Iqbal the economist – Part III

  • His solutions for Pakistan


Having already addressed the steps required to correct the economic imbalances and trade deficits as proposed by Allama Iqbal and discussed in the first two parts, let’s review the taxation policies and infrastructure reforms in the light of Iqbal’s vision which can result in ease of doing business, investment flowing into the country, jobs creation and equitable taxation leading to surplus revenue collection without negatively hampering the business eco-system.

Taxation shortfall and pilferages are a major reason of the economic problems of Pakistan. As we’re aware, taxation is an extremely important source of funding for any state to finance the running of governmental functions. To put it simply, there is both direct and indirect taxation (in different combinations). Direct taxation refers to taxes directly levied on an individual or business’s income while indirect taxation entails taxes on products and services, whereby consumers are made to pay taxes when they consume these.

Importantly, direct taxation allows richer segments of the society to be taxed more and poorer classes are provided with relief and benefits in line with the philosophy of Iqbal. This proportionate taxation not only helps smooth the flow of money across various classes of the society, but also helps in ensuring that every citizen has a minimum living standard by providing state assistance where required.

Unfortunately, a different story is at work in Pakistan. A culture of tax avoidance has long engulfed our national horizons. An ongoing cat-and-mouse fight between the tax authorities and the taxpayers, with the latter believing that it would be a waste of money to pay off their tax bills due to the deep pockets of the corrupt government officials and non-delivery of necessary public services of an acceptable standard, has led to a greater focus on indirect taxation.

While it is true that no state can perform the necessary duties with empty coffers, taxpayers also have a point in that they don’t see any real delivery but instead are greeted with stories of herculean corruption rife all around. The plague of corruption is widely believed to be consuming most of the available resources. Hence, there seems to be a massive break-down of trust between the taxpayers and the “tax-men”.

A mess has been created by the taxation policies pursued by the previous governments which are unfortunately still largely continuing. What is required is to restore the faith of the taxpayers by implementing a multi-dimensional tax reforms agenda in line with Iqbal’s vision

This serious trust deficit and a general lack of documentation has led to a difficult situation where Finance Ministry overemphasises indirect taxation to meet the revenue targets. Unfortunately, this approach has serious negative ramifications for Pakistan’s economy and people.

In reality, ordinary people are taxed indirectly on just about everything in Pakistan. Nowhere in the developed world is indirect taxation utilised as heavily as in Pakistan, due to the negative effects that it creates for the economy. In Pakistan’s case (and that of many other developing countries following this strategy) the negative impacts far outweigh the contributions raised in this manner due to the missed opportunity costs.

This way of collecting taxes indirectly leads to inflationary pressures in the economy as the increased costs, particularly the transportation costs, translate into increased prices for just about everything, including the commonly used commodities. The effects are hyper-inflationary in nature because there is a multiplicative rather than an additive element in the inflation passed-on at every level.

Furthermore, the pay rises are not proportionate to inflation, thereby forcing people tend to rely on expensive credit to make their ends meet. As businesses also require more finance to run their operations, this increases the cost of finance even more. This hyper-inflationary environment then leads to higher interest rate, which negatively affects the businesses. With higher finance costs, many business projects which would otherwise be viable become unfeasible. The resulting lack of employment opportunities combined with the limited money supply puts recessionary pressures on the market. The above issues lead to the devaluation of the currency which in turn results in increased foreign debt burden. As a result, financing costs of the foreign debts rise, leading to a higher proportion of GDP spent on debt financing. All this combined with hyper-inflation drags the already battered economy further back in Pakistan’s case.

The above is a summary of the mess created by the taxation policies pursued by the previous governments which are unfortunately still largely continuing. What is required is to restore the faith of the taxpayers by implementing a multi-dimensional tax reforms agenda in line with Iqbal’s vision as below:

  • Taxpayers are educated and facilitated by making the process easier and fairer, focusing on maximum automation in order to stem out corruption.
  • Decrease the tax rates and instead widen the tax net.
  • More focus on direct taxation.
  • Meaningful tax rebates and reliefs are introduced for the less able sections of society.
  • A system of proportionate taxation is adopted with the more affluent contributing more to the treasury.
  • Certain exempt sectors are brought into the tax net (subsidies can be given for assisting any under-pressure areas/products).
  • Tax rebates and incentives are introduced to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, etc as may be required in a particular sector.
  • Tax money is actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.

Should these reforms be made with reliance on local resources and a will for change, there is no reason why Pakistan cannot stand on its own feet economically.