Broadening the tax base | Pakistan Today

Broadening the tax base

  • The IMF’s attention is again on the FBR

The failure of the Federal Board of Revenue (FBR) to meet the revenue collection targets set for it have caused the government to have to go cap in hand to the International Monetary Fund (IMF), and has led to the IMF sending a special mission, which has made recommendations for changes in the tax structure which will become preconditions for the resumption of the stalled programme which has been agreed with the IMF. These are the large number of exemptions granted to various interest groups, with the tax exemptions being worth Rs 540.98 billion in 2018-19 to Rs 972.40 billion in 2019-2020. These were exemptions granted before the onset of the covid-19 pandemic, which is used as an excuse for all the flaws in the government’s own economic management.

The PTI may rightly claim that it has not been the first to give special groups special treatment, but that should not provide an excuse. The official Finance Ministry figures, used in a penetrating analysis made by a Pakistani economist, who is also an Atlantic Council fellow, show that the country’s tax base is stagnant. There are those who engage in some concealment, and thus avoid paying taxes, even keeping out of the tax base. The tax-to-GDP ratio has never exceeded 23 percent, and was 11.4 percent in 2019-20. Again, all governments are seen responsible for this, including political governments of whatever party, as well as military governments. The present government should have been different, for its head, Prime Minister Imran Khan, campaigned on the promise to make everyone pay their fair share of taxes. However, as retailers, sugar manufacturers and construction sector giants have shown, among others, all that has to be done about any scheme to make the tax burden more  equitable (like the ID card condition for sales above Rs 50,000) will be withdrawn if the affected lobby can get to the Prime Minister.

Before the election, the PTI claimed that such shenanigans were only possible because the FBR was unreformed, and the root cause of the problem was the corruption of the politicians comprising the government. The failure of the government to reform the FBR means that it was either misguided about the power of corruption, or is itself corrupt. There is a third possibility: it is incompetent.