Every year around this time the same question starts being asked everywhere, ‘what are you expecting in this year’s budget?’. The answer more often than not is ‘nothing new’ or ‘same old’. For Profit’s first ever pre-budget story we decided to ask the country’s top economic and business minds a different question: What suggestion or idea would you give to the Finance Minister for the upcoming budget?
Here is what we got, in no particular order:
1) Increase petrol prices back to Rs 110
By: Dr. Kaiser Bengali, Economist, Founder BISP (As told to Babar Nizami)
The General Sales Tax (GST) should be reduced from 17% to 5% gradually over 3 to 5 years. Parallel to this the oil prices (at gas stations) through whatever mechanism should be raised to the equivalent of $100/barrel and be maintained at that level until the international prices cross this level.
There will be a shortfall in government revenue due to the reduction in GST rates but the increase in oil prices will compensate for that. The government should not have reduced oil prices here in the first place when they started to come down internationally. That reduction only benefitted motorists only but it did not bring down public transport rates or goods transport rates as there is a certain stickiness to these prices whereby they increase immediately but do not come down as rapidly.
An added advantage of this will be to that people will to the environment as people will be discouraged to use their vehicles due to the higher cost of fuel.
2) Offer 20% more and the imported goods will be yours!
There should be a website where the details of each and every import L/C that is opened should be made available including the number of units and per unit price. Anyone on that website with the proper credential then has the first right of purchase whereby he can offer the L/C opener 20% over and above the invoice amount that he has quoted.
So, for example, person X is importing mobile phones from the US for $300 but – in order to pay a lesser duty – has under-invoiced and claimed he bought the good from his US supplier for $100. Person Y sees the goods on the website and offers to pay $120 for the goods which person X will have to accept and take a loss of $180.
In turn, this practice of undervaluing the actual value of imported goods to avoid paying more duty will be discouraged. This is not being done with regard to import L/C’s but India uses the same mechanism in their real estate market to achieve the same thing – the true market value of the product.
This will measure will generate more revenue for the government while it could eventually discourage certain products being imported which would positively affect the balance of trade.
By: Dr. Kaiser Bengali, Economist, Founder BISP
3) For God’s sake make a proper budget and for once follow it!
By: Dr. Nadeem Ul Haque, Former Deputy Chairman, Planning Commission of Pakistan (As told to Babar Nizami)
We do not have a budget. It is a farce. In the rest of the world planning and discussion over the budget starts in November and all stakeholders at every level of government are involved. In Pakistan, the budget is made two weeks prior to it being passed. This non-serious attitude to such a serious matter is criminal.
It is no wonder therefore that the proposals and the outcomes are very different. The document says one thing and the Economic Coordination Committee (ECC) does something completely different as and when it suits their political/budgetary needs. The budget is ‘debated’ and passed in both the lower and upper house and once passed it becomes a law. By going against what has been written in law you are essentially breaking the law.
Therefore the ECC and the Finance ministry works outside the scope of the budget. When there is no intention of following what is decided in the budget then very little time will be spent in preparing it rendering it a mere formality. Before anything else this is what has to change.
4) Allocate Rs 2 billion to research
A ton of money is spent on infrastructure and mega transport projects with very little consideration given to the pre-planning stage of these projects. There has to be a cost-benefit analysis to come up with a feasibility that makes economic sense. Only then should a project get a green light.
Theses flyovers and underpasses do not have a rate of return, all they are good for is getting you from A to B just a little quicker. The way the PSDP is used these days contributes very little towards economic growth.
If I had Rs 2 billion to give under the PSDP I would much rather give that money as a grant to someone conducting research than spending it on another road or bridge. So do something better with PSDP that contributes to the economy and society.
There is money in the PSDP for education but the Finance Ministry does not release all the funds on time. This is criminal, in fact, they should have more money and should definitely get it on time.
By: Dr. Nadeem Ul Haque, Former Deputy Chairman, Planning Commission of Pakistan
5) Allow private DISCOs to operate and compete with publicly owned ones in major cities
By: Mian Muhammad Mansha, Chairman MCB (As told to Babar Nizami)
Whenever there is a debate about the budget, taxation reform is at the heart of it. It is true that Pakistan’s tax net is very narrow with only around 300-350 people paying more than Rs 10 million in taxes but equal if not more attention is required on the cost cutting side.
Public sector enterprises like PIA and WAPDA rack up billions in losses every year and continue to haemorrhage money. Attempts have been made at privatising them but failed due to resistance from unions and other factors as well. But that is not the only way to do it.
