With the federal budget for the 2021-2022 fiscal year, the Pakistani government Tehreek e Insaf (PTI) has bet the survival of the economy and its own on an expansionary budget loaded with incentives that strongly contradicts that of the International Monetary Fund ( IMF) contraction structural adjustment mantra.

Every fortnight, the Daily Times will provide expert commentary on the tax system built into the budget, starting with a general overview and then analyzing the details one by one.

In the first part of the series, Daily schedules interviews Dr Ikramul Haq. He is a lawyer at the Supreme Court and specializes in constitutional, corporate, media, IT, intellectual property, arbitration and international tax law. He is also a Visiting Faculty Member of Lahore University of Management Sciences (LUMS), Advisory Board Member and Visiting Principal Researcher of the Pakistan Institute of Development Economies (PIDE).

Daily Times: In a way, collecting revenue is the most important part of the federal budget, because without it development spending becomes a big deal. Why, then, that the budget’s tax collection target is never met and yet governments are increasing the target year after year?

Ikramul Haq: Basically there are two sides to this story. First of all, we need to consider whether the tax collection targets are unrealistic because we cannot collect the estimated amount or because the Pakistani economy has no depth in it.

The major problem is that if the economy is growing and expanding, sound tax collection is one of its by-products. We believe that instituting more taxes might be the best solution as other countries use tax collection as a tool to increase their revenue bases.

Pakistan is the only country to charge 10pc of tariffs on imports, while all other countries charge 5pc on average

If our tax rates go down, then in my opinion we will have a cushion despite the pandemic. But it’s not as if the Federal Board of Revenue (FBR) is going to rush instead, need to be made aware of its tax obligations.

In addition, before giving an estimate of the tax collection for the next fiscal year, planning should be done on how these taxes are collected and what will be done after these taxes are collected. Planning is still lacking due to which our expenses always exceed our revenues and we have to face a large budget deficit.

DT: It was decided with the International Monetary Fund (IMF) that the budget was going to be restrictive, with more taxes and more tariffs. But they gave an expansionary budget where you can see significant tax relief. So the question is: were you pleasantly surprised or worried after seeing this situation?

IH: I am concerned that the taxes have not been applied as they should have been and that they may even slow down economic growth. The government has also not worked according to the IMF’s program, nor presented a better strategy on its part. For example, with respect to exports, we have not exceeded our capacity by more than $ 25 billion to $ 30 billion. We receive approximately $ 28 billion in remittances. But for our domestic market, we have maintained high tariffs and at the same time, we also collect sales tax.

We also get value added tax (VAT) as well as income tax on the same things. Due to this situation, people indulge in under-invoicing because after paying such huge taxes most people cannot survive whether they are retailers or production managers.

Pakistan is the only country that charges 10% tariffs on imports, while all other countries charge an average of 5%. There should be a paradigm shift in our policies or a complete change in our tax system, otherwise the economy will not improve.

DT: Can you explain to us a little about the major taxes introduced in this budget and the tax breaks that have been granted?

IH: No new tax was introduced in this year’s budget. At least that is what the new Minister of Finance has been saying since his arrival. Yet on the other hand, the Prime Minister’s special advisor on revenue, Dr Waqar Masood, has suggested that taxes to the tune of Rs 540 billion are needed. That’s why, in a nutshell, taxes were actually put in place on a number of things like the 17 percent sales tax on crude oil.

DT: According to the government, taxes have been reduced, many exemptions have been granted, and government spending. was increased in particular the fiscal policy. How will they generate income if many exemptions have been granted? Even the subsidies have been increased. They also said they would use the technology, what technology would they use to increase the tax base and reduce the tax rate?

IH: The tax collected in the last fiscal year, after handing it over to the provinces, whatever amount was left, was not even enough to pay our $ 3 trillion in debt service or even cover 1,200 billion in defense spending. All our development projects and our current expenses will be paid for by debt.

Pakistan – the only country since 1960 that has completed 40 projects but only one was successful during Ishaq Dar’s time.

DT: The IMF gave the government two months to prove that its expansionary budget is working, but what is the Fund going to look at to decide if we are making the right kind of progress or not, and what will happen? he if not impressed?

IH: First, people need to be very clear about certain things. Every businessman should register for sales tax. Each person should be taxed according to their income.

In addition, the sales tax rate should be lowered. This is how to broaden the tax base and get more people into business. This will increase growth and therefore also the tax base. But we don’t, although it would help us in many ways, like reducing food inflation.

If we don’t stay on the IMF program, the soft loans we get for development projects will also stop coming.

Three things must be done:

1- Institutional reforms, so that they give you controlled results. Provide people with their consolidated statements so they know how much income they can use and how much tax is owed to them.

2- Using the land in the cities, leasing it, will create opportunities for people, push the economy forward towards growth and improve tax collection.

3- New businesses are needed because our young people need more jobs and opportunities and this cannot be done if investments are not generated in the country.

DT: There has to be a way to overcome our chronic inability to increase revenue collection. What actions would you recommend?

IH: The only real problem we face is software. We need to train people in technology and completely overhaul the tax collection mechanism by digitizing the whole system. This will eliminate all distortions and all forms of discrimination.

If we work according to an elaborate plan, the Pakistani economy will improve in a few years and then we will have no problem working according to
IMF programs.