“The makers of the caretakers, the tacit approvers and the dispersed opposition agree that while elections are the business of the Elections Commission, the single purpose of the caretakers is to fix the economy. In the polarised state of affairs, this is a rare consensus. Political class has shown little appetite for the purpose. Rather, it has empowered the caretakers to achieve the purpose.”—Dr. Pervez Tahir, Cabinet fit for the purpose
“The interim government has picked an experienced duo of Dr. Shamshad Akhtar and Dr. Waqar Masood Khan to steer the country out of a prolonged economic crisis”—"Interim setup picks pro-liberal policies duo, Express Tribune
“We need to design a fiscal policy that facilitates businesses, we would like to do spade work for the upcoming governments, so that the country could benefit in the future.”— Caretaker Finance Minister, Dr. Shamshad Akhtar, June 7, 2018
The second time caretaker Finance Minister, Dr. Shamshad Akhtar, and old-timer at Pakistan’s Ministry of Finance, Dr. Waqar Masood Khan, Adviser to the Caretaker Prime Minister on Finance in the capacity of Minister of State, are the choice of the “makers of the caretakers,” as per the learned and witty Dr. Pervez Tahir (friends call him PT), in his latest column. He has been saying that Pakistan does not need technocrat finance ministers and that we can live without the International Monetary Fund (IMF).
This “choice” by those who matter in the Land of the Pure must have the blessing of the lender of the last resort that released on July 12, 2023 the first tranche of US$ 1.2 billion of yet another bailout package—a 9-month US$ 3 billion standby arrangement (SBA), agreed between Pakistani authorities and IMF staff on June 29, 2023 and approved by its Executive Board. The credit for this was given to the Chief of Army Staff by former Prime Minister, Muhammad Shehbaz Sharif.
Last time when Dr. Shamshad took the charge of Finance Minister in 2018, she was reported to have emphasise the need to improve tax-to-GDP ratio “to fund the development projects” and asked the Federal Board of Revenue (FBR) to furnish reports about the monetary implications of various tax incentives and amnesty schemes on revenue collection. She gave a go ahead for holding policy level dialogue with the IMF, but even before her green signal, the IMF arrived in Islamabad “for gauging the economic health of the country.” According to a report, now after taking charge of her office, living to her reputation, she “showed commitment to the IMF deal and the market-based exchange rate during her maiden meeting with a team of the finance ministry.”
It appears from reports that the duo of Dr. Shamshad and Dr. Waqar has not been “selected” to perform the routine job as mere caretakers of the economy till the next elections, for which the exact date is yet unknown, despite the clear command of Article 224(2) of the Constitution of the Islamic Republic of Pakistan, which unambiguously says: “When the National Assembly or a Provincial Assembly is dissolved, a general election to the Assembly shall be held within a period of ninety days after the dissolution, and the results of the election shall be declared not later than fourteen days after the conclusion of the polls.”
The issue of elections as per the Constitution, constitutionalism, independence of judiciary and rule of law are now becoming obscure in Pakistan. These will continue to be commented upon by many in the coming days, when general elections are once again not held in 90 days under one pretext or the other. However, certain things are clear, namely the lingering and deepening economic crisis, especially the bourgeoning fiscal deficit, dwindling reserves and huge current account and trade deficits.
The real tax potential of Pakistan is not less than Rs. 16 trillion, but the FBR in the past was begging for money in the name of amnesty schemes from tax evaders and criminals. The IMF is also not bothered about the real tax potential, and has always been forcing the government to introduce harsh indirect taxes that does not hurt the rich, but strips the poor and salaried classes of whatever little income they earn.
We all know that the economic meltdown of Pakistan and the continuous danger of default on external front have alarmed IMF, so it is amenable to work with the caretakers even beyond the stipulated period provided in the Constitution. The anxiety of the IMF is bona fide regarding Pakistan’s capacity to repay its huge loan if the present economic mess continues. The forces that matter are trying to avert bankruptcy. The IMF, with an 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.
The perpetual failure to crack down on untaxed assets and ill-gotten wealth, and rather giving generous amnesty schemes to the rich and mighty, has converted Pakistan into a ‘soft-state’—a term introduced by Swedish Nobel-winner economist Gunnar Myrdal in his book ‘Asian Drama’ to describe a general societal “indiscipline” prevalent in South Asia and by extension, much of the developing world in comparison to kind of modern state that had emerged in Europe. The decades-long policies of appeasement towards tax evaders and plunderers of national wealth have ensnared the entire nation in a ‘debt prison.’ We need radical reforms on all fronts to liberate ourselves and transform Pakistan into a true social democracy.
