Pakistan: be penny wise and pound foolish

Hassnain Javed

JULY 23, 2019

On June 11, the Pakistani government revealed its first annual budget for the 2019-2020 fiscal year and was able to pass it only on June 28.The significant delay was due to powerful opposition resistance in parliament that threatened the government with demonstrations over perceived economic mismanagement. Indeed, the current economic condition in Pakistan is stressing. The Pakistan Economic Survey this year, a government-issued report preceding the annual presentation of the budget, framed a significantly different picture of the domestic economy.

There has been a downward trend for nearly all economic indices. The growth rate dropped from 6.2% to 3.3% by nearly 50%. Next year, it is anticipated to go down even further to 2.4 percent, which in the previous 10 years will be the lowest in the country. Since the start of this fiscal year, the Pakistani rupee has lost a third of its value against the dollar. Over the next 12 months, inflation is anticipated to slide around 13 percent, approaching a 10-year-high as well.

Then there is the ever-increasing debt issue, which gobbles up about 30% of the budget each year. Pakistan continued to carry out loans to cover initial loan repayments. It recently signed another deal for a bailout package worth $6bn with the International Monetary Fund (IMF). And in the latest ongoing visit of Prime Minister in the US is expected to bring some more favors.

Besides this, Prime Minister Imran Khan announced the formation of a consultative committee to explore why the nation has so much debt in a televised address after his speech on the budget. But Khan ought not to look outside the budget his own government has uncovered to see where the real problem lies. The nation has low revenue sources and heavy spending on non-development, a perfect recipe for an economic catastrophe.

The Pakistani authorities have been unable to determine efficacious practices for tax collection for decades. Only one percent of Pakistanis are currently paying their taxes, and the nation has one of the world’s smallest tax-to-GDP ratios. Previous governments resisted enforcing restrictions that are more stringent because members of the same elites who were among those actively evading taxes employed them. Not only because of inaction from the state, but also because of rampant corruption, can they do so. Indeed, bribery is easier for them than billing their duties.

The tax burden in Pakistan, therefore, falls predominantly on the poor, who pay indirectly in multiple ways and who are already striving to achieve ends. A third of the country presently lives below the poverty line. Moreover, do one more thing, do not complain either that Pakistan is not making progress. It’s so unfortunate that almost everyone starts speaking about indirect taxes while you’re talking about income taxes. Without investigating without reading anything about how nations evolve and how they have their tax systems in other nations. We gladly offer stories of how excellent Sweden is, how wonderful Japan is, how amazing Denmark’s hospitals are, how excellent Germany’s colleges are, but we never devote second learning how they arrived there. By paying taxes, they reached that point. Income and indirect. Furthermore, Sweden has a tax rate of 61.85 percent. Japan’s tax rate is 55.95 percent. Denmark has a tax rate of 55.80%.A small country like Chad has a tax rate of 60%. Ivory Coast has a tax rate of 60%, Austria has a tax rate of 55%, Finland has a tax rate of 51.60%, Israel has a tax rate of 50.1%, the United Kingdom has a tax rate of 45%, the United States has a tax rate of more than 40%, India has a tax rate of 35.8% and Pakistan has a tax rate of only 20%.We’re still complaining. We’re subverting the government. We’re going on strikes, closing our stores, and stimulating the government’s writ. We are doing everything we can challenge law enforcement.

In addition to income tax, according to the findings of KPMG Global Economy Research, all the countries I mentioned above also have a very high indirect tax. In relation to income tax, Hungary has 27% indirect tax. Denmark 25 percent. Finland 24 percent. Sweden 25 percent. Italy 22 percent. France 20 percent. 20% United Kingdom. India is 18%, while Pakistan is 17%.We get nothing but aimed governments ‘ support to our demands. Pakistan has an annual credit payment of approximately Rs. 3 Trillion rupees. Half of the budget we have. If we do not document this economy, I can assure you that we will be forced to default on our loans within the next 10 years, with inflation and dollar fluctuations plus additional loans and a slow economy.

Those in authority and those enjoying monetary privileges must recognize at this stage that this status quo is economically unviable. The only way out is to implement a fair tax system along with the ever-increasing military budget being cut or at least frozen

And once a country fails, the whole system will collapse, your bank transfers will not be honored. You can devalue up to 500 percent or more of your currency. Your trade ends because your letters of credit are not accepted by any bank. Complete your imports. Without bank LCs, your exports become non-existent. And those who try to save a few thousand rupees a month as tax store owners end up losing millions in their respective business. A proverbial is an excellent example of penny wise and pound foolish. So next time you increase your concern and create excuses for “I’m paying indirect taxes so I’m not going to pay income taxes.” The entire world is paying indirect taxes and taxes on revenue. So if you want the failure of Pakistan. To make your kids homeless. To make your house worthless. To bankrupt your companies. Your currency will be devalued by 500%. Thus, it is called not to pay taxes.

Before coming to power, Khan promised to crack down on tax evasion and corruption, but so far nothing is being done. For instance, he has not put in place any steps to tackle corruption in his own party ranks. It has appeared recently that a minister in Khan’s cabinet has dodged taxes for years by moving his luxurious properties to one of his staff, but so far no action has been taken against him.

It is hardly surprising, given this selective justice, that a latest government-imposed tax amnesty system in which tax debt is forgiven in return for a fee failed to kick off. While the government of Khan does not increase income flows, it also does not cut non-developmental spending. After debt servicing, the largest source of such expenditure is the military, which gets around 18 and 23 percent of the budget annually.

Thus, Pakistan seems to be stuck in a negative feedback loop of trying to accommodate the army’s interests and the strong financial elites that are crippling its economy and forcing it to continue borrowing from global creditors, plunging further into debt and bringing it nearer to a complete economic collapse. Those in authority and those enjoying monetary privileges must recognize at this stage that this status quo is economically unviable. The only way out is to implement a fair tax system along with the ever-increasing military budget being cut or at least frozen. To prevent the looming financial catastrophe, Pakistan needs to review current spending and prioritize expenditure that will effectively create social and economic development and elevate the poor, not just the civilian and military elites.

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