Convenient’ taxation

Last week, at a function to announce the discovery of substantial gold, silver, copper and iron reserves in a 2,000 square miles area around Chiniot, while the Prime Minister rightly thanked God for blessing Pakistan with this treasure, he blamed the past governments for not conducting geological surveys in this territory, which delayed the discovery of these reserves.

According to the Geological Survey of Pakistan (GSP), an autonomous and independent institution under the Ministry of Petroleum and Natural Resources, these reserves are located in Faisalabad, Nankana Sahib and Chak Jhumra (Faisalabad). GSP had been working on exploring this treasure trove since 1989, and had identified 32 possible reserves in the Punjab.

According to GSP, what delayed the completion of this project all these years was inadequate annual allocation of funds to carry out the requisite tests necessary for conclusively establishing the existence and size of these reserves. Nawaz Sharif headed two federal regimes between 1990 and 1999; didn’t his regimes too pay ceremonial attention to this crucial effort?

However, he praised the present Punjab government headed by his brother (CM Punjab for the fourth time) for expediting the project. Interestingly enough, none from the GSP was invited to the ceremony announcing the discovery of these reserves although GSP engineers and staff did the ground work on this project despite funding and technology constraints.

Whoever the Prime Minister may assign this discovery to, mining these reserves will require building the requisite physical infrastructure to allow transportation of the heavy mining equipment to the mine sites, and security of the mining personnel who will have to live there during the coming years – a financial outlay for which resources may again fall short.

Non-discovery or delayed extraction of Pakistan’s natural resources owes itself to greed-driven obstructions and the routine slashing of the Public Sector Development Programmes to finance current (often wasteful) expenditure because no regime, especially democratic regimes, tried to increase the country’s tax-to-GDP ratio. Worse still, resource waste kept multiplying.

Besides failing to collect higher volumes of direct taxes, successive regimes squandered national resources. The grossly under-priced sale of vast tracts of state land or their illegal occupation by land grabbers with the connivance of state functionaries who remain unpunished is an example thereof and, more recently, the sale of over 6,000 used vehicles by OGDC, virtually for pennies.

Not surprisingly, and as admitted by the Finance Minister, in FY15 too, fiscal deficit will exceed the target set in the FY15 federal budget. Circumstances wherein keeping Pakistan’s foreign exchange reserves at a minimal reasonable level implies fulfilling every IMF condition for its continued funding support, Pakistan may end-up with a fiscal deficit exceeding the limit set by the IMF.

This is hardly the setting wherein Pakistan could finance the infrastructure required for mining the metallurgical reserves around Chiniot that promise billions of dollars worth of revenue because the expected fiscal deficit is Rs 196 billion. This impending tragedy has forced the desperate Finance Minister to levy controversial indirect taxes without obtaining the sanction of the parliament.

The expected year-end fiscal deficit will materialise despite the fact that tax collection during the first half of FY15 has been Rs 1,172 billion (up by 13 percent) compared to Rs 1,031 billion over the same period in FY14. While the rise in tax collection (though largely via higher indirect taxes) is a welcome development, it also raises questions about the reasons behind missing the fiscal deficit target.

According to the Finance Minister, two constituents of the revenue deficit are the Rs 80 billion decline in import duty on petroleum products due to global oil price decline, and Rs 31 billion of the Gas Infrastructure Development Cess whose collection has been stayed by the judiciary. About the remaining shortfall of Rs 85 billion he has yet to offer an explanation.

What is the current productive capacity of the debt-ridden Pakistan Steel Mills (PSM) is no secret. Yet, of the 314 goods whereon the Finance Minister slapped additional regulatory duties a significant portion comprises iron and steel products (many used as inputs for manufacturing value-added exportable goods) because PSM cannot produce these items.

Pakistan’s economy either stagnates or slides. The reason there for is that governments try to plug the fiscal gap using ‘convenient’ strategies – increasing tax revenue either by requiring third parties to collect it (and pocket the bulk thereof) or collecting it in one go at source (eg import duties), with zero concern for ensuring that taxpayers bear its impact according to their ability to pay.

The hurry with which the Finance Minister hiked-up indirect taxes (that escalate economic disparities) shows that his sole aim is meeting IMF conditionalities, whatever their impact on the economy. Proof thereof is the hike in GST on petroleum products, especially furnace oil – costs that have a snowballing effect in increasing inflation and reducing competitiveness.

According to the Finance Minister “We collect 20 percent of the total tax revenue from petroleum products” and additional GST on these products will provide additional Rs 33 billion. He doesn’t realise that, though a ‘convenient’ route to increasing tax revenue, this levy will inflate the expenses of the transport and energy sectors at a heavy cost to the entire economy.

The Finance Minister’s logic justifying the rise in GST on petroleum products is that since September 2014 prices of these products were reduced by 37.7 percent, and are now the lowest in the entire South Asia region. To begin with, this claim is only partially correct, and other South Asian countries don’t confront as crippling oil and energy shortages as does Pakistan’s economy.

The decades-long craving for ‘convenience’ in taxation explains why, defying socio-economic logic, almost two-thirds of the tax revenue is collected via indirect taxes, and those doing so aren’t just our tactless politicians but also the bureaucrats in the ministries of finance, economic affairs, and the FBR who aren’t bothered about the sustained rise in poverty and the threats it is unleashing.

Quite visibly, the Finance Minister’s approach to taxation also defies the principle that says “no taxation without representation”. Not surprisingly, last week a meeting of All Pakistan Chambers of Commerce & Industry demanded his resignation. But our ‘businessman’ Prime Minister can’t see the damage single-handedly being done to his regime by the Finance Minister.

Pakistan urgently needs to cut resource waste and adopt austerity in state offices, which appear a low priority. The VIP culture, huge and questionable outlay on marginally beneficial ventures (eg motorways), and Prime Minister’s foreign visits portray lack of commitment to cutting waste and adopting austerity; it foretell even higher economic instability.