IMF wants Rs40b in taxes — who will bear the brunt?


    Will the public stand for more taxes; can it afford to?


    Taxes — the ruling party can’t seem to run the country with them, and if it doesn’t add Rs40 billion more of them, it won’t be able to run the country without them.

    The International Monetary Fund’s (IMF) Mission Chief to Pakistan, Harald Finger, recently made an announcement that the ruling government will be introducing around Rs40 billion worth of taxes to meet the fiscal deficit limit and continue getting funding under the IMF programme.

    The news was cushioned with the simultaneous announcement that the GDP will at least grow by 4.5 per cent during FY2015-16. But what does this mean for regular Pakistanis? Pakistan Today found out by talking to a few.

    Malik Omaid, an editor and blogger, keeps an eye on the news. He thinks that Pakistan has once against crumbled under IMF pressure.

    “A written statement by the IMF notes that ‘the [IMF] mission welcomes [Pakistani] authorities’ plans to take action to attain the budget deficit and tax revenue targets for fiscal year 2015-16.’ The statement underlined the need for accelerating steps to widen the tax net,” he said.

    “This clearly suggests that although the IMF welcomes the government to take actions to cover the gap it also clearly told them what the main failure is and this is why keep going back to organisations like the IMF for loans,” he added.

    Omaid was of the view that the government needs to correct its failure to widen the tax net, and stop adding to the burden that the public already has.

    “Reports in the media are also talking about (Finance Minister Ishaq) Dar seeking the premier’s permission to extend the ordinance issued to lower the withholding tax rate on banking transactions to 0.3 per cent under an arrangement with the traders,” he said.

    The government has repeatedly failed to bring in tax returns and evaders are a huge problem.

    The news was cushioned with the simultaneous announcement that the GDP will at least grow by 4.5 per cent during FY2015-16

    “Power traders refuse to file NTN and are not even agreeing to the minimal 0.3 per cent direct tax… by not looking into the matter as to why these traders are evading taxes, the government has proved that it is not going to bring structural changes and rely on short term and easy tactics, which will have long term implication on the economy,” he added.

    Waseem Arain, an educator from Karachi, feels that it is the middle class that will get hurt the most by the upcoming taxation.

    “As long as this taxation is not indirect like GST or commodities it won’t affect them, which is unlikely. The government has been slow on widening the tax-base out of political expediency and fiscal reforms to sustain the system,” he said.

    However, Arain pointed out that if the government took an imitative to bring small and medium traders into the tax net by levying a small tax on transactions, he would support them.

    “We cannot sustain governance structures without taxes, even growth is not possible without starting mega infrastructural projects, which would require revenue generation through taxes,” he asserted.

    Arain also pointed out that criticism of IMF at this point is unfounded.

    “As lenders they would want to ensure that we have the capacity to pay back otherwise why would they give us money?” he questioned and added that fiscal discipline requires a lot of patient planning and political maturity, which the country lacks at present, so it isn’t surprising that organisations like the IMF step in to take control.

    “We should work on reducing our expenditure but that is easier said than done since 50 per cent of our budget goes to security related issues, and the rest is used in paying back the interest so there is virtually no room,” he lamented.

    Pakistan’s odd priorities may be to blame. The country has no money for development programs and almost always either ends up borrowing or taking aid, which in turn raises the debt. However, the issue isn’t just that the government isn’t taxing right, it’s also that people refuse to pay taxes.

    “I pay a lot of taxes but there are many who are doing better than me and they virtually pay nothing. This inequality makes people frustrated. Revenue can only be increased from taxes if everyone begins to pay… but how much more can you milk the ones who already being milked?” Arain questioned.

    The middle class is already feeling the pinch of the taxes, especially those that are not in the business of evasion.

    Khurram Shahzad, a sales manager from Lahore, cannot understand the government’s decisions.

    “The announcement is very disappointing. In order to take more loans the government has agreed to a very harsh condition, which is to be borne by the public. Though ostensibly this tax will apply on ‘luxury items’ used by ‘the rich’ but I think these are all empty words and at the end the middle class will be affected the most. We already pay so many taxes, an additional Rs40 billion is outrageous,” he said.

    “Almost half of the mobile recharge amount goes to the government. I can also see petrol and electricity prices going up,” he lamented and added that if the government wanted to cut the budget deficit perhaps it should do so by cutting borrowing first.

    The government opting to introduce new taxes worth billions instead of improving on collection is the government being lazy.

    “Having worked in steel and wood industries I know that many businesses are evading taxes altogether or paying only a fraction of what they should pay. So instead of fixing that they take the easy way out and apply sales tax on everything, which has to be paid by the consumer. However, big business taxes continue to not fully reach the government,” Shahzad pointed out.

    Natasha Shahid, an educator from Lahore, says that the taxes would make perfect sense if they were going to only apply to the rich two per cent that rules the country, and perhaps luxury goods.

    “But that’s likely never going to happen under the current government so the working class would bear the brunt of these taxes, which would naturally affect a majority of Pakistan adversely. We’re paying too much sales tax already — it’s hard to believe the government can actually fathom increasing on that,” she noted.

    According to a recent report from RAFTAAR, only 0.3 per cent of people in the country are filing their taxes, while Pakistan’s tax to GDP ratio is only 9.4 per cent

    The IMF is also not really the reason that the government is raising taxes, their loan repayment is. There is little evidence to suggest that if Pakistan found a way to generate revenue and pay the loan back the IMF would still continue to ask for higher taxes.

    “That is obviously the only recourse left right now, but the government could have chosen to generate that revenue by investing in more businesses instead of spending absurd amounts on non-developmental projects, like the “Disneyland” they’re planning to open up in Lahore. Taxation might be the quickest method, but it is not the most productive,” Shahid said.

    And she isn’t wrong. Government’s expenditure on development has fallen sharply during the last 30 years. Instead of focusing on the real problems that need solving, the priorities seem to sway more towards flashy projects that will mean little in terms of growth.

    Waqas Arif, a former banker from Lahore, paints a harrowing picture of the current situation.

    “I think every child born now has over Rs100,000 debt over their head. This is because of short term planning and as a citizen I am worried,” he said.

    Arif points out that since the number of tax payers is already low, the ones that do pay will have to shoulder the new burden. The ones that are outside the tax net will continue life as they knew it before, while the people that were silly enough to sign up for an NTN will see life getting harder with every passing day.

    “The government is not transparent, it keeps creating a loan bubble. I am already wondering what to do with the local currency that I hold, I reckon devaluation is on the cards, despite what they keep claiming. Of course the dollar will rise and so will inflation,” Arif said.

    According to a recent report from RAFTAAR, only 0.3 per cent of people in the country are filing their taxes, while Pakistan’s tax to GDP ratio is only 9.4 per cent. Debt and the misery associated with it will not change unless the government can figure out a way to ensure that more Pakistanis come under the tax net. For the ruling party this means having a serious conversation with its own vote bank, much of which consists of businessmen. Introducing an entirely new set of taxes for the 0.3 per cent will not result in revenue generation in the long run, but it just might reduce the number of people that do pay taxes — and that won’t end well for Pakistan.