Daily Times

With Pakistan’s economy seriously overburdened, the ongoing International Monetary Fund (IMF) program is pivotal to the country’s reform and financial stability efforts. In such a context, the tax inequalities are being pointed out as a matter of the development of more equitable fiscal policies.

For instance, Rs 60 per litre of petroleum is for motorcycle and rickshaw drivers, who belong to the less-affluent people. On the other side, the wealthy class High Octane fuel, of which the wealthy will benefit, has only Rs 50 per litre. This regressive structure not only amplifies economic inequality but also questions the fairness of the tax system.

This inequality widens, as the government has set Rs 32,000 as the minimum wage, but the enforcement of this policy remains inconsistent. Statistics suggest that a significant number of workers, perhaps more than 60 percent, are not receiving this mandated minimum wage. This shortfall is occurring within an economic environment where inflation rates are persistently above the increments, exacerbating the financial strain on workers.

The World Bank projects that the average annual GDP growth in the country will remain just stagnant at 1.7 per cent from Fiscal Year 23 to Fiscal Year 26, potentially the lowest in its record since 1950. This points toward a slowdown period that might put at risk deepening further the entrenchment of the country in the cycle of debt and financial vulnerability.

As Pakistan navigates these waters, lessons from global peers and an eye to ensuring equity in economic policies will matter a lot.

The month of March 2024 proved to be the peak crisis, as the Consumer Price Index (CPI) inflation recorded 20.7 percent, another surge since May 2022. Though there was a slight plunge from the policy rate, the relief was tiny, since there were always surges of great increases – more so in food prices during Ramadan, where it had spiked at 2.9 per cent from amplified demand. This has been linked to political instability and worsening financial turmoil. From 2022, political stalemates have hampered the performance of the economy, and GDP growth has barely touched 1 per cent in 2nd Quarter of Fiscal Year 24.

This growth was only slightly buoyed by a 5 per cent increase in agriculture, while industrial and service sectors continue to decline; this situation seems to reflect the fact that the pressing effect of political unrest is not only reflected but also governance problems that have been affecting economic stability for years now.

The situation, therefore, demands that Pakistan needs to adopt a proactive strategy with pronounced fiscal discipline along with safeguarding the poor from emerging difficulties. Against this backdrop, progressive tax reforms are quintessential to ensure that the wealthier sections do pay their due share.

Other measures, which should be taken to mitigate the magnitude of the effect of the negative impact caused by inflation and economic restructuring, include improvements in social safety nets; making sure that subsidies go directly to the poor; and investment in areas where sustainable growth is likely to be attained.

The Special Procedures for Small Traders and Shopkeepers Scheme has been launched to include dealers, retailers, and manufacturer-cum-retailers all over major cities including Karachi, Lahore, Islamabad, Rawalpindi, Quetta, and Peshawar. However, its exclusion of major trade hubs like Faisalabad questions the coverage measure.

Under-taxation continues to pose a serious challenge in Pakistan, with the country collecting only 10.4 per cent of its GDP in taxes and facing an estimated tax gap exceeding 50 per cent of current collections. A significant portion of this gap is due to inadequate income tax collections. The expansion of Pakistan’s tax gap can be linked to several interconnected factors: fragmented tax administrations, weak enforcement, low compliance, generous and distortionary exemptions and concessions, and narrow tax bases.

Addressing these issues is crucial for Pakistan to adequately fund public service delivery, enhance social protection spending, and reduce compliance costs for taxpayers. Income taxes, if properly implemented, could serve as the most progressive form of taxation, effectively redistributing wealth and reducing income inequality.

Key reforms for the income tax regime in Pakistan should include harmonizing income tax structures, rationalizing income tax rates, widening the income tax base, and improving overall tax administration. Additionally, reducing public government trust deficits is essential for increasing tax compliance and effectiveness. By undertaking these reforms, Pakistan can take significant strides towards achieving fiscal sustainability and improving economic conditions for its populace.

As Pakistan navigates these waters, lessons from global peers and an eye to ensuring equity in economic policies will matter hugely. Thus, through these steps, the economy of Pakistan is expected to stabilize, and an environment in which economic growth becomes sustainable and includes growth by aligning recommendations of the IMF with socio-economic needs and ensuring equal distribution of the burden of adjustment.

This is not only an exercise for balancing the balance sheet but laying the foundation for a future whereby prosperity can be shared much wider, and development becomes sustainable. However, The IMF’s role, while pivotal in stabilizing the economy through financial support, demands a careful balancing act from Pakistan.

The prescribed austerity measures and inefficient subsidy cuts, although potentially stabilizing in the long run, often lead to immediate hardships. The experience of Egypt with the IMF, which involved substantial economic restructuring including currency devaluation and interest rate hikes, serves as a potent reminder of the pains such reforms can induce.

The writer is a freelance columnist.