May 11 - 17, 2009

With increasing burden of external debt servicing that erodes away major portion of tax and non-tax revenue, the government has reached to a decisive point where it needs to revisit how to broaden tax base without promoting trust deficit harboured by corporate sector as well as public about structural flaws in the tax system, perceptibly that tilts heavily towards sales tax for revenue collection. This government needs to realign its priority list comprising sales taxpayers on top and corporate sector down. Not only multilateral donors, but also multilateral options should be considered to introduce tax reforms that motivate large taxpayers to support government money collection efforts in the wake of industrial growth deceleration. Why civic responsibility of paying tax is avoided? Is it because of concerns that collected tax would be spent on purposes other than that for which it is collected? Or, is centralization of tax system making federal government entitled for collecting important provincial taxes a problem? Maybe, provincial autonomy improves efficiency of tax system.

Tax reforms encouraging direct taxation through inclusion of transparency can be relatively instrumental in enlarging tax revenue and ballooning tax to GDP ratio with growth uptick, without which percentage point shows upside move. External debts and liabilities that totalled almost $50 billion started to depict upward trend opaquely since end-2008 when government signed 23 months Stand By Arrangement loan of $7.3 billion with IMF. With that came a structural adjustment programme that required government of Pakistan to improve tax revenue collection and reduce fiscal deficit. Obviously, good collection creates a fiscal space for the government. The government set tax revenue target of Rs1300 billion for the current fiscal year as one of the policy stance dictated by the foreign lender.

As 10 months result shows that Federal Board of Revenue will be unable to achieve the target until the yearend, it seems that setting target for budget 2009-10 beyond this benchmark will be over ambitious. Approval of IMF's third tranche of SBA loan may demand government of expansion of tax to GDP ratio or increasing tax for the next financial year. The likelihood of this desire is based on the Pakistan's possible intention of seeking further foreign loans. From IMF or other international financial institutions, the country may seek loans. Even if this does not happen, government will be required to continue improving tax revenue collection. During July-April FY09, the net collection by FBR of total direct and indirect taxes was over Rs898 billion, 17.7 percent up from Rs763 billion in the comparable period.

When compared to last year macroeconomic indicators are showing positive signs of recovery. However, overarching tax revenue target is difficult to be attained at this moment of growth downturn. Yet, it is achievable provided the government's unpopular decisions regarding general sales tax, petroleum development levy, and subsidies removal. It is believed that later two enabled the government to shorten budget deficit while sales tax both domestic and import increased revenue by 22.2 percent as net collection to Rs358 billion from Rs293 billion. Of total net collection of sales tax, which was the largest contributor among other indirect taxes during July-April, domestic sales tax earned federal government Rs194 billion in contrast to Rs135 billion in the comparable period last fiscal year. General sales tax as main source of tax revenue will remain a palatable mode for the government to boost tax revenue, but given the rising poverty this can never be a long term solution. Rather, consumption driven revenue will be like jab in the arm of poverty.

Government should look forward to alternative options of paying off liabilities and facilitate corporate sector' participation in it. Business community has been critical of tax structure in the country, saying double and triple taxes on corporate sector have never contributed well for the betterment of the economy. Reformation of tax structure has turned out to be a unanimous demand of trade bodies and associations all over Pakistan. Many industrialists go one step further by associating the tax system with the capricious mechanism of levies that hobble progress of trade and industry.

At this time when Pakistan's economy is reeling under recessionary pressures, only unhindered growth in trade and industry could clutch out the economy from current woes and therefore government must direct its inclination towards eliminating flaws in taxation of manufacturing like it does for selected sectors such as exploration and petroleum. While some of them have been demanding complete tax exemption to exports-oriented industries, others hold somewhat practical desire that government increases spending of tax revenue on building of conducive business environment. That business friendly atmosphere can be developed through infrastructure building by materializing on fast track basis energy solutions. Government should reduce basic concerns related to electricity load shedding and law and order situation, which among other things are adversely affecting the industrial production.

By resolving basic issues, government will acquire capabilities to collect high revenue from the corporate sector in addition to discourage tax evasion, which in present circumstances is tantamount to keep chasm of revenue and expenditures wide. It seems that government will keep swelling defence budget in years to come, specifically in the next budget. If government can not decrease outlays for military, which is not possible when it has just kicked off anti-militants operations in northern areas, then it should build up its case strongly before US to mobilize required funds to meet counterinsurgency costs. And, spend domestic revenues for civic rehabilitation.