Qarz ki peetay thay mai per dil mein kehtay thay keh haan,

Rang laavegi hamari faaqa-masti aik din

(Hooked on borrowed funds for
intoxication,

one harboured false hopes of wonders someday)

---- Mirza Asadullah Khan Ghalib

dilemma for our economic managers, especially those making the budget, is what the poet Ghalib captured in the above couplet. They appear to be painting a rosy picture of the national economy in utter disregard of the fact that growth is almost dead, exports are fast declining, debts are swelling alarmingly, fiscal deficit is widening beyond expectations, inflation is not receding, abject poverty is a reality for millions, tax compliance is pathetically low and unemployment is a source of disillusionment for the overwhelming young population. We need high and sustainable growth for at least a decade to provide two million plus jobs every year to our youth alone. The current tax policy is one of the main reasons for low savings and investment, needed for growth and prosperity.

The Finance Bill 2023, presented with the budget 2023-24, shows that making the tax system equitable, levying taxes on the rich and mighty, especially absentee landlords, is not a priority with the rulers. Resultantly, the poor will continue to pay for the luxuries of the privileged. In civilised societies, it is the other way round; the rich are taxed for the benefit of the less privileged. To accelerate industrialisation and create much-needed jobs, corporate tax rates have been reduced to 20 percent and less all over the world. Our economic wizards, on the contrary, have proposed an exorbitant super tax and income tax on bonus shares to further retard the growth of companies and discourage shareholders.

On the one hand, the government pleads for documentation