Publicly owned power supply companies like LESCO for example have very strong unions so it is tough to privatise them. Why then not allow and provide licenses to small private companies who can do the same thing in Lahore. The same can be done for other cities like Faisalabad and Gujranwala.
Let the public sector companies compete. Delhi, for example, has three companies competing in the city namely Reliance, Tata and Essar.
The government is currently busy trying to increase megawatts in the grid with new projects. What it does not seem to understand is that if the percentage of distribution losses remains the same and power generation increases it will cost even more and the government simply does not afford it.
As it is, all the good well-paying customers of these publically run distribution companies are setting up their own power generation solutions and are leaving them which is a big dent in their revenue.
6) Document assets, stop presumptive taxes, revamp custom tariffs,
By: Shabbar Zaidi, Partner at A. F. Ferguson and Co. (as told to Farooq Baloch)
It is about time government took radical steps by documenting assets, such as land, prize bonds and bank accounts. If the government were willing to take this radical step, it would be as simple as it could get. How can you prepare people’s income record unless you have their assets record?
The entire taxation mess can be corrected if the government is willing to document assets of everyone, especially those living in the upscale localities, the likes of Bahria Town and DHAs.
Let me break down our problem. Three quarters of our official gross domestic product is excluded from taxation. Agriculture and Exports, each 25% of the GDP, are exempt from taxes; Traders, which are about one-fifth of the economic output, and unorganized services (doctors and lawyers, for example) that contribute 10% to the GDP do not pay taxes. These figures are for the official GDP only as they do not take into account the underground economy.
So, you are taxing only a quarter of your GDP, that is why you are collecting only Rs3.5 trillion or $35 billion of tax revenue from 25% of your economy, which is the highest rate in the world. Since that contribution mainly comes from manufacturing, you are hurting the backbone of your economy.
The major issue we are facing is the country is divided into two parts: on one side are 20 million people who are getting richer and on the other side are 180 million people who are getting poorer. So disparity of wealth has increased a lot.
Major tax evasion is happening in trade and industry but they are the vote bank of the incumbent. You can’t form and income record unless you determine the actual ownership of their assets.
Once you complete the documentation of assets, you can stop all kinds of presumptive taxes. To be precise when the economy’s assets are undocumented, how can you talk about tax collection?
We also need to revamp our custom tariff arrangements with China and Thailand. A lot of their goods are coming to Pakistan but nothing is going there. The current tariffs need to be terminated and new ones formed to local industry.
7) Offer cash incentives to merchants and buyers for automation and digitisation
Pakistan’s tax collection system is more of an extortion racket than a workable solution to get everyone to pay their fair share. There is a fine line between tax evasion and tax avoidance and the latter is very easy to pull off given the outdated approach of the tax collection authorities.
There is a need to update, automate and digitise this system to generate the required information that would in turn enable tax authorities to identify discrepancies and follow up on them. More than half the work is done by the banks. Although each and every transaction is recorded digitally there are ways around it like using cash cheques as currency or not swiping debit card at Point Of Sale (POS) and instead just using the ATM. For this, there should be incentives and rewards by banks that encourage both buyers and sellers to use and accept cards respectively.
The government, on the other hand, just to meet targets, is discouraging people away from banks by taking counterproductive measures like the 0.6% tax on banking transaction.
Automating the systems of the tax authority is very important. The Federal Bureau of Revenue (FBR) has so far received two world bank grants to automate their systems but so far they have not been able to. It does not take international donor money to do this, just take a look at the Sindh Revenue Board (SRB) that was automated by a team I was heading using only internal resources. The SRB has 90 people working while FBR has 33,000.
By: Dr. Kaiser Bengali, Economist, Founder BISP
8) bring back the Wealth Tax
The purpose of taxation is not merely to generate money to finance government expenditure. If done properly it can enhance efficiency and promote redistribution of wealth. Unfortunately, in Pakistan the government is always fixated on the revenue generation and has ignored the rest.
This flawed approach increases distortions in the tax system. Globally the approach is to heavily tax import of finished goods while a minimum tax is applied on import of raw materials. Here we do the exact opposite.
For example ready made books are imported as they are tax exempt hence cheaper than those produced here which are made using imported raw material like paper that is heavily taxed.
85% of our taxes are indirect that are largely regressive and hurt the poor the most. A study showed that the richest 10% pay 12% tax (all taxes included) on their income while the poorest 10% pay 16% (all taxes included) on their income.
You see there are goods and bads, meaning that certain products are good for you while others are bad. The bad ones like cigarettes, cooking oil and even fuel should have increased excise duty on them. This will curb their use and increase revenue. The government has to be cautious though so that there aren’t any secondary distortions like smuggling that would hurt local producers of these products.
