A risky precedent

Signs of weakness in government’s economic policies

Taking a U-turn on its policy of documenting Pakistan’s highly undocumented economy, a move that was prompted by fears of having an economy at the verge of collapse, the government has stated that it is not going ahead with the move and has instead announced a series of steps that would not only exclude many from the initiative but will also provide relief to the business and commerce community by lowering various tax rates. The move appears to be a backtrack from government’s avowed stand though not totally an unexpected one, considering that most of PML-N’s top leadership is known for having business backgrounds. Finance Minister Ishaq Dar termed the move a beneficial one, saying that the “measures would provide relief, remove procedural anomalies and demonstrate the business-friendly approach of the PML-N government to revive the economy.”

The government has given over Rs2bn worth of tax concessions and procedural facilitations to the business community by withdrawing several measures for documentation of economy announced in the federal budget 2013-14. A documented economy is good for plugging holes in the revenue stream but with moves like this, the government has shown two things: it either didn’t take into consideration all the factors while making that policy or it is weak enough to bow down before the business community’s demands. In either case, it shows a lack of understanding of the forces in action running Pakistan’s economy. The situation could get even worse if the big businesses demand the same from the government or ask for more of the same. One of the reasons why we have one of the lowest tax-to-GDP ratios is that along with our registered, documented businesses, commercial enterprises, wholesalers and retailers, we have an altogether different kind of economy, one that is unregistered, undocumented yet has a volume in billions. It is this part that was intended to be brought under the tax net to increase country’s revenue but as it appears the government is taking one step forward, two steps back approach. This shift in government’s policy is not a good one. It can create more problems than it can solve, especially when Islamabad has agreed to make changes to its fiscal and monetary policies to get a loan programme approved from IMF.

Leaving out simple conditions like asking for CNIC or NTN from retailers, the government has itself offered a way out to a community that has long been averse to taxation. Reducing withholding sales tax would make matters even worse, though finance ministry officials say the financial impact would be less than 0.1 percent of the Rs2.475 trillion revenue target set for the current year. If that is true, it is good news yet it cannot be denied that the move sets a precedent that the government should have avoided in the first place.