Hard decisions

LAHORE: The economy cannot be run on emotions. The structure of every government is based on the revenues (both tax and non-tax) it collects to run its affairs -- from education, health and social welfare to defence and infrastructure.

In Pakistan’s case, total revenues collected by the state are half the actual expenditure incurred on running the government. The gap, which was plugged through borrowing (both domestic and foreign), that used to be a small deficit some 25 years back has now jumped to a nearly unmanageable level.

In recent years, the country has reached a point where no one is prepared to give us loans on normal terms. Resultantly, we seek loans at high interest rates from both domestic banks and international markets. The expensive rate continues to add up to an unmanageable loan portfolio.

Now we have reached a stage which demands that we start reducing our reliance on loans. This can only be possible if the government increases its revenues. The gap between our genuine needs and revenue collected by the government is so high that it looks impossible to reduce the gap in one go. However, efforts should be made to at least reduce our appetite for loans by increasing revenues through every avenue, particularly those that have not been properly taxed or remained undertaxed.

The sectors that come to mind are real estate, traders and agriculture. Take for instance traders: in the year 2023-24 traders will tentatively pay around Rs71 billion in income tax. However, a salaried person’s income tax is likely to surpass Rs300 billion. Every salaried person earning Rs50,000 or above is taxed. The tax shoots up progressively with an increase in salary. There are over 2.2 million shuttered shops in the country besides millions of roadside or roaming vendors.

One can safely say that the monthly net income of the smallest shuttered shop would be over Rs50,000 per month and each trader operating from the shuttered shop must pay the income tax. Unfortunately, hardly 10 per cent of them pay income tax. Middle-level traders earn more and must pay higher taxes. Then there are shops in posh areas that earn as much as an industry and should be taxed accordingly.

The state is expected to show leniency to these traders in the coming budget by asking them to pay a fixed tax ascertained by the FBR, which is much less than the actual tax they would have to pay if they were properly documented. There is stiff resistance. We hope that the government goes ahead with its proposed tax scheme that will yield Rs500 billion in tax revenue. This is five times more than what these traders paid last year.

If we look at the lifestyle of traders operating in posh markets in major cities, we will see that they live more lavishly than employees drawing Rs300,000 per month. Their numbers are: 50,000 in Lahore, 100,000 in Karachi and 350,000 in the rest of the country.

Tax evasion in real estate is higher than that by traders. Market-based property rates can fetch hundreds of billions in revenue. Traders are merely a street force, but real-estate operators are highly influential, some of them are embedded in the corridors of power. Housing societies will resist real taxation in the sector. Let us see how the government handles them in the coming budget as real estate is on the radar of the IMF.