Daily Times

With the federal budget for Fiscal Year 2021-22, the Pakistan Tehreek e Insaf (PTI) government has staked the economy’s, and its own, survival on an incentive-laden, expansionary budget that contradicts very sharply with the International Monetary Fund’s (IMF’s) contractionary structural-adjustment mantra.

Every fortnight Daily Times will provide expert commentary on the tax regime incorporated in the budget, beginning with a broad look and then analysing specifics one by one.

In the first part of the series, Daily Times interviews Dr Ikramul Haq. He is an advocate of the Supreme Court and specialises in constitutional, corporate, media, IT, intellectual property, arbitration and international tax laws. He is also a member of the visiting faculty at Lahore University of Management Sciences (LUMS) and member advisory board and visiting senior fellow of the Pakistan Institute of Development Economies (PIDE).

Daily Times: In a way revenue collection is the most important part of the federal budget, because without it development spending becomes a big problem. Why is it, then, that the budget’s tax collection target is never achieved and yet governments still increase the target with every passing year?

Ikramul Haq: Basically there are two sides to this story. First we must consider if tax collection targets are unrealistic because we cannot collect the estimated amount or because Pakistan’s economy does not have depth in it.

The major issue is that if the economy is growing and expanding, healthy tax collection is one of its by-products. We think instituting more taxes might be the best solution while other countries use tax collection as a tool to increase their revenue bases.

Pakistan is the only country charging 10pc custom duties on imports, while all other countries are charging 5pc on average

If rates of our taxes is decreased, then in my opinion we will have a cushion despite the pandemic. But it’s not as if the Federal Board of Revenue (FBR) will churn out instead, have to be made aware of their tax obligations.

Also, before giving an estimate of the tax collection for the next fiscal year, there should be some planning done on how those taxes are collected and what will be done after those taxes are collected. Planning is always missing due to which our expenditures always exceed our revenue and we have to face a large fiscal deficit.

DT: It was decided with the International Monetary Fund (IMF) that the budget was going to be contractionary, with more taxes and more tariffs. But they have given an expansionary budget where we can see a major tax relief. So the question is, were you pleasantly surprised or are you worried after seeing this situation?

IH: I’m afraid the taxes have not been applied in a way that they should have been and they might even slow down economic growth. Neither has the government worked according to the IMF programme, nor has it presented a better strategy of its own. For example, talking about exports, we haven’t exceeded our capacity from more that $25-30 billion. We get remittances of around $28 billion. But for our domestic market we have kept high tariffs and at the same time we collect sales tax too.

We also get Value Added Tax (VAT) along with income tax on the same things. Due to this situation people indulge in under-invoicing, because after paying such huge amounts in tax, most people cannot survive, whether they are retailers or production managers.

Pakistan is the only country charging 10% custom duties on imports, while all other countries are charging 5% on average. There should be a paradigm shift in our policies or a complete change in our tax regime, otherwise the economy will not get better.

DT: Could you explain a little about the major taxes introduced in this budget and the concessions on taxes that have been allowed?

IH: No new taxes have been introduced in this year’s budget. At least that’s what the new finance minister has been saying ever since he came. Yet on the other hand, the prime minister’s special advisor on revenue, Dr Waqar Masood, suggested that taxes to the tune of Rs540 billion were necessary. That is why, in a nutshell, taxes were indeed implemented on a number of things like the 17 percent sales tax on crude oil.

DT: According to the govt., taxes have been decreased, many exemptions have been given, and the expenditure of govt. has been increased especially the fiscal policy. How are they going to generate revenue if many exemptions have been given? Even the subsidies have been increased. They also said that they will use technology, which technology will they use which will increase tax base and decrease tax rate?

IH: The tax collected in the last fiscal year, after giving it to the provinces, whatever amount was left, it was not enough to even pay our 3 trillion debt servicing or even cover out 1.2 trillion defense expenditure. All our development projects and current expenditures will be fulfilled by debt.

Pakistan- the only country since 1960 who has done 40 projects but only one was successful that was during the time of Ishaq Dar.

DT: The IMF gave the government two months to prove that its expansionary budget is working, but what will the Fund be looking at to decide whether we are making the right kind of progress or not, and what is going to happen if it is not impressed?

IH: Firstly, people should be very clear about a few things. Every businessman should register himself for sales tax. Every person should be taxed according to its income.

Also, the sales tax rate should be decreased. That is how to expand the tax base and attract more people into business. It will increase growth and therefore, also the tax base. But we’re not doing it, even though it would help us in many ways, like decreasing food inflation.

If we do not stay in the IMF program, the soft loans that we get for development projects will also stop coming.

Three things should be done:

1- Institutional reforms, so they give you monitored results. Provide people their consolidated statements so they know how much income they can use and how much tax is due on them.

2- Use land within cities, give it on lease, it will create opportunities for people, move the economy towards growth and improve tax collection.

3- New ventures are needed as our youth needs more jobs and opportunities and it cannot be done if investments are not generated within the country.

DT: There must be a way to overcome our chronic inability to increase revenue collection. What measures would you recommend?

IH: The only real issue we face is of software. We need to train people about technology and completely overhaul the tax collection machinery by digitising the entire system. That will eradicate all distortions and all forms of discrimination.

If we work according to a worked out plan, Pakistan’s economy will improve in a few years and then we will have no problems in working according to
IMF programs.