The new government has many burning issues to deal with. Some of these have been highlighted by the media and some by the politicians themselves. The budgetary constraint that is visible and made now clear in the negotiations with the IMF is the scarcity of capital. The resource gap is so huge that the implications for macroeconomics are horrendous. Ask any tuppence economist and you will gat a straight answer as to the limits of the resource gap. Abeynomics (after its elected PM) in Japan found an answer to falling exports but willing devaluation and the method that they followed was to print money in excess so that the yen-dollar equation was resorted to such a level that they could start exports again.
Pakistan cannot follow that pattern for it has no export-oriented goods to export and it has never been competitive in world markets, nor does it have the human negotiating skills to convince trading partners to accept Pakistani products. All it can do is offer some commodities. What little was left of economic life was undone by fallowing the Neo-Classical Economics (NCE) of free markets. It is now understood that NCE has important shortcomings and that it may be better to resort to other models. But we are digressing from the real intent today.
The view that everyone that earns incomes beyond a certain level has to contribute to the resources of that country is a tenet that should be acceptable to all. The country has budgetary constraint because it has to meet many of its requirements so as to meet its obligations to the nation as provided in the manifesto of the party now in power. If the budgetary systems are inelastic what can be done to find new avenues? If the Boston Tea Party is to be avoided then the need is for the taxation proposals be discussed with the community that is being taxed. That is never done and it’s not possible to do so a few days before the budget is to be passed. The problem with the ‘Pakistani psyche’ is that it has its head buried in the sand and is not willing to face up to tough proposals. The budget debate has already ended with people calling it foul. That is not the way of decent societies. The implication of each proposal has to be considered. That means a standing committee of eminent personalities who will consider these matters through the year and taking everyone affected on board. It does not mean the present style of stakeholder consultation but one that goes deep into the heart of the ramifications of the policy.
Much would depend on the constitution of the committee but can we find five persons in Pakistan who are eminent and not prominent? Designations lead to prominence. The President and PM are prominent people and prominent people are always susceptible to advice from the loyal followers. Reason is at a low priority for them. Having set the committee that can do this work at least skeletally, one now has to see what kind of substance this committee is expected to come up with. But before that we have to see that these eminent persons carry with them imagination and an ability to persuade the population that here actions are going to be fair and decent. That when it comes to taxation the responsibility of the government increases far more than in proportion to the taxes raised.
There is a conservation element in the taxation proposals that has never been considered by the government but accepted on the basis of advice from the IMF/WB. They are our fair weather friends and whether they are friends at all requires some deliberations. They will be our friends when we deal with them squarely and not in a manner that is messed up by our trying to play truant with them. Data used to be fudged and wrong information was provided to them. If they are so bad why not get rid of them? I was very happy when the ‘Cashbook’ breaking attitude was brought in. Reality dawned on the policymakers for reality is always contrary to verbosity.
Agriculture income tax application has some difficulties. These difficulties arise from the fact that there are no accounts kept. When the colonialists were here and they wanted to begin a new thing they considered the knowledge difficulties. For the local contractors they brought in the overseer whose job was to ensure that the contractor was helped in filling the measurement book, known in ordinary parlance as MB. In the irrigation department, they were to measure the supply of water in the canals so they developed what was called a ‘Rod man’. Since work was done by bullocks so they had a bullock man as well. The stagnation that we are in is that the overseer continues to flourish; the rod man and the bullock man have become servants of the irrigation staff. These are called euphemistically perks of the system. The point has been made that all that was organised by the colonials was for their own purposes and these matters have outlived their utility. Pakistan may well have to take something out of the earlier system and create a body of technicians in revenue that may advise the farmers how to keep their account books. If an overseer can be created for the contractors surely something for the farmer can also be developed.
There are other serious issues that need to be understood. The first is that if you tax a community then in return a development has to be done. That means that one may have to use the tax collected from a tehsil in that very tehsil. For a sweetener it may also be added that if this is done it will be done by the local leadership and not some engineering concern that is neither here nor there and if government was to add a matching grant equivalent to the tax collected by way of incentive the farmer would be encouraged to pay income tax. The problem is that the government has no credibility in the rural areas and it may well backfire. Governments rarely have a conscience. They do things at their own peril and at their own will.
The income tax to be levied on the farmer has another problem and that has to do with the calculation of net profit. Since farmers have no access to markets they cannot sell their produce and therefore have some distance to travel before they can sell their produce. Markets may be as far away as few or a hundred miles and therefore the transaction cost may be horrendous. Tomatoes coming from Balochistan and selling in Islamabad may well be a case in point. The real person to tax is the middleman. They have become a law unto themselves and with urbanisation that is more so. All kinds of sharp practices are being practised by them. They have a monopoly on agriculture markets. They charge the commission that they do without adhering to the laws enunciated in the market committee act. The tragedy with all indirect taxation proposals is that these will be passed on to either the consumer or to the producer or both.
The points at issue pertain to the existing land revenue as a tax on incomes and what proportion is already paid? Secondly, there is already an exemption in the revenue system and how the farmers in debt will be dealt with when a tax is considered as unjust. With land holdings division due to inheritance laws the dynamic forces in say five years’ time will lead to more land on exemption. This will be a continuous process. The tax as such will be evaded (not avoided) and will lead to regressive actions by the administration authorities. In social terms this is visible in other services made available to the general public and whenever an action of the government is seen as regressive actions contrary to social harmony increase. Increase in inefficiency and discipline become a common phenomena (this is visible in Balochistan, KPK, Sindh and Punjab where gas and electricity theft is now a common phenomenon).
The rural areas and the farmers have paid their dues to the nation by providing food security at a pittance of the world prices. This is undoubtedly a tax on them. In return, what have the urban-based decision-makers given to the country? If the rural area turns itself against itself there will be no productivity resulting in inflationary prices. We are already seeing this in the urban areas. It is always better to have the farming community on one’s own side so as to offset any policy that forces them to think otherwise. The tax will be and is very unpopular will produce very little while the consequences will be adverse.
So think a while. The industrial sector is very keen that these farmers be taxed. Instead of listening to them it might be better to tell the industrial sector to clean up their own acts of omission and commission. How many taxation appeals are pending before the tribunal may be a good case to pursue in the first instance. A study be made of the two sectors for determining comparative facts.
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Keywords: Social sciences , Economics , Economic issues , Economic policy , Policy maker , Income Tax , Electricity , Agriculture , Budget , Tax , Macroeconomics , Balochistan , Islamabad , Pakistan , IMF , WB , NCE , PM