PTI tax policies: transformative or more of the same?
Campaign slogans and party manifestos may help win elections, but the rubber only hits the road when an elected government declares its first annual budget. Nothing demonstrates the leadership’s political will to implement its vision like the measures embedded in the finance bill.
The lack of a clear ideological divide between previous ruling parties, the PML-N and PPP, and perennially high fiscal deficits, meant that the budget had become a routine bureaucratic process reflecting short-term revenue exigencies rather than long term policy goals.
However, with PTI coming to power on the back of a reform agenda that promises a progressive tax policy and social welfare spending on the most vulnerable sections of society, the government’s economic success will be measured by how successfully it implements its fiscal vision for ‘Naya’ Pakistan.
The previous PML-N government did little to eliminate inconsistent policies that bedevilled the tax regime, impeding business and exports growth. Despite its imposition of arbitrary levies, the tax to GDP ratio remained below 13 percent of GDP, among the lowest in the region.
But PTI’s vision of an Islamic welfare state hopes to provide a safety net for the most vulnerable members of society, all the while maintaining a business-friendly environment for wealth creation. Given the formidable macroeconomic challenges, and the constraints of the IMF bailout, the government was faced with a three-pronged challenge: simplify tax laws and procedures; maximize revenue to narrow fiscal imbalances; broaden tax base through registration and documentation.
PTI’s vision of an Islamic welfare state hopes to provide a safety net for the most vulnerable members of society, all the while maintaining a business-friendly environment for wealth creation
In its efforts to simplify taxation, the government eliminated numerous tax exemptions for sectors like textiles, leather, carpets, sports goods and surgical instruments. These and similar measures are estimated to raise approximately Rs. 225 billion (or 0.5% of GDP) in the current fiscal year.
Second, for narrowing fiscal imbalances, the budget introduced numerous revenue generating measures. Through lowering the income tax threshold for salaried and non-salaried individuals to Rs 600,000 and Rs 400,000 respectively, and increasing the tax rate at the top of income distribution, the government plans to raise an additional Rs. 90 billion this year.
The third most vital long-term challenge of broadening the tax base through greater documentation has been addressed through measures like giving compulsory identity card details for transactions made with unregistered persons for sales tax, recording of ID data by withholding agents where persons are not on the Active Taxpayers List (ATL); compulsory registration for income tax through the national database and registration authority (even for taxpayers whose income is below the tax threshold).
Gifts, one of the most exploited loopholes in tax evasion, have been brought under the definition of income. At the same time the government has done away with the concept of tax filers and non-filers and introduced provisions to penalize persons who do not appear on ATL.
The IMF estimates that these measures, backed by an effective tax administration, is likely to generate additional revenue of Rs. 733.5 billion or 1.7 percent of GDP this fiscal year.
In line with PTI’s commitment toward protecting the most vulnerable from the harsh economic realities this year, the budget contains a significant increase in social welfare spending. Allocations to the Benazir Income Support Program (BISP), the biggest assistance program at the federal level has been increased by 80 percent over the previous year. Moreover, the budget contains an additional Rs. 50 billion in power tariff subsidies for the poorest households.
The government seems willing to withstand public pressure and take tough fiscal measures to entrench lasting reforms and ensure sustainable growth. But the effectiveness of these measures rests on the implementation strategy of Pakistan’s primary tax collecting body, the Federal Bureau of Revenue (FBR). Despite the induction of a highly regarded technocrat, Shabbar Zaidi as its chief, there remains skepticism about organizational shortcomings and the body’s capacity to perform.
The government envisages that investment in the modernization and digitalization of FBR functions, improvement in databases and the streamlining of legal procedures will mitigate some of the difficulties in taxing the informal sector of the economy. It is not only expected to help in improving FBR’s organizational efficacy, but also to minimize reliance on regressive measures like withholding/indirect taxation and the contrivances of filers/non-filer distinctions.
Over time, the government is considering further measures such as transforming the General Sales Tax into a broad-based Value Added Tax; strengthening taxation on agricultural turnover by provinces; eliminating tax credits and deductions on personal income tax for higher income slabs, and ensuring equivalent taxation for all sources of income.
If the PTI succeeds in going through with an ambitious combination of policy and administrative reforms, then it can claim to have delivered on its transformative vision of instituting a progressive tax regime in a welfare state where everyone is taxed according to their ability.