There is a consensus among economists that getting out of the present economic crisis requires increased reliance on indigenous resources through a broadened tax base, and gradually lessening the debt burden. The main thrust of the IMF package is also on increasing the tax-to-GDP ratio – and rightly so. The ideal situation is when the tax-to-GDP ratio ranges between 25 percent and 50 percent.
A cursory glance at the tax-to-GDP ratio of countries across the globe reveals that states which are considered to be developed and welfare states owe their status to higher tax-to-GDP ratio. The average tax-to-GDP ratio of EU countries is 35 percent. African countries like Zimbabwe and South Africa boast of tax-to-GDP ratio of 27 percent. India collects 16.1 percent taxes out of its total GDP whereas Nepal stands above the whole region with 27 percent. Pakistan has a dismally low tax-to-GDP ratio of 11 percent. Even Kenya, the least developed country of East Africa, has a tax-to-GDP ratio of 18 percent.
The low tax-to-GDP ratio owes it to a narrow tax base, large-scale tax evasion or non-existing tax culture, weak and corrupt tax administration and the existence of large informal economy. The remedy undoubtedly lies in refining the tax structure which means not only expanding the base and bringing more and more people into the tax net but also eliminating avenues of tax evasion through documentation of the economy as well improving the tax administration.
The unfortunate reality of Pakistan is that successive governments have given false hopes to the people, without taking steps to address the existing maladies as well as putting in place policies designed to unleash the process of sustained economic growth. They all succumbed to political expediencies and hence all their economic decisions were politically motivated with the result that the country never experienced a real change and has drifted to the ebb of a precipice.
Governments require indigenously raised resources to finance projects related to socio-economic development and public well being. The consequence of low tax-to-GDP ratio has been that governments mostly relied on loans from external and internal resources to finance their developmental and other needs, coupled with phenomenal increase in the non-development expenditure which has pushed the country into a debt-trap and a burgeoning budget deficit, with all the debilitating implications.
In view of the precarious situation of the economy with a whopping public debt, the government had no choice other than to seek assistance from friendly countries and approach the IMF for a bailout package. Going to the IMF is not as reproachable as the opposition parties and detractors of the government have tried to portray. Beginning from 1958, all our governments have sought assistance from the IMF to rectify their balance of payments situations and avoid default on previous loans. What really matters is the productive utilization of the loans taken and introduction of reforms that lead to broadening of the tax base and elimination of the informal economy.
It is therefore encouraging to note that the PTI government has shown the political will to rectify the maladies afflicting the economy. The government seems determined to raise more and more resources indigenously and cut down non-development expenditure. Though its decision of enhancing tariffs on utilities, reduction in some subsidies and new taxes are hurting certain sections of the society, the reality is that it had no other choice and had to adopt this course without caring for the political costs involved. The government faced a now or never situation. So it rightly decided ‘better do it now’ than allow the country to drift further into the economic sand-pit. It is also engaged in reforming the FBR.
The Tax Amnesty and Assets Declaration Scheme and the implementation of the benami law are positive measures towards documenting the economy and an essential ingredient of broadening the tax base. In this regard, the FBR is also contemplating to introduce a scheme for bringing small traders into the tax net by imposing fixed tax on them according to the size of their business as well as the condition of obtaining a licence from the FBR for starting a business. The scheme is likely to be unfurled after approval by the cabinet. This will help in documenting the economy and bringing the informal sector into the tax net.
Imposition of new taxes or bringing people into the tax net is invariably resisted all over the world particularly in countries like Pakistan where tax culture is almost non-existent. The PTI government is also facing resistance from the trading community and businessmen. It is pertinent to mention that the traders association has already announced a three-day strike call against the contemplated tax measures by the FBR. It is pertinent to point out that the condition of registering or obtaining licence for stating a business is practised in majority of the countries around the globe.
In the backdrop of the permeating situation, it is hard to take an issue with the strategy adopted by the government to remedy the situation. The opponents of the government might try to exploit the situation by whipping up public sentiment against the government but the reality is that they also do not have any alternate plan or idea to stem the rot. Though it would be a hard path for the government to traverse, ultimately it would lead to the rectification of most of the aberrations afflicting the economy and setting the course for sustained economic development enabling the government to provide desired relief to the people and spending on their wellbeing.
Nobody in his right mind can challenge the conceptual thrust of the government initiatives and the rationale for the introduction of the required reforms. They are a key to the much required economic revival but their success will depend on taking all the stakeholders on board. It will also be imperative to improve the political situation in the country as it has a pivotal role in creating a congenial atmosphere for the success of economic policies and attracting foreign investment which nowadays are crucial drivers of economic growth.
This article was first published in the The International News