An emergency ‘windfall’ tax on banks flows from a failure to reform

When Pakistan’s negotiators and members of a visiting IMF team closed their latest deal to facilitate the flow of another U$700 million, they agreed to race towards filling a fiscal gap. It was an outcome that remains in sync with Pakistan’s repeated failure to reform its tax collection framework and narrow a stubborn resource gap.

The country’s chronic failure to reform this area has led to an excessive dependence on indirect taxes and knee jerk reactions, as successive governments have failed to widen the tax net.

In the latest response to that chronic failure, the government has slapped a so-called ‘windfall’ tax on Pakistan’s banks citing their excessive gains during the 2021 and 2022 calendar years. Singling out banks rather than widening the net to areas such as parts of industry or real estate developers that reaped profits in previous years, defeats the principle of targeting high income businesses across the board.

It also smacks of a failure to reform the tax collection system in a country that stands out as one of the world’s poorest examples of an equitable collection of taxes. As Pakistan’s economy faces multiple challenges compounded by the dramatic consequences of continuing low growth and high inflation, the failure to reform tax collection remains one of the key gaps surrounding a future recovery.

And the numbers say it all. Less than one per cent of Pakistan’s population comprises the combined number of tax payers and tax return filers. In sharp contrast, there are parts of the community of affluent Pakistanis who remain virtually or practically exempt from paying an income tax.

Anecdotal evidence in the past has concluded that the majority of members of parliament in Islamabad and Pakistan’s provincial legislatures either paid no income tax or paid just modest amounts. As Pakistan heads towards another political transition, the story of the past is very dangerously inclined to repeat itself with decision makers of the future saddled with interests akin to their compatriots of the past.

The failure to spread the income tax net wider carries two profound challenges for Pakistan’s economic future.

On the one hand, a reliance on a narrow set of tax payers carries the danger of leaving a significantly larger chunk of prospective tax payers out of the collection net. Consequently, clamping down harder on Pakistan’s already large black economy will receive no more than mere lip service, irrespective of promises fromhigh quarters of the ruling structure.

In the recent past, government sponsored TV ads promising to cancel the mobile phone SIMs in addition to disconnection of electricity and gas lines of tax evaders, is just a first step in a long journey. Years ago, many pro-reformists across Pakistan were thrilled to hear the late prime minister Moeen Qureshi in 1993 publicly ordering the publication of the country’s first directory of tax payers. The paltry sums revealed in tax payments on account of many affluent Pakistanis were meant to put them to shame.

Tragically however, Mr Qureshi’s return to Washington where he was settled and eventually passed away, also witnessed an end to an idea that could have led to a new beginning in turning around an excessively failed collection system. In its latest incarnation, the ongoing TV ads that are meant to strike the fear of harsh action against tax evaders, must now be translated to action to make it a meaningful exercise.

On the other hand, increasingly indebted Pakistan which remains not too far from a sovereign default, can not afford to oversee an economic recovery without spreading its tax net wider. In time, more tax payers could potentially lead to tax collection rates beginning to be reduced. Unless such a progressive push is urgently begun, Pakistan remains at the risk of facing more of the same pitfalls that have deepened its economic malaise. And the country’s present and future decision makers will only remain hooked to searching for one sector with a windfall or another, as banks have become the latest to be targeted in this exercise.