With a lukewarm attitude and its signature incompetence, FBR will never be able to achieve the desirable tax-to-GDP ratio of 20-25 percent. FBR’s failure can be measured from the fact that since 2018, six tax amnesties have been given, yet it failed to improve the number of return filers. Out of 120 million unique mobile users [total subscribers as on June 30, 2023 were 191 million], there are about five million that expend Rs. 30,000 or above per annum and have average income of Rs. 2 million plus, but have never filed tax returns. The real tax potential of Pakistan is not less than Rs. 16 trillion, but the FBR in the past was begging for money in the name of amnesty schemes from tax evaders and criminals. The IMF is also not bothered about the real tax potential, and has always been forcing the government to introduce harsh indirect taxes that does not hurt the rich, but strips the poor and salaried classes of whatever little income they earn.
The Fund wants austerity, oppressive taxes, privatization and their mantra has always been followed in Pakistan by their imposed financial wizards.
It is high time that the FBR improve its enforcement capacity through a Tax Intelligence system to detect and recoup tax losses. Capping the budget deficit at 4 to 5 percent is not possible without substantial resource mobilization and drastic cuts in non-productive expenses, coupled with rapid industrial growth that will ultimately improve the tax-to-GDP ratio.
It is time to suggest to the duo of Dr. Shamshad and Dr. Waqar to stop talking about more taxes—the favorite prescription of lenders/donors. Due to the non-taxation of luxury and commercial properties e.g. clubs and golf courses, unprecedented exemptions given to generals, judges and high-ranking civil officials, the national kitty suffers immensely. We must discuss the palatial bungalows used by militro-judicial-civil-political elites—by leasing enormous land occupied by elites in posh areas for 100 years for commercial purposes, Pakistan can raise funds of billions to fund projects and retire loans. We can redo our large cities to make them engines of growth. Dr. Shamshad and Dr. Waqar may suggest to the coming government to end the colonial systems (elite service groups, judiciary, perks, plots, laws etc)—the real cause of our problems—that nobody wants to change. Even the suo moto actions by Chief Justices of Pakistan in the past proved to be largely cosmetic in nature—these remained meaningless, as we never opted for complete structural reforms in all spheres of governance. The judicial system of Pakistan is one of the worst examples of inefficiency. It will not deliver under any Chief Justice for simple reason of no will to completely revamp it per modern lines.
The real dilemma of the 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). This will not plug the loophole despite restriction of five million in a year to probe the source. Those who do not whiten their black money through “managed remittances” avail loathsome periodic amnesty schemes to decriminalize their untaxed wealth and incomes which amounts to sneering at honest taxpayers.
Two schemes ended on June 30, 2018 announced by Pakistan Muslim League (Nawaz) and three during the regime of Pakistan Tehreek-e-Insaf caused huge losses to national exchequer, which is well documented in the paper Incidence of Taxes: Who Bears How Much Burden. Indeed, the IMF will never bother to take note of this—this is not their concern at all. The Fund wants austerity, oppressive taxes, privatization and their mantra has always been followed in Pakistan by their imposed financial wizards.
Adding insult to injury, the tax collected from citizens is wasted on unprecedented privileges and perquisites meant only for the elites—indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and industrialist-turned politicians.
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 inflicts greater and undue incidence on the poor and middle-class people. The rich and mighty are neither paying any agricultural income tax nor income tax on their non-agricultural income. Most of them are landowners-cum-industrialists-cum-politicians and are engaged in massive tax evasion—a case of cartelization and the tax bonanza in the sugar industry is a classic example. Adding insult to injury, the tax collected from citizens is wasted on unprecedented privileges and perquisites meant only for the elites—indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and industrialist-turned politicians.
Pakistan faces the herculean task of providing jobs to millions of young people every year. For achieving this target, the economy must grow at the rate of 8% to 10% per annum over a long period of time—for this we need investment around 25% of GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are youth, which is our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by the assignment of taxes for productive investment and employment generation—our real engine of growth. The prevalent pessimism is due to the attitude of rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.
We can raise the tax-to-GDP ratio to 25% only if a fair, predictable and efficient tax model for rapid industrial and business growth is devised. It requires an analytical study of all the irritants prevailing in our tax codes, procedures and implementation processes.
The main irritant is highhandedness, corruption and an unprecedentedly high level of maladministration in the country’s tax apparatuses—both at the federal and provincial levels. We need a public debate for suggesting solutions to remedy the situation and promote taxation and business growth attracting domestic and foreign investment and ensuring much-needed jobs. The starting point for this can be proposals contained in the book Towards Flat, Low-rate, Broad & Predictable Taxes.