1 - 7, 2010

It is a big challenge for the government to create enough fiscal space in the midst of economic slowdown and absence of tax paying culture to meet the public sector development expenditures and increasing defence and domestic security expenditures.

Government expectation was dashed because the expected financial assistance of $5.8 billion from friends of Democratic Pakistan (FoDP) did not materialize. What is more disturbing is the fact that the Federal Board of Revenue (FBR) has apparently failed to meet the revenue collection targets assigned to it for the current (2009-10) fiscal year.

Against the target of Rs 1,396 billion for the year FBR has been able to collect only Rs 577 billion during the first half (July-Dec 2009). This very factor along with low export resulting in low economic growth has compelled the federal finance minister to warn that tax rates might be increased or new taxes imposed to meet the shortfall.

Instead of increasing tax rates, the finance minister should focus on revamping the tax collection system and making it more effective by removing all loopholes in the system. The rising size of black economy, tax evasion, and corruption in the tax collection machinery should be effectively controlled.

The only new tax, which needs to be imposed without loosing any further time, is the tax on income from agriculture.

The finance minister should try to find out why he could not come up to his own expectations to raise tax-to-GDP ratio from 11 to 15 percent. On the contrary, the ratio has come down to 10 percent from over 11 percent. The decline in the tax-to-GDP ratio has caused accumulation of public debt, fueled cost-push inflation, and increased fiscal deficit.

In order to minimize the negative impact of all these factors, it is essential to revamp the tax collection system.

Former vice president World Bank and a Pakistani economist of international repute, Shahid Javed Burki, while talking informally to the newsmen in Islamabad said that IMF had expressed concern over Pakistani highly low tax base. According to him, the low tax base (prevailing tax to GDP ratio is around 10%) posed a challenge and it was imperative to bring non-taxpayers into tax net.

The size of the black economy is rising, as the system provides many avenues for parking illegal money in the country including the property sector. Another economist present on the occasion said the avenues available for parking illegal money in the country including the property sector and the capital market were vast. He said the vehicle for whitening the money was also available in the system. He said anyone desiring to get his money legalized could simply go to a moneychanger and arrange remittance from abroad.

He said this tendency had facilitated many large business houses and many smugglers, hoarders to openly display their wealth without fear of being probed. Another expert said the smuggling, under-invoicing, or under-filing was due to the weakness of regulators.

He said smuggling occurs because the institutions monitoring border movements are either not competent or some elements in the institution are corrupt. He said under-invoicing occurs due to the connivance of the importer and the custom official.

A large segment of society comprising of landlords have been completely exempted from tax payments as there is no tax on farm income.

Tackling twin menace of black money and tax evasion has always been a failure in Pakistan. Successive governments, instead of dealing with these issues with an iron hand, have been pardoning the corrupt and appeasing tax evaders through various laws and amnesty schemes. The result is obvious. There is an ever-growing informal economy undermining national growth and promoting lack of transparency in all spheres of life. Political culture is fraught with favors to those having money power and control over economy.

The government has been repeatedly assuring international donor agencies and the public at large about increasing tax to GDP ratio but it has not been to show any improvement. Instead, the ratio fell by about one percent. Winning public confidence by good governance, eradicating corruption, checking tax evasion by an iron hand and perusing equitable tax policies are essential for revamping tax collection system.

Unless some strong and concrete measure are taken on these lines, the anxiety about not being able to pull the economy out of mounting debts and public expenditure would linger on.