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Road to prosperity — I

A public manifesto that suggests some concrete solutions to cure the well-known maladies to move towards the cherished goal of self-reliance and welfare state

Road to prosperity — I

For the next elections, the political parties should start unveiling their manifestos to make Pakistan a true egalitarian state. For true democratic dispensation that ensures mass participation it is imperative to debate all-out reforms in all areas with the aim to move towards the cherished goal of self-reliance and welfare state.

It is not possible to make Pakistan a welfare state unless we make structural reforms in the prevailing economic system that favours the elites at the expense of the less-privileged segments of society. The outmoded justice system needs major changes to ensure that rights and obligations are performed within the four corners of law.

A fair and just tax system is at the core of social democracy. Funds contributed by taxpayers should be expended for meeting state expenses and providing social justice to all citizens. We are presenting a detailed roadmap for a new tax system that can help in achieving the much desired goal of autarky leading to welfare state. This may be debated by all political parties and after public consensus can be adopted as common agenda for introducing fair taxation and extending social security to all citizens.

The last government during its tenure added Rs6.3 trillion to debt burden —103 per cent increase — and the record of the present government is equally appalling.

One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector partly for borrowing by the government and partly for enhancing investment resources within the private sector for economic development. In Pakistan, we have failed to achieve this goal.

Recent years have experienced closure of large industries and stagnation in growth. Besides corruption and incompetence of Federal Board of Revenue (FBR), inconsistent tax policies have forced the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding.

Another important factor that discourages compliance with tax laws is the extremely complicated and cumbersome nature of procedure involved in being registered with the revenue authorities. Even the corporate and educated class finds it difficult to comprehend, follow and observe the simultaneously applicable innumerable legal obligations, what to talk of the illiterate and ordinary man on the street.

If a survey is conducted with respect to merely the advance tax provisions (almost 75 in number), it would reveal how a person is supposed to be aware of so many avenues where either tax is being withheld or he is himself paying income tax and the consequences of these taxes, the credit of which he may or may not be allowed to take while filing his return. In the first instance, a highly meticulous record of all such transactions that invoke taxes would have to be maintained and secondly, an even higher level of grasp over the law would be required to apply it.

Economic challenges faced by Pakistan are multiple and grim — we are trapped in a deadly debt trap, but there is no will on the part of the rulers to come out of it by tapping the real tax potential and stop wasteful and unproductive expenses. Our total debt is about 68 per cent of GDP now and it is increasing due to sheer callousness of the rulers.

The last government during its tenure added Rs6.3 trillion to debt burden —103 per cent increase — and the record of the present government is equally appalling. The present government has been borrowing heavily to pay earlier debts and bridge the fiscal gap — it pushed debt servicing alone to Rs1.8 trillion in 2016-17 — nearly 68 per cent of total revenue collection. The reckless borrowing to bridge burgeoning fiscal deficit is estimated to cross Rs2.5 trillion this year.

Pakistan also faces the Herculean task of providing jobs to millions — on an average we need to create 1.2 million jobs annually for young people alone. For achieving this task we will have to ensure that economy grows at the rate of 8 per cent to 10 per cent per annum over a long period of time — for this we need investment of 20 per cent of GDP. This challenge is also our great opportunity for economic progress.

Majority of job seekers are young people, who are our greatest asset — imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation — our real engine of growth. The prevalent pessimism is due to attitude of the rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.

Devising an efficient tax model for rapid economic growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses — both at federal and provincial levels. We need public debate for suggesting solutions to remedy the situation and promote taxation and business growth attracting domestic and foreign investment and ensuring much-needed jobs.

In this ‘Public Manifesto’ (to be published in two parts) an effort is made to suggest some concrete solutions to cure the well-known maladies that need to be fixed through holistic reforms. Fundamental reforms alone can accelerate growth and ensure voluntary tax compliance.

At present, both the centre and provinces are not collecting taxes according to their respective potential due to weak enforcement and inherent problems of an outdated tax system. Total tax potential of Pakistan is around Rs12 trillion if agricultural income tax and other provincial and local taxes are also collected efficiently. At federal level alone, income tax collection can be raised to Rs7 trillion provided the entire undocumented economy is brought into tax net. So far all efforts to achieve this objective have miserably failed.

The existing tax system itself is the root-cause for encouraging parallel economy, the reform of which is a fallacy. Patchwork here and there is just an exercise in futility and no matter how many tax reform commissions or committees are constituted the consequence would be curing the incurable. Remedy lies in dismantling the existing oppressive tax system and shifting to a flat-rate taxation that is pragmatic, growth-oriented, workable and acceptable to all stake-holders. Model of flat-rate taxation needs to be debated. Under this model those not coming into tax net or avoiding true disclosures would opt to pay voluntarily as tax rates for individuals and companies are only 10 per cent and 20 per cent respectively. The cost of compliance will be minimal but penalty for non-compliance is extremely high. Tax system should be meant to incentivise growth and not to stifle it as the prevalent one is doing.

After levying all kinds of oppressive taxes, the federal government has failed to bridge the ever-increasing fiscal deficit that is creating a greater debt burden — at present 68 per cent of tax revenues are going towards debt servicing alone. On the other hand, provinces are critical of inefficiencies of the FBR due to which their share in the overall divisible pool is insufficient to meet their annual budgetary requirements. Since the share of every province in federal taxes under the National Finance Commission (NFC) is dependent on how efficiently taxes are collected by FBR, it is important that centre and federating units actively participate in the tax collection apparatus/processes/efforts.

No serious debate has ever been initiated on the issue as to how we should increase the size of the cake to ensure that both the centre and provinces flourish as sufficient funds are made available to run the governments and fulfil the needs of the people.

In the second part we will present a blueprint to achieve these objectives.

Dr Ikramul Haq

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