Friday, May 21, 2010

Coming out of 'debt prison' By HUZAIMA BUKHARI AND DR IKRAMUL HAQ

ARTICLE (May 21 2010): Value-Added Tax (VAT), even if imposed from July 1, 2010 and successfully implemented - there exist serious apprehensions about it - will not help us to break free from the 'debt prison' in which we are incarcerated. With the new tranche (US $1.13 billion) from International Monetary Fund (IMF), received on May 18, 2010, our total external debt has now touched the monstrous figure of US $55 billion.

Pakistan represents a classical example of "debt enslavement" in modern history - a nuclear state totally muzzled by foreign powers through the mechanism of economic subjugation.

According to the IMF estimates, our total external debt is to reach nearly $75 billion in 2015 from $57.1 billion by the end of the current fiscal year. It is estimated to increase by $7 billion or 12.3 percent to $64 billion by the end of the next fiscal year. These estimates suggest that the external debt will increase by another $2 billion in 2012 and cross the $74 billion-mark in 2015.

Pakistan caught in a deadly debt trap - burgeoning external loans of $55 billion and domestic debt of nearly Rs 5 trillion - is still begging for more, more and more money, not to invest for future betterment, but merely to meet its day to day requirements. Because of this vicious circle, where one has to borrow to meet debt servicing commitments, there remains little hope to come out of debt enslavement in the near future. There are no signs yet for the civil-military bureaucracy and public office-holders to stop squandering taxpayers' money, foreign funds, wasting public funds and plundering national wealth.

Pakistan represents a state where a trio of corrupt civil-military bureaucrats, crooked politicians and profit-hungry businessmen is very affluent, but the government is on the brink of bankruptcy. This state of affairs is the direct outcome of the state's policies that allow a free hand to forces of loot, corruption and terrorism. No other state in the world has undergone such a horrible experience.

Clearly, Pakistani rulers have destroyed the state through corruption and incompetence. Unfortunately, foreign-trained Pakistani economists are merely engaged in defending and serving their masters, instead of advising the concerned quarters to enforce financial discipline and better financial management.

It is an undisputed fact that conditions imposed by the IMF and other donors have aggravated the inequalities of income and wealth in Pakistan and resulted in more unemployment. These have caused more harm to us than doing anything really productive.

The rationale of seeking more and more loans for curing evils caused by the mounting debt itself is simply beyond comprehension. It is high time that we stop taking fresh loans. We must mobilise all our resources - our tax revenue potential alone is not less than Rs 4 trillion. If we manage to generate these resources, we will be able to meet not only our current and development expenditure but also pay off all the external loans within a span of five to ten years.

The continuous failure to tap actual tax potential has forced the country to rely more and more on external and internal borrowings. The persistence of large fiscal deficits, among other reasons, is one of the primary causes for the rising indebtedness and the major source of macroeconomic imbalances over the last four decades.

This year fiscal deficit will be more than Rs 800 billion. Our existing economic policy is the rootcause of all ills. Instead of aiming at growth, social welfare and employment generation, it is creating recession and income disparities through oppressive tax measures like VAT.

It is an admitted official position that despite resorting to all kinds of highhandedness, illogical policies and unjust indirect taxes, the Federal Board of Revenue (FBR), even after spending huge borrowed funds, has failed to improve the tax-to-GDP ratio. In 2008-09, it was just 8.8%. In 1991, our fiscal deficit was merely Rs 80 billion.

In fiscal year 2008-09, it crossed the figure of Rs 600 billion proving beyond any doubt that irrational taxes failed to avert fiscal disaster. To be more precise, it has pushed us on the verge of total economic collapse. Irrational tax measures have always played a decisive role in destroying civic society, paving the way for anarchy and economic retardation.

In 2004, the FBR promised 0.2 percent per annum growth in the tax-to-GDP ratio for the next five years while submitting 'tax projections' and 'revenue-to-GDP ratio' to the IMF on the conclusion of 9th review by the Fund under the Poverty Reduction Growth Facility (PRGF).The FBR informed the IMF that it would increase tax-to-GDP ratio from 9.2 percent to 10.3 percent in 2008-09. Interestingly, in 2008-2009 instead of improvement, there was a sharp decline!

It is a sad but incontrovertible fact that even the World Bank-IMF funding and "guidance" has failed to bring desired results and the FBR remains the inefficient and corrupt body. The failure of collecting taxes where due has culminated in the prevailing pathetic state of affairs: debt burden is increasing monstrously, fiscal deficit is now out of control, inflation is crushing the poor, taxes are evaded and avoided by the rich and whatsoever is collected is mercilessly wasted by those who matter in the land.

What a tragedy that the rich and the mighty not only evade taxes, but also thrive at the taxpayers' expense. They are the de facto beneficiaries of all the State's resources - generated mainly by the suppressed landless tillers and over-worked industrial labourers. The state's kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers' money by the rulers and non-exploitation of natural resources.

The absentee landlords - they include mighty generals and bureaucrats who have been allotted state lands under one pretext or the other during the last many decades - have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people alliance of trio of indomitable civil-military bureaucrats, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% of the state resources - contribute below 2% towards national revenue collection.

