Careful with expectations
Tax reform was right up there with power shortage in the list of PML-N’s promises on the campaign trail before the ’13 election. Power, they now say, will have to wait till ’18 at least; that is, of course, if the N-league stays in power, otherwise there’s no telling. The Rs500b odd that evaporated instead of the circular debt – which has climbed back to record levels – remains unaudited and unexplained. The tax-to-GDP ratio hasn’t been much to write home about either; and the government does not even bother promising better results next time.
Therefore it would not exactly be right to read too much into recent IMF optimism about tax expansion. The N-league will, naturally, like to beat it to death considering how the opposition hounds it on the issue of earnings, and how Islamabad is chronically dependent on foreign aid (not to mention relentless borrowing from the local money market). For one thing, 60pc is, indeed, a huge rise, but when it takes tax earnings up only to 12.5pc, it just shows how weak the starting position was, not much else. And since the report goes on to mention that the revenues are highly skewed towards indirect taxes, the exercise immediately comes into question.
Also, since the report is riddled with familiar words like ‘low direct tax mobilisation, weak compliance and abundant tax exemptions’, little about the tax machinery’s structural problems seem to have been overcome. Perhaps the government needs reminding that expanding the tax base means simply increasing the number of direct taxpayers. That would require comprehensive reforms known to rattle the political elite. As the next election nears earnings will naturally come under strain considering how campaigning invariably involves expansionary fiscal policies. With the IMF program having run out revenue will, one way or the other, make a strong show in the election.
