TAX NEWS - June 2010

Pakistan Tax: Budget and the poor

Here is an anecdote on the budget. When I was working for a national English daily in the early 1980s, to report the budget, we were gathered in a small TV monitoring room waiting for Ghulam Ishaq Khan's speech. As there was not enough space, jokingly I asked my friend Siddiq Baloch, who was crime reporter, what he was doing in the room. He chuckled and said, "I am here to witness the biggest pick-pocketing crime of the year where every Pakistani would be robbed." We all laughed but the irony of his statement left us thinking how right he was.

After every budget speech, the media, which is supposed to be the watchdog protecting the interests of the common man, tries to figure out how much did the budget rob the poor. As almost all the journalists belong to the middle and lower middle class, they naturally look for the immediate reliefs in the budget. In most reports, the thrust of the economic policy on which the budget is based and its ramifications are overlooked.

On the other hand, most governments in Pakistan have very little elbow room to present a 'pro-poor budget'. For instance, let us look at the constraints of the present government while presenting the budget 2010-11. First, it lacks the political will to change the whole paradigm, which is at present in favour of the ruling establishment of the country. Any expectation from the ruling class to change its political and geo-political strategy is unrealistic. And without moving towards these changes, the economic policies of the country cannot be changed. Economic policies are linked to the ecology in which the khakis and their co-evolutionists live at the expense of the surpluses produced by the common man.

Thus, Dr Hafeez Shaikh had to give a routine budget and, as he said, it is aimed at stabilising the economy first, meaning finding equilibrium in containing inflation and stimulating growth. Another compulsion is that this has do be done without burdening the privileged classes, without cutting down non-productive expenses, which include the defence budget, protecting the interests of the ruling classes and at the same time saving a sprinkling of direct subsidies for the have-nots.

Parliament and the ruling political party have a strong landed-class representation. This restricts the government in levying any tax on agricultural income. Yes, I know that it is a provincial subject, which allows the Centre to pass the buck to the provinces. But are the provincial governments not coalitions where the PPP and its allies are present? For understanding the clout of the quasi-feudal lobby, it should be remembered that even the martial law governments with their military administrators in all provinces did not levy taxes on agricultural income. Why should the generals support tax on agricultural income when most of the top brass of the armed forces is blessed with agricultural land for conquering this nation thrice?

According to Shaukat Tarin, "One of the major predicaments of every finance minister is to deal with the strong lobby that represents the agriculturist...You see 65 percent people in this country live in rural areas and are attached to an agrarian economy; it is this class which does not allow levy of agricultural income tax but wants all the subsidies." "There is no reason that the agriculture sector that contributes 21 percent of the GDP should not be taxed," he argues.

If there is political will, it would not be difficult to tax agricultural income. Pakistan has four major cash crops — wheat, rice, sugarcane and cotton. Each province can impose, say, just 2-3 percent withholding income tax at procurement level to begin with. This would bring in billions of rupees. The argument against this tax is that the poor farmers would also be taxed. Let it be so. After all, he is also receiving subsidised electricity, water, fertiliser and loans. Agriculture tax has also become justified because now the government has started giving farmers support prices that match international prices.

Secondly, no finance minister has so far been successful in taxing the informal sector because they are serving the ruling classes and help them in evading taxes. That is the reason value-added tax (VAT) or general sales tax (GST) at retail stage and services is resisted in the name of protecting the poor from price increases. On the contrary, tax evasion is robbing the poor. Many critics say that VAT is an indirect tax hence it would hurt the poor, which is misleading. The government has failed to explain the benefits. If the food, medicine and basic level amenities are exempted, then VAT cannot hurt the poor. The rich consume more hence they will have to pay more. Monthly expenditure basket of the poor contains 80 percent food items. Their children's schooling and textbooks are free. Government hospitals and basic medicine also have no sales tax. Electricity and gas rates for the low units consumers are also less, hence sales tax/VAT will not hurt them. Look at the economic cycle of tax evasion: tax income is just nine percent of the GDP, one of the lowest. One percent increase in taxes could yield around Rs 120 billion. As the rich evade taxes, abetted by the tax collectors and policy makers, the government has to rely on borrowing, and borrowing leads to inflation. The poor suffer inflation's impact more than the ruling classes.

However, Dr Shaikh did include some token pro-poor reliefs, giving the PPP leaders face-saving in the debates to come. These measures are increase in Benazir Income Support Programme funds, 100 days salary to 200,000 unskilled, unemployed people in a year, salary and pension increases and stipend for the educated youth to continue, etc.

In spite of a tight fiscal situation, he has kept the size of the development budget at Rs 766 billion. This is an attempt to fuel the economy, create employment and maintain the growth rate. But the real challenge is that both federal and provincial governments have to improve governance and efficiency. In the past no public sector development programme (PSDP) allocation was fully utilised. For the critics of corruption, the satisfactory thing is that the corrupt bureaucracy has become so inefficient that they cannot even use the funds available to them.