The following article has been published in Daily Nation, dated 9th February 2015
(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-09/page-9 )
(Online: http://nation.com.pk/business/09-Feb-2015/solving-pakistan-s-economic-woes )
Solving Pak’s Economic Woes
By: Omer Zaheer Meer
Government of Pakistan borrows more from the IMF. World Bank approves next loan tranche to Pakistan. Asian Development Bank sanctions grant for Pakistan. These are the sort of headlines that regularly defines Pakistan’s economic persona in international media. Why a resourceful country like Pakistan has been caught up in the never-ending web of interest-based borrowings without significant increase in economic output over the recent past is a question that should worry our policy makers. More significant still is the answer to the dilemma of how to solve Pakistan’s economic woes in the short term?
While there are many corrective measures including long-term structural reform that are warranted to ensure a functional, productive and self-sufficient economic apparatus, some short-term measures can provide effective support to the economy till the long-term reforms bear fruits. First and foremost is continuously advocated and inefficiently pursued goal of expanding the tax base. Instead the incumbent government, like many before it, is focused on squeezing the existing limited tax-base, further discouraging people from entering the tax-net and encouraging both tax-avoidance (legal) and tax-evasion (illegal).
Recently when the petrol prices crashed-out in the international markets, first the government was reluctant to pass-on the relief to the masses. However owing to political pressure when the government did reduce the prices eventually, it chooses to increase the General Sales Tax (GST) levied on petrol. At present GST on petrol is up-to 27%, an increase of almost 59% from the previous level of 17%. In simple words it means that app Rs. 25 is collected from everyone on every litre of petrol they purchase, indirectly via GST & PDL. Pakistanis are ending up paying more taxes on petrol than they used to before the huge price drop in international market. Similarly four new taxes (surcharges) have been added to the electricity tariffs. At the same time, for some mysterious reasons, the government seems unwilling & unable to widen the tax net by taxing those with more income.
Pakistan has one of the lowest tax-payers to population ratio in the world where less than 1% of the population pays direct taxes compared to just under 5% in India, approximately 58% in France and almost 81% in Canada. One of the main reasons for this is the huge emphasis on indirect taxation. To elaborate this further let’s briefly overview some key taxation statistics. At present there are only a few million tax payers out of a population of 200 million in Pakistan. While those filing income tax returns (many of which are nil) were a meager 711,000 in 2012 while 800,000 till 16th December 2013 as per official figures released by FBR. This dependence on indirect taxes is worrisome. General Sales Taxes (GST), Federal Excise Duties (FED), Customs Duties, e.t.c. collectively constitute app 74% of all tax collection by the government. I’ve explained before that this high dependence on indirect taxation results in increased costs of production and services, giving rise to inflationary pressures and relatively low economic output results in trade and current account deficits.
This is happening in a country where the bills of import for the luxury items and 4×4 vehicles keep increasing. The property prices are still ballooning with every passing day. In short, Pakistan has no shortage of millionaires and billionaires, let alone a few hundred thousand above the taxable income limit as read from the dismal income tax return filing figures. All that is required is to identify the taxpayers currently not paying their taxes. Integration with NADRA database can be extremely useful for this, more so if various other institutions’ databases can be linked to the main NADRA database. Visualize this, anyone buying a plot in defence or importing a 15-20 million PKR vehicles would be immediately identified by the system and bought in the tax-net (assuming the political pressures are not given in to). As per conservative estimates there are atleast 2-3 million big tax-evaders with due taxes in millions, that can be brought into the tax net in this manner. This translates into hundreds of billions of extra revenue which will greatly reduce the dependence on borrowing. The space provided can then be used to pursue long-term goals to resuscitate the economy. For this we don’t even need extensive time-consuming meetings which lasts the entire tenure of Governments, all that is needed is political will and a few officers willing to implement.
Though FBR has recently taken an important initiative where it has taken data from various institutions including Motor Vehicle Registration Authorities, Car Manufacturing Companies, Electricity Supply and Distributing Companies, Property Registration Authorities, Mobile phone subscribers Cos, Medical and Dental council, Pakistan Engineering Council, Pakistan Bar Council and information from Jamal’s Yellow Pages ( about business concerns) and now fed into PRAL’s database, it still needs much to be desired. First of all this data will become outdated soon, secondly each time FBR would need to go through the same exercise to secure the data and thirdly they’ll need to merge it all together in their systems too. On the other hand having a central database where all these and other concerned institutions’ databases are connected with NADRA’s will form a central and continuously updated data pool which can then be allowed to be accessed by FBR. The benefits of such a move would be grand and rejuvenate the ailing taxation system of Pakistan. This would certainly need to be backed with long-term structural reforms including proper resources for FBR along-with an effective accountability system.
Lastly some good news to share about the taxation reforms in the country. A positive measure that has been pursued for quite some time has been approved by the concerned authorities due to the effective campaigning by Lahore Tax Bar Association under guidance of its President Mrs. Ayesha Qazi. The move is to allow the use of CNIC (computerized national identity card) numbers as the NTN (national tax number). This would reduce the hassles in income-tax registrations and will help widen the extremely small tax base. The present system is a sad joke where a citizen has to go and apply for a tax number instead of it being automatically allocated to them via CNIC. If the approved plan is actually implemented (it can later be extended to GST registrations too), this can be a giant leap forward and win accolades for the incumbent government too.
The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or email@example.com