Then there is the problem of a fragmented tax base. Agriculture income, under the constitution is not taxable which is why the provinces inefficiently do it collect peanuts. That is also largely attributed to the fact that around 80% of our farmers are very small scale hence out of the tax net. But nonetheless agriculture tax should not be exempt and there should be a constitutional amendment that allows it so that it is done at the centre.
There also no justification for there being no wealth tax. It is very unfair that the amount of tax the rich pay has a lesser effect on their disposable income than someone who earns much less than them.
Talking about all these reforms and discussing these suggestions is futile until and unless there political will starting from the top all the way down to seriously review and reform our taxation policy.
By: Dr. Kaiser Bengali, Economist, Founder BISP
9) Think out of the box
Taxation in Pakistan is very distorted. The process of filing for tax is too complicated which makes it even more difficult for the government to widen the tax net. People just don’t bother. There should be simplicity but instead each year it becomes more complicated with new types of taxes and slabs and what not.
There also has to be a distinction between a tax filer and a taxpayer. There are a lot more taxpayers than there are ‘filers’ for the mere reason that each and everyone who consumes goods and services pays one form of tax or the other. For example, a person with a 20,000/month salary pays withholding-tax on a mobile phone he buys or sales tax on the milk he purchases.
So when that person does not file his tax returns it does not mean that he has not paid his taxes, in fact, he has paid more than he is liable to. Therefore this whole rationale of ‘non-tax filers are evading tax’ is wrong and there has to be some out of the box thinking to fix this.
Look at Dubai, they have no income tax and they are doing fine. That is not to say that we eliminate the income tax in Pakistan but it should be the direction of thinking at least. That direction has to be accompanied with research in order to break these colonial eras outdated taxation policies.
By: Dr. Nadeem Ul Haque, Former Deputy Chairman, Planning Commission of Pakistan
10) Abolish the ministries
There are around 15 to 20 divisions in the federal government that need to be abolished. After the abolition of the concurrent list from the 18th amendment, these divisions became constitutionally redundant and therefore need to be devolved to the provinces but that has not been done.
This would mean that the salaries of all those secretaries, additional secretaries, joint secretaries and divisional secretaries and their staff of a minimum of five each that includes clerks peons and drivers would no longer be paid by the federal government. There are all sorts of other expenditures that go along with having such a staff as well so the cost saving would be quite significant
On the expenditure side, I think the development budget has to go up to at least 10% of GDP between now and five years. Currently, effectively, it is less than 3%. Infrastructure has virtually collapsed in this country and we need to invest into rebuilding our infrastructure. We do not have industrial estates in Pakistan, which is a big disadvantage to industrialists who want to set up a factory but are unable to acquire land.
This expenditure in industrial estates will also make it necessary to invest in all the infrastructure that goes with that includes roads, electricity, gas and water. A four-star hotel would also be required to accommodate foreigners.
By: Dr. Kaiser Bengali, Economist, Founder BISP
11) Reducing Tax Rates, Reforming FBR and Facilitating Exports –Sakib Sherani, former economic advisor to the government
By: Sakib Sherani, former economic advisor to the government (as told to Amer Sial)
The top three priorities should be to reduce the tax rates, reform FBR and facilitate the export sector.
The first and foremost thing is that the budget strategy should be for at least a three-year period. Different strategies and targets are difficult to implement as well to achieve in a year but longer duration allows far more room to achieve the desired results.
The tax base has not increased during the last three years. The reason is the high tax slabs for sales tax and withholding taxes. The sales tax has to be rolled back from 17 percent to 12.5 percent within the first three years. Corporate tax has to be brought down to 20 percent.
A completely roll back of the Gas Infrastructure Development Cess and Petroleum Development Levy is also necessary as they have a massive impact on the efficiency of the private businesses and make them less competitive internationally.
Yes, these steps would result in ballooning the fiscal deficit, but only for the first financial year and would normalise over the next two fiscal years as all the incentives will be provided to the businesses and manufacturing sector, increasing their productivity which will help in getting more jobs, revenue and export earnings.
Reforming the FBR is overdue and has to be done immediately. Improvement in the tax collection machinery will produce the most positive impact on the economy. If FBR is reformed it will help the government recover more taxes and doing away with the non-necessary taxation.
The export sector has to be given more support and for this an allocation of Rs 6 billion per annum is necessary. The government brought out a Strategic Trade Policy Framework in FY2010 which was a major document with many appropriate measures to boost exports. However, it failed to release a single penny during the last six years because although the government did collect cess on export proceeds to facilitate the export sector, it never returned it to the exporters. That money is instead used to finance fiscal debt.
