Tax reduction or evasion?

Nov 30, -0001

Public revenue generated by taxation is an essential source of fiscal strength for any nation. Today, the most perplexing question facing Pakistan is how to organize and strengthen this system in order to prosper.

The credit-crunch history has served as an Achilles heel of Pakistani state throughout its history. The present government is also facing the dilemma of either increasing the tax-to-GDP ratio or increase the foreign debt through multi-lateral or bilateral borrowing and issuing Eurobonds to stabilize the economy. The former objective demands structural and institutional overhauling of state and economy while the latter requires technocratic ideology of securing present at the cost of future.

In order to understand modern economic structure we need to look back at the commercial revolution in 15th and 16th centuries that led to the emergence of the modern state’s revenue-generating- architecture, i.e, the modern taxation system. The importance of taxation for both economy and politics led to the rise of a new phenomena; political economy.

In this new structure of economy, the entire society contributes to production of goods and services. In a capitalist economy, production and distribution is regulated by social contract, codified into statute by the state.

This brings us back to Pakistan. The ratio of tax to GDP is 10% while, according to economists it should at least be 15%. Most of the tax is collected indirectly because the elites in Pakistan aren’t comfortable with the idea of paying taxes. Tax evasion in the agricultural sector is only one side of the story. No one, be it industrialists, land owners or businessmen, is willing to pay tax. Ironically these very people pass legislations to increase tax rates.

The apparent success of Eurobonds and the 'successful management' of economy by Dar&Co. reminds me of the golden era of Shaukat Aziz. The similarities are quite obvious and extraordinary: the aid we are currently receiving comes from the Middle East while, in the latter’s era we received it from across the Atlantic. Both issued Eurobonds with same level of fan and fare and both regimes got positive reviews from “technocracy” (mostly economists at home) and praise from IMF and WB for handling the economy with such skill.

Before we carried away with the apparent developments in economy we should remind ourselves of the crisis our nation faced when the last “spectacular growth” era came to an end. The damage wasn’t just limited enormous deficit of balance of payments; the infrastructure of almost every institution toppled. We faced serious power shortage, political instability, increased poverty and reduced security. And considering the recent policies our government has adopted, it hurts me to say that history might repeat itself.

In last year’s speech, finance minister made a solemn pledge of expanding tax net to further 100,000 people. However, recent reports of FBR have show that out of total the 3.5 million, only 890,000 filed their returns. However, this situation failed to irk our government. They are too busy raising their glasses to the success of the Eurobonds.

The recent budget forecasts paints an optimistic picture of receding budget deficit to 3%, however the target has been achieved only by drastically reducing development expenditure. This reduction is difficult to understand when one looks at the poverty level, but what else can be expected of “Daro-economics”, a Pakistani version of neoliberalism.

In a situation of such chaos and suspicion, when the image of government is termed as dysfunctional and untrustworthy, state coercion cannot help in increasing tax compliance. A more comprehensive policy paradigm is the need of the hour.

The structural problems of Pakistani economy lead to injustice and inequality in society. The political culture of patronage deprives many of their legitimate rights. Filling the coffers by borrowing, or issuing Eurobonds as they like to call it, may stall the crisis of balance of payments and give strength to crippling Rupee but it is not the solution to the social and infrastructural damage our country is suffering from.





Ishaq Dar

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