The armies of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) are not willing to cut down their perquisites and privileges. They are not prepared to live like the common man. The government should monetize their perks and privileges.

It will save billions of rupees of the taxpayers. Like other citizens, they should travel by public transport and send their children to government schools. Soon they will improve after experiencing their pathetic conditions. Unless the ruling classes are deprived of their luxurious life nothing will change. They resist change because they are the beneficiaries of the present exploitative system. Change will only take place once these benefits are withdrawn.

The existing exploitative tax system is rapidly widening the divide between the rich and the poor. Sole stress on regressive indirect taxes [even under the garb of direct taxation through presumptive tax regime on goods and services] without evaluating its impact on the economy and lives of poor masses and lack of political will to tax the rich and the mighty, remains our dilemma.

There is no scarcity of resources. Even the propaganda about narrow tax base is malicious only to conceal their own inefficiency and corruption. People are paying exorbitant sales tax of 16% [its real impact on imported goods is over 35% after taking into consideration compulsory value addition and income tax at source etc). There is excise duty on goods and services.

Poor people are subjected to host of taxes, but rich and might pay no tax on enormous wealth and income under one pretext or the other. Their wealth keeps on increasing by way of loan write offs, rent-seeking and price hikes (they snatch money from the poor by selling even flour and sugar at rates they choose). They even do not pay taxes on these windfall gains!

Equity demands higher taxes from those, who have higher income and wealth, but in Pakistan gradually all the progressives taxes like, estate duty, gift tax, capital gain tax and wealth tax were abolished decreasing tax burden on the rich. These were replaced with indirect taxes shifting incidence on the poor.

The entire debate about low tax-to-GDP ratio misses the point that it is direct tax-to-GDP ratio that is pathetically low at 3% and has decreased substantially over the period of time. The agriculture sector, having 22% share in the GDP, contributes just 1% towards direct taxes.

This means it should be taken out of the GDP to calculate the tax-to-GDP ratio. If we do so the current tax-to-GDP ratio will be around 15%. Why does the FBR hide this fact from the people? Obviously, the landed aristocracy is its master and servants have to look after the interests of the master. This confirms why the VAT is being advocated and personal taxation of the landed classes ignored. The government is using the VAT as smokescreen to hide the crime it is committing by not taxing the rich and mighty.

If the following measures are taken our tax-to-GDP ratio will go up 20% in one year:

-- Absentee landlords and so-called pirs should be taxed heavily as they earn millions by exploiting landless tillers and mureeds

-- Capital gains arising from movable and immovable assets should be taxed

-- Assets created out of untaxed money should be confiscated and sold through public auction by the FBR

-- All kinds of tax exemptions and tax amnesty schemes should be withdrawn at once

-- Provisions facilitating whitening of black money eg section 111(4) of the Income Tax Ordinance, 2001 should be abolished forthwith

-- Progressive taxes eg wealth tax, estate duty, gift tax etc should be re-introduced

-- Stringent measures should be taken to counter tax evasion, corruption, money laundering and rent-seeking.

We can easily generate taxes of Rs 4 trillion if above measures are taken. The government can easily meet all the current and development expenditure and there will be no need to borrow funds. At the same time we need to boost the economic activity by accelerating industrialisation. Once the government starts spending taxes for the benefit of the poor and needy, people will start paying taxes diligently.

The dire need in today's Pakistan is rapid economic growth, coupled with reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means that can be adopted for achieving these ends as has been done in many democratic countries.

For socio-economic justice and economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, heavy duties on liquor (remove prohibition which is just an eyewash as the commodity is freely available everywhere), tobacco and special levies on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spillover of these items that create disturbance in the society as a consequence.

For achieving the cherished goal of establishing an egalitarian welfare state, a leadership is needed that can tax the privileged classes and vested interests (mafias is the better word). They are the culprits who, by amassing immense wealth control the organs of state and exploit the masses. Not only they do not pay personal taxes, but are beneficiaries of taxpayers' money and huge loans write-offs. They are guilty of plundering and wasting national wealth generated by common people.

The rulers have become so callous that the people living under the poverty line are also subjected to tax on the purchase of salt, being sold under brand names but people who have wealth of billions of rupees are leading tax-free lives. In the coming VAT, more and more goods and services - consumed by the poor - will be taxed.

But no tax will be levied on enormous wealth possessed by the ruling elite. People are dying of hunger, abandoning and selling their children but the President, Prime Minister, Governors, Chief Ministers, the army of ministers, state ministers and their lackeys in bureaucracy are wasting millions on personal comfort and "security", lunches, dinners and foreign visits. Improving tax-to-GDP ratio through the VAT is a hoax. It is a ploy of ruling elite to divert the attention of the masses from the real issue. The real issue is how to break the shackles of economic subjugation, come out of the "debt prison" and make Pakistan a truly democratic welfare state.

The so-called experts, hired by the FBR on the recommendation of foreign donors, can never be our savious. They want continuation of the existing exploitative system. We need to tax the rich and mighty, generate sufficient resources and spend them for the welfare of society and not for the few chosen ones.

(The writers, tax lawyers and authors of many books, are visiting professors at the Lahore University of Management Sciences.)

Source: http://www.brecorder.com/index.php?id=1059809&currPageNo=1&query=&search=&term=&supDate=

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