With the next budget fast approaching and the IMF in town for a review, the focus on Pakistan’s fiscal challenges, particularly taxes, is rising. The pressure is on for the government to push the Fund towards a more lenient approach as Pakistanis struggle under the weight of rising taxes, stagnant wages, tepid growth and almost nil investment. Thus far, big business seems to be the loudest voice demanding relief. Both multinationals and big local companies have asked the IMF to abolish the Super Tax, reduce corporate tax in a phased manner and rationalise advance and withholding taxes in order to reduce the burden of compliant sectors. They have also complained that the tax burden for those following the rules is much higher than for tax-evading sectors. This is in line with the IMFs emphasis on phased tax cuts and the need to broaden the tax base. For its part, the government seems sympathetic to the businesses, with the prime minister calling for a cut in direct taxes in the forthcoming budget last Wednesday, observing that a higher tax burden would be inimical to growth. But what about the ordinary salaried folk who are now the single largest income tax contributors, paying more than exporters, retailers and property buyers and sellers combined?
This also does not even factor in the burden of indirect taxes like the GST, which falls disproportionately on the shoulders of the salaried. What are the relief plans for this group? While the prime minister has also highlighted the importance of across-the-board reductions in indirect taxes in the upcoming budget and regretted that indirect taxes taken from consumers were not being deposited with the government, some questions need to be asked here. With a tax-to-GDP ratio of 10.5 per cent, still below the reported IMF programme target of 10.7 per cent, and revenue collection struggles continuing, is it really feasible to cut both direct and indirect taxes? Also, if some businesses are allegedly not depositing their indirect tax collections with the state, do they really need to be rewarded with a cut in direct taxes? Will this encourage them to change their ways or for more businesses to join the tax net? This seems unlikely, simply because if one has not been playing by the rules for years without facing the stick, they will probably gobble up any carrots they see. Any move to offer relief to businesses should be accompanied by sincere and effective efforts to actually crackdown on those violating the rules.
One could also make the argument that it would be best to channel all potential relief towards the salaried classes and lift their purchasing power. A World Bank study from last year found that the GST has the largest marginal contribution to the increase in national poverty. How can businesses thrive in an environment where poverty is spiking, most people are overtaxed and growth is low? It is also unclear if any cut in direct taxes will result in lower prices for consumers. Ultimately, what is best for the people may well be best for business.
