Thursday, 29 May 2014

More Taxes, No Please...!

Sent to Money Matters ...  
Revenues (income of government) and expenditures by the government are critical in Pakistan. We talk so much on these issues that we ignore the real problem, i.e., growth. In my last article I started with the PM’s announced policy of increase in the share of education expenditure by 4 percent. Further, I tried to point out various possible solutions to finance it.  Deficit financing of 1.8 percent is one way to increase spending on education but if other expenditures remain the same, it will increase our debt, hence debt servicing and repayments.
I resist myself to say anything in favor of imposing any new tax because it will eventually be paid by the bourgeois class in the form of taxation or increase in prices. More importantly, we need to stop certain expenditures such as untargeted subsidies, #PerksPlotsProtocols and other bigger leakages in the economy.
Dr Nadeem-ul-Haque has been saying on different forums that we are not taxing #PerksPlotsProtocols. If we monetize them it will be under tax net unless government declare it no-taxed income. Neglected document of the Planning Commission “Framework for Economic Growth”, which was written in the presence of Dr Nadeem-ul-Haque as deputy chairman says “All of the perks in Malaysia are monetized”. Everything is quantified in incentives which have been in practice for more than ten years. Therefore, following the model of Malaysia by monetizing all the perks we can increase the revenue collections.
In general it is believed that the Framework for Economic Growth (FEG) is difficult to implement. Some fears that it will take 30-40 years to implement these policies. With due respect, No. They are all wrong. The FEG talks about different reforms which may take one minute to sign and few months of implementation effectively.
Guestimates of spending on #PerksPlotsProtocol range between Rs. 250 billion to Rs. 500 billion, which if monetized will generate sufficient revenues because it will become part of civil servant’s income. Question is who will do it? Bureaucracy?
Another wicked policy is a policy of SROs which are the most popular among the business communities. It consumes billions of rupees every year, which significantly affect our budget deficit. According to some estimates last year we lost around Rs. 500 billion due to several SROs issued by the Government. Finance Minister using his DARNOMICS looks keen to abolish several SROs which caused Rs. 300 billion loss last year. Nevertheless, whether abolishing that SRO will contribute Rs. 300 Billion is a separate question.
One of the other issues which I have observed lately is the problem of collection or in other words problem of enforcement. Most of the times we as consumers give taxes but it is not forwarded to the government. Government or FBR does not have proper mechanism to track these transactions and collect the total amount of taxes which consumers pay by consuming various goods and services. I’ll try to clarify problem of collection by giving few examples.
One may disagree with my calculation based on the assumptions I have taken. Nevertheless this is a good area which needs to be explored intensively. While standing at a local and relatively smaller restaurant I asked about the daily sales of his best selling product. I multiply total sales with 17 percent sales tax which the restaurant is taking from the customers but it is not accounted anywhere because all the transactions are based on cash. Then I multiply it with 5 assuming that on average sale of four other products matches with the sale of the best selling product. Furthermore, I assume 2500 restaurants all over Pakistan which are similar to this restaurant. My calculation shows that GST which can be collected from these restaurants is Rs.110 Billion in six months. I still believe that it is an understated figure.
Let’s look at another example. Every city has bakeries. Some ask for sales tax while some do not. Nevertheless, I went to a good bakery and asked the total daily sale of best selling item. Following the same procedure my calculations show that across Pakistan if we take 1500 similar bakeries, we are losing Rs.68 billion due to inefficiency and lack of proper infrastructure of revenue collection.
While looking at the above figures, I firmly believe that we do not need more taxes to impose on us we are already heavily burdened by different kinds of taxes.  These were just examples of such non-collections. Bottom line is that collection should be made better instead of imposing more oppressive taxes on us.
Another interesting tax which was levied on us in the last few years is tax on cell phones usage. We pay sales tax, withholding tax when we load the prepaid card. Other than that we pay tax on each call, each package (such as friends and family numbers, 1000 SMS in a week for just Rs. 10 etc), special SMS and sharing balance with someone. While calculating the effective rate I was shocked to see that we pay almost half in taxes, implies that on Rs. 100 card we consume 50 and we pay 50 in taxes.
Since Budget is coming and I hope government can address some of these issues. Another important issue is introduction of VAT, which is welfare enhancing. What is VAT? It is a tax on value added of any product at each stage of production. In simpler words, if a product is sold at Rs. 100 and it is further improved by processing it further then the VAT will be applied on the difference between the new price and old price (Rs.100). In this way the end customer need not to pay tax on the total amount but on the value addition. Consider the example of a restaurant which was discussed above. If price of certain product doubles after value addition then customer pays only half of the amount on taxes which he/she is paying currently. Thus VAT is welfare enhancing.
VAT has been discussed for the last two decades but it was never implemented due to lack of documentation and according to some lack of political will. Huzaima Bukhair and Ikram ul Haq wrote in one of their writings that VAT is not considerable to businessmen because of unscrupulous traders, dishonest tax advisers and corrupt tax officials. Therefore we need to reform our tax administration.
In the end I’ll copy the statement from the FEG that in Malaysia the whole cabinet and Prime Minister were pro reforms.  Thus, political will with the support of cabinet is the key to support reform initiatives.

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