Thursday, September 21st, 2017
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It is extremely unfortunate that successive Pakistani governments have steadily increased their heavy reliance on taxing the energy sector because of the ease of collection while remaining unconcerned about the fallout of such reliance not only on the productive sectors but also on households. Last fiscal year, the government generated one trillion rupees from the oil and gas sector - 11 percent higher than what was generated in 2015-16 with a collection of 912 million rupees; and this rise in collection was almost equivalent to the rise in total revenue collections by the government last year in comparison to the year before.

The fallout of such heavy reliance has been higher input costs relative to other countries that, in turn, have increasingly disabled our exporters from competing internationally; and, equally disturbingly, has rendered our productive sectors - industrial as well as agricultural - unable to compete domestically on a range of products given the scale of smuggling on our large extremely porous borders with India, Iran and Afghanistan. As if this was not enough of a source of concern, the Abbasi administration recently decided that domestic gas supply to the industrial sector would be curtailed from 35 percent to 28 percent effective 1st September, much to the chagrin of the textile sector as it would be diverted to the domestic sector given the rise in demand due to the onset of winter in the upcountry areas.

The captive power plants run by many a textile unit on domestic gas (available at 600 rupees MMBTU) would now have to be run on Liquefied Natural Gas (available at 1000 rupees per MMBTU) as per Pervaiz Malik, the new Federal Minister for Commerce and Textiles. The Economic Survey 2016-17 notes that cotton and manufactures contributed 59.6 percent to total exports in 2016-17 and a decline in the exports of these items are the major factor in lower export earnings. In other words, with declining exports, rising imports and a worsening in the balance of payment position the government would be well advised to take cognisance of the impact of any policy shift on the economy rather than focusing on the fallout of a gas shortage on the political fortunes of the PML-N in the elections scheduled for 2018.

It is relevant to note that collections from the energy sector account for around 26 percent of total collections cited as tax revenue. Out of the total collections, 304 billion rupees was not collected by the Federal Board of Revenue (FBR) and includes dedicated funds, for example, the Gas Infrastructure Development Cess and Natural Gas Development Surcharge as well as Petroleum Levy, airport tax and other taxes. Additionally, at least 60 percent of taxes collected as direct taxes in the revised estimates of last year (around 827 billion rupees) were collected as withholding taxes which are largely in the sales tax mode (on services and products); or in other words, indirect taxes whose incidence is greater on the rich than on the poor. These figures reflect the urgent need to not only reform the country's tax structure which is heavily skewed in favour of indirect taxes but also to reform the FBR and improve its governance.

The FBR sadly has been able to resist all measures to improve its governance including technical assistance extended by multilateral donor agencies as reflected by the failure of the World Bank administered Tax Administration Reform Programme. In a report titled "Implementation, Completion and Result Report", the World Bank noted that "the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services."

Subsequent Pakistani governments have shied away from taking far-reaching decisions that would improve FBR's performance and increase revenue collections and have instead relied exclusively on further taxing existing taxpayers or more recently have made itself a subject of global ridicule through applying different tax rates on filers and non-filers (and thereby tacitly approving non-filers to retain their status).

To conclude, the need to reform the tax structure as well as improve FBR governance was acknowledged decades ago but unfortunately remains pending. One can only hope that the new administration focuses on this issue and takes some long-awaited decisions.

the author