Debt and taxes
The government of Prime Minister Imran Khan is focused on bringing structural reforms in an effort to stabilize Pakistan’s economy by getting out of the debt recycling circle. It’s clear to Khan that if his government is to implement his major reform agenda, Pakistan needs a lot of financial resources. Already, there are talks of changing the way Pakistan’s economy works. However, the major question is: does the government have the capacity and political will to implement such a deep structural reform agenda?
In terms of where the government’s so-called interventions are taking place, we have already seen the government claiming an expanding tax base. However, this is not quite true as Khan’s government has hardly been able to increase the number of taxpayers.
There is just a pressure on the FBR to increase the number of tax filers rather than a structural policy implementation to fill the gaps which is a permanent reason that a number of big businesses and companies continue to evade taxes. For instance, during the past few months of this government, there has not been a single major action taken against a major company, business or wealthy individual to showcase the government’s intention to broaden the country’s direct tax base. Rather than taxing the rich and incentivizing economic growth by supporting small and medium level businesses, the PTI government, in a desperate move to generate money, is indirectly taxing the poor and middle class of the country.
According to the 2017 census Pakistan’s population is 207.77 million according. The dependent population of children under the age of 15 years is 35.4 percent and 4.2 percent people are above the age of 65. Out of the total population, 40 million are below the poverty line earning less than two dollars a day. Pakistan’s labor force is among the tenth largest in the world, at around 70 million. Majority of rural labor force [42.3 percent] earns below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Juxtaposing, all these figures, individuals liable to income tax cannot be more than 10 million. According to these numbers, Khan’s government is yet to bring around 8.5 million Pakistanis into the tax net base which doesn’t appear to be happening.
The policy of higher withholding taxes and barring people who do not file their taxes from buying properties and vehicles has not helped either. Rather than addressing the root causes (such as lack of trust in the FBR as they are known to make life difficult) of why Pakistanis look to avoid taxes even being aware that they are paying more indirect taxes, Khan’s government is raising indirect taxes to alarming levels. The government has increased the prices of oil rather than giving subsidies as international prices have declined. More taxes have been imposed on goods and services sector and heavy taxes are being planned on imports such as vehicles, mobile phones, and electronics. According to an individual who spoke on the condition of anonymity, the government is trying to put in place additional taxation measures besides trying to broaden the tax base to resume talks with the IMF which has called for extreme measures to generate revenues through taxes.
According to an individual who spoke on the condition of anonymity, the government is trying to put in place additional taxation measures besides trying to broaden the tax base to resume talks with the IMF which has called for extreme measures to generate revenues through taxes.
The government is planning to bring another mini-budget later this month which is likely to include proposals on additional taxation measures. It’s expected that the government is going to cut the development spending at the deferral and provincial level in the coming mini-budget in an effort to reduce the fiscal deficit. The current government has already shown its intention to roll back the 18th Amendment to the Constitution which allows the provinces to claim their individual shares of budgets from the federal government. It is apparent that Khan’s government wants to control and micromanage everything from Islamabad when it comes to the flow of money and spending. However, it’s unlikely that the government can remove the 18th Amendment as it doesn’t have a majority in the parliament. That said, with the government in around 3 provinces (PPP in Sindh is a glitch but BAP in Baluchistan is expected to go with Khan’s plans) of the country, Khan’s government can strongly make an effort to achieve some sort of balance in its spending and income generation. While Khan would like to see the provinces generating their own funds which can certainly reduce their dependency on the federal level, it’s unlikely that any such thing will happen any time soon as there are no industrial or export-oriented measures taking place that can make the provinces independent financially.
Pakistan’s Foreign Exchange reserves have fallen sharply over the last few months. “The reserves decreased to USD14, 016 Million in October from USD14, 920 Million in September of 2018. Foreign Exchange Reserves in Pakistan averaged USD 16, 004Million from 1998 until 2018, reaching an all-time high of USD 24,025 Million in October of 2016 and a record low of USD 1, 973.60 in December of 1999,” states government released data. Khan’s government is in a rush to arrange funds to make sure that Pakistan has enough money to keep its imports afloat and pay for the debt which continues to pile up. In this context, the government is trying to attract lending from the IMF and other countries such as China, Saudi Arabia, UAE, and others. Khan may be able to generate funds for the short term period, his government will need to do a lot more than just increasing direct and indirect taxes if he is interested in truly reforming Pakistan’s domestic economic base.