken decisions in the past that hurt the common man in the urban sector, mainly because the people there do not constitute their vote bank. It is time it acknowledges that the latter have paid enough for living in the cities, and it should take on the feudals who earn from the rural sector but live in the cities. They neither invest in the rural nor in the urban economy but plough in their gains into maintaining themselves and their status so that they get themselves elected to the assemblies. It is by virtue of their position in the assemblies that they keep themselves absolved of the payment for the earnings in the rural sector.

The keenness to help the rurals and ignoring the parallel cases in the urban centres is demonstrated by the decision of the federal government to extend its programme for the alleviation of poverty to the rural poor by providing them the relief from the burden of accumulated debt. The government will pay the tax-payers' money collected from the urban sector, to the rural landlords who have been holding the peasants and haris, the brick kiln workers and the kharkars, so that these poor people could be released from their yoke. Whatever the intentions, this step will benefit the feudals more than the poor who will remain poor.

The burden of taxes imposed to meet the conditionalitites of the IMF is mainly on the urban dweller since he is the one who has to respond to the levy of taxes by the federal as well as the provincial governments. The agriculturists, more precisely the landlords have been spared again, although tax on agricultural income was among the IMF conditionalities. This has not been done in the federal budget because agricultural income is a provincial subject. The federal government will have to do it, even if it has to go out of the way to introduce an ordinance, a mechanism by which most of the state matters are governed these days.

The agriculturists are of the opinion that if they had been given the right to fix the rates of their products, as has been enjoyed by the industrialists, Pakistan would have figured among the major granaries of the world. On the other hand, the agriculture sector has been neglected since the subsidies are not forthcoming in time and the support prices are never adequate. The products are not lifted in time and artificial shortages are deliberately created, the specific examples being those of the production of chillies and onions.

Why the agri-income is not taxed was replied to by the Punjab finance minister. The democracy which the PM talks about is the democratic attitude of the majority in the parliament. It is not the majority in the masses which matters but that in the parliament, which at best comprises the faithfuls. According to the Punjab finance minister, the government, in a democracy, has no choice but accept the majority decision of the parliamentary party. The claims of the PM that the feudals shall be brought in the tax net and of the president that the big landlords will not be spared from fresh taxation, have been belied. The real reason was disclosed by the finance minister, and that was that the present coalition government derived its power from the feudals in southern Punjab, against whose wishes it dare not go.

The Sindh government which claims to be the first to have introduced agricultural tax as far back as 1977, has admitted that it could collect only Rs 0.15 million from the farmers in 1995-96. It proposes to introduce changes in the system so that tax on agriculture could, in 1996-97, yield Rs 35 million. The basis of calculation of the farm product has now been changed to the new system of charging on the basis of area under crop production. This, however, raises doubts whether the benefit goes to the landlord or the government. The Sindh government aims at collecting Rs 120 million by increasing the abiana rate by 25%. This half-hearted approach towards taxing the agriculturists only shows that the major tax-payer in Sindh, in spite of the reforms, will continue to be the urban dweller who will pay Rs 120 million through property tax, and Rs 554 million as motor vehicles tax.


The Rs 26 billion that might be collected by breaking the backbone of the taxpayers will cover only 20% of the deficit. The government is unnecessarily trying to be unpopular by imposing taxes. It could do just as well by following the IMF prescription for the reduction of inflation through the reduction in the overall budget deficit and to introduce the GST in a phased manner, initially at the import level, followed by its levy at the manufacturing level and then at the retail level. The government need not levy a heavy GST at the rate of 18% and 23%. It may, be way of introducing the idea, levy GST at the rate of 5% on items which do not fall in the list of essential commodities, and thus net at least one third of its target. The remaining two third, may be much more, could be recovered, of course by using force, from the tax evaders and the bank borrowers, the topmost in both categories being the agriculturists.

The writer is former Director General (P&D) PCSIR