12) Direct and flat taxation with a new tax authority
By: Huzaima Bukhari & Dr Ikramul Haq, Tax Lawyers
There is a consensus in Pakistan that the ill-directed, illogical, regressive and unfair tax laws, regulations and highhandedness of tax agencies at federal and provincial levels are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets from the existing taxpayers, without reforming the tax system and evaluating its impact on the economy, is a self-defeating exercise.
Direct tax system intends to achieve the twin aims of maximizing revenue as well as achieving socio-economic justice. The tax system that will work smoothly for Pakistan must be a flat rate with no compliance hassles. All taxes should be merged into one single tax with complete assurance to the masses that they would be free from any kind of harassment, and money collected would be spent towards their welfare.
Where the public is blamed for not paying their due share, public authorities are equally, if not more, responsible for indulging in corrupt means. Currently, the FBR collects much less than the actual tax potential of Rs 8 trillion.
In these circumstances, Pakistan needs a paradigm shift in tax policy and revamping of the entire tax administration by establishing National Tax Agency (NTA). Through consensus and democratic process, all the parliaments can enact laws for establishing the NTA, which shall be an autonomous body comprising of specialists and professionals that would facilitate people to deal with a single body rather than multiple agencies at national, provincial and local levels.
A tax intelligence system is essential as well. This system should send quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations.
Simple taxation like a 10 percent flat rate tax on net income of individuals and reducing corporate tax rate to 20 percent would induce voluntary compliance provided citizens are aware that competent tax machinery exists.
According to the available data, the total number of persons having taxable income of more than Rs 400,000 is between 10 to 12 million and tax base is around Rs 50 trillion (after taking into account informal economy). Flat rate taxation of just 10 percent with strong enforcement system will yield Rs 5 trillion under income tax alone. If amnesty for earlier years is given, not less than further Rs 2 trillion can also be collected.
All existing indirect taxes should be replaced both at the federal and provincial levels with Harmonised Sales Tax (HST).
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Editorial- The 13th Idea
In the run-up to the federal budget, there are many points of view in the market of ideas for the government to act upon. We have outlined some of them in this issue of Profit. These range from those who preach the gospel of the free market like former planning commission boss Nadeem-ul-Haq to leftist highbrows like Qaiser Bengali, who was instrumental in putting together the BISP. This right-to-left spectrum obviously has many distinct shades of opinion on the issue of taxation.
It is on this front of taxation that we here at Profit would also like to take a crack at throwing out an idea to the government. Except, unencumbered by the expectation of actually being taken seriously by the finance ministry (a luxury that the two aforementioned gentlemen do not have) we can afford to be rather bold in our loud thinking.
Try this for bold: we propose that the government scrap the personal income tax altogether. Yes, you read that right. Completely scrapped. Compared to us, Nadeem-ul-Haq looks like Qaiser Bengali.
But why, you ask? Well, there are several arguments for it. For starters, in one fell swoop, the black economy (other than that derived from non-tax crime) would become legal. With no reason to hide their money, the individuals in question will their cash out of non-productive stores of value like gold and deposit it in the banks. This would undoubtedly be a fillip to investment in the country.
But where would that money that we would be letting go of come from? Well, first of all, as a proportion of federal receipts, it is not as large as one would think. But, to answer the question: indirect taxes. But that isn’t fair, you say. Progressive income taxation is the way to go; taxes on consumption are regressive and hurt the poor. Well, yes, but two answers to that. First of all, the merits of progressive taxation are best discussed in countries that have effective systems of taxation, which we don’t; the trading classes get away with everything whereas the low-hanging fruit that is the salaried class bears the brunt. Secondly, even the poor are hurt by direct taxation in terms of the withholding taxes that they have to pay on consumer products like, say, cellular calling cards. Yes, but they can be redeemed and reimbursed, you say? No one redeems. No one from the middle class and certainly no one from the poor working classes will take the additional cost of having a tax accountant having a look at all their receipts
We need to be selective about increasing the indirect taxation. Perhaps slap higher rates on luxury items; Pigovian taxation, if you will. Whatever the resulting mix is going to be, there is going to be a corresponding inflation. But one accompanied by increased spending and economic stimulus as well.
This removal of income tax should be accompanied by an encouragement by the government for the people to utilise proper banking channels and financial technology. With an increased documentation and, indeed, understanding, of the economy, we could perhaps move back to the imposition of income tax in due time.
Anything is better than this current system, where, in the name of lofty ideals of progressive income taxation, it is the salaried class and the poor (through withholding taxes of consumer items) that pay and the fat cats remain mostly out of the net.
Babar Nizami
