The fiscal budget 2021-22 presents a very bleak state of the economy. The total deficit is about Rs. 3.5 trillion. On the other hand, there is an unmanageable foreign and domestic debt. The budget fails to propose measures on (i) debt retirement, now swollen to US$ 127 B, (ii) effective domestic revenue mobilisation, (iii) revival of a sick industry, (iv) realistic fixation of POL prices, (v) effective inflation control, and (v) overall measures to take the economy out of the current morass. Measures being taken by the government to broaden the tax net would take four to five years to yield results, with no certainty. On the other hand, the country is faced with serious challenges which could take the economy below the peril point with unmanageable fiscal deficit, depreciation of the Pak Rupee—resulting in an increase in POL prices/inflation, making life difficult for the low-income groups to meet the two ends, and unnecessary increase in the burden of foreign debts.
The general public and the downtrodden are developing a sense of fear and deprivation of being hard hit by the ruthless artificial hyperinflation, rising unemployment, threats of economic collapse and political instability. An increase in petty crime/looting to make the two ends meet for survival has become the only option for some with looming fears of total anarchy in the country. Studies conducted by certain research organisations have concluded that tax evasion is touching its peak and there is a shortfall in revenue collection, resulting in soaring fiscal deficit and lower tax to GDP ratio (currently 11.2 percent). Other developing countries’ ratio ranges from 17 to 21 percent. These organisations have observed that a fairly significant part of the revenue loss is due to corruption in the tax departments and the results suggest that if the potential revenue is Rs 100, the government only collects 38 percent. Whereas the balance—62 percent—is shared by the taxpayers, collectors and practitioners. In other words, the tax collected in the year 2020-21, is just 38 percent of the total tax potential.
The finance minister and his professional team seem to be totally ignorant of the mechanics of tax evasion, controlling inflation, POL pricing and the legal aberrations involved, nor does he seem to have the vision to propose a debt retirement policy and the revival of the economy and the industry. The focus, on the contrary, still seems to be on ad hoc measures to control inflation by injecting subsidies to a few essential food products. This would, however, be counter productive as firstly, the subsidy might not reach the intended beneficiaries due to poor economic governance, administrative flaws and corruption in the system. Secondly, the suppliers and producers would increase the prices of these commodities each time, expecting more and more subsidies. Thus, prices have to be controlled by stringent economic and demand and supply measures instead.
The government has recently introduced measures to generate more revenue through the Tax Laws (Third Amendment) Ordinance 2021 as of 16.09.21 and the track and trace policy initially for sugar, cement, tobacco and fertilisers. The Ordinance makes digital payment instead of cheques/drafts over Rs 250,000 in one year mandatory apart from introducing the point of sale (POS) mechanism. I wonder if someone has advised the Finance Minister (FM) that traditionally businesses in Pakistan are conducted on a revolving credit basis, besides, disabling utility and cell phone connections and the imposition of additional advance tax at the rate of 5 percent to 35 percent on electricity bills.
The economy cannot afford new experiments. The biggest mistake the government is making is that it is trying to tax skimmed milk whereas it should focus on taxing the cream.
The FM is advised to keep himself abreast and well informed of the mega tax evasion cases which are costing the country a colossal loss, and if controlled can turn the fate of the nation. The main areas of annual leakages and financial drainage are (a) evasion of taxes and duties to the tune of Rs. 6000 B, (b) POL sector over pricing Rs. 500 B, (c) pilferage of foreign exchange in exports of US$ 1.5 B, (d) counterfeiting of currency and legal instruments costing Rs. 300 B, and (e) siphoning out US $ 10 B from the country in imports. The government’s wild goose chase will not yield the desired results and would be counterproductive. Tracking based on inside information and correct tax assessment based on economic analysis is the only solution to check and control evasion for revenue generation.
Apart from the above-mentioned efforts to broaden the tax net the government should focus on the trade and industrial sectors which are grossly engaged in mega annual tax evasion to the tune of billions and trillions and the evasion continues for even decades. No rocket science nor new and novel experiments are required to collect the much-needed revenues from such evaders, it can be collected without creating economic ripples by just resorting to the fundamentals of domestic revenue mobilisation.
During the last couple of years, the food commodities, consumer products and consumer durables, have witnessed enormous and manifold appreciation in their prices. In many cases taxes and duties on many industrial inputs have also been reduced yet no price reduction was witnessed and the producers increased the prices under the garb of Rupee depreciation. Had adequate measures been taken to tax these sectors, a substantial amount of revenue could have been generated. But all the appreciated value seems to have gone undetected, unnoticed and untaxed, causing huge revenue loss of billions to the national exchequer.
The writer is former Chairman, the National Tariff Commission and
ex-consultant at the World Bank. He can be reached at abbasraza55
@gmail.com.
The economy cannot afford new experiments.
