New bailout package

The government, at the fag end of its tenure, has reportedly invited International Monetary Fund (IMF) for negotiating a three-year bailout programme. It is a rather surprising move, especially its timing. Analysts are of the view that after bringing the economy to the brink of collapse, this regime lacks legal or moral authority to negotiate a long-term agreement with the IMF.

They argue that prudence requires that they should have left the matter to the new government having a fresh mandate for the next five years. One view is that lingering and deepening economic crisis, especially bourgeoning fiscal deficit, has alarmed the IMF – it has bona fide worries about the capacity of Pakistan to repay its huge loan if present political lot continues to rule. The forces that matter are even trying to engineer desirable political changes so that bankruptcy is averted. The IMF with enormous stake in Pakistan has been highly critical of FBR’s performance, in particular, fixing what it calls ‘ambitious targets’, and then missing the same with wide margin. After failure to meet the target of Rs 1952 billion during the last fiscal year – a shortfall of Rs 71 billion was admitted by FBR – fixation of target at Rs 2381 billion was simply irrational, said IMF’s review mission after last year’s detailed discussions with Pakistani officials to assess Pakistan’s ability to pay back remaining debt of approximately $6.4 billion.

According to latest estimates of IMF, since FBR would not be able to achieve the revenue target of Rs 2381 billion fixed at the time of budget for fiscal year 2012-13, consequently budget deficit target of 4.7 percent would not be achieved. The IMF has reportedly conveyed to FBR that it would even miss the downward revised revenue target of Rs 2231 billion (it has yet not made public) during 2012-13.

In these circumstances, the decision to go back to IMF for another Stand-by Arrangement (SBA) facility is obviously a compulsion as our foreign exchange reserves are dwindling and expected to remain under pressure due to repayments of IMF loan in the next more than 36 months. Despite an adverse economic situation, Pakistan paid US $1.2 billion to the IMF during fiscal year 2011-12 from foreign currency reserves held by the State Bank of Pakistan (SBP). According to the repayment schedule agreed between Pakistan and IMF, Pakistan will repay $7.6 billion to the IMF until the end of the fiscal year 2014-15. The $11.3 billion SBA program expired on September 30, 2011, and the last two tranches of $3.7 billion could not be paid to Pakistan by the IMF following Islamabad’s failure to pursue key reforms as well as the exposure of fiasco of revenue figures. Pakistan had entered into an $11.3 billion program in 2008 with the IMF and got disbursements of about $7.6 billion, but failed to get the remaining $3.7 billion due to slippages in performance criteria, leading to suspension of the program in May 2010, which was ended unsuccessfully on September 30, 2011.

The present Chairman of FBR, Ali Arshad Hakeem, in a meeting with the Prime Minister on September 28, 2012, ensured him achievement of target of Rs 2381 billion through two amnesty schemes yielding extra revenue of Rs 160-170 billion. Experts at that time expressed serious reservations about the success of such schemes and estimates given by the FBR. Since the fate of schemes is in doubt due to resistance from coalition partners, opposition parties, tax bars and civil society, FBR is in bewilderment regarding enforcement of tax compliance, whether voluntarily or forcefully. The dilemma of FBR is also puzzling for the donors as well – in the past, the World Bank provided US $100 million for five-year-long Tax Reforms Administration Programme (TARP) and at its end tax-to-GDP ratio declined from 11% to 8.2% and tax gap increased from 75% to 150%.

With a lukewarm attitude, there is no hope that Pakistan will ever be able to achieve a desirable tax-to-GDP ratio of 15-20 percent. After foreign-funded TARP, the FBR is showing helplessness to enforce tax laws despite claiming that it possesses “information of all the rich persons who spent millions but never filed tax declarations.” FBR’s failure can be measured from the fact that about 70% of legislators did not file tax returns and wealth statements for tax year 2011 and it did not bother, or more appropriately dare to, issue notices to them. There were about ten million mobile users alone who expended Rs 30,000 or above per annum but never filed tax returns. If annual income of each such individual is Rs 1.5 million (a very conservative estimate), the total tax from them comes to Rs 3,750 billion. The real tax potential of Pakistan is not less than Rs 8 trillion, but FBR is begging for money in the name of amnesty schemes from tax evaders and criminals. Strangely, the IMF is also not assessing the real tax potential of Pakistan and forcing the FBR to enforce tax laws.

It is high time that FBR, instead of announcing any new amnesty scheme, improve its enforcement capacity through Tax Intelligence system to detect tax losses. Capping budget deficit at 4.5% cannot be possible without substantial resource mobilisation and drastic cuts in non-productive expenses coupled with rapid industrial growth that will ultimately improve tax-to-GDP ratio.

The real dilemma of FBR is that mighty segments of society do not pay personal income tax, courtesy permanent amnesty scheme available in the Income Tax Ordinance, 2001 in the form of section 111(4). Those who do not whiten their black money through “fake” remittances periodically avail loathsome amnesty schemes to decriminalise their untaxed wealth and incomes by just paying 1%-2%, which amounts to sneering at honest taxpayers. One wonders if the IMF will take note of it or ignore it again as it did in the past.

People in Pakistan ask why they should file tax returns when their president, prime minister, ministers, governors and elected representatives do not do so. We have written time and again in these columns that tax culture in Pakistan will never take roots unless tax and asset declarations of all the mighty segments of society – politicians, high-ranking military and civilian officials, judges and all public office holders – are made public. There should be a public campaign that the absentee landlords, most of whom are members of parliaments, should reveal their tax declarations. All the judges, high-ranking public servants, including serving and retired generals, should also be required under the law to make public their assets and tax declarations on annual basis. Any person, who is a tax delinquent or has been beneficiary of any loan write-off, should be debarred from contesting elections. All kinds of exemptions and concessions provided under various tax codes should be withdrawn.

The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax system to an extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes greater and undue incidence on the poor and middle-class people (e.g. 16% GST takes larger portion of low-income groups compared to high income groups). The rich and mighty are not paying agricultural income tax and income tax on their non-agricultural income. Most of them are landowners-cum-industrialists-cum-politicians and are engaged in massive tax evasion – case of cartelization and tax bonanza in sugar industry is a classic example. Adding insult to injury, the tax collected from the citizens is wasted on unprecedented privileges and perquisites meant for the elites – indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and its cronies, industrialist-turned politicians, religious and spiritual leaders (sic) and unscrupulous businessmen.

We can raise tax-to-GDP ratio to 20% if we tax absentee landlords, speculative dealers in real estate (this would also help in promoting construction industry as prices of land come down) and introduce asset-seizure legislation for untaxed assets and incomes. It is the need of the hour that FBR should be insulated from all kinds of political, financial and administrative pressures. At the same time, it should not assume the role of legislature and policymaker which, under the Constitution is the sole prerogative of people of Pakistan through their elected representatives.

The appointments of Chairman and members of FBR should be through a public hearing by Select Committee of both the houses of Parliament and not on the wishes and dictates of the ruling political party headquarters. All kinds of loopholes in tax laws should be plugged by proper legislation. The infamous SRO culture should be abolished. No executive authority should have powers to amend tax laws. Through public debates and democratic processes, the Parliament should devise a rationale and workable tax policy after taking inputs from all the stakeholders and experts in the field. There should be zero tolerance in respect of enforcement of tax obligations across the board without any fear or favour. Tax collected should be spent on the welfare of the masses and not on the luxuries of the mighty segments of society. The rich should be taxed for the benefit of the poor – we are doing just the opposite. This alone can help in improving tax-to-GDP ratio.

(The writers, tax advisers and author of many books, are visiting Professors at Lahore University of Management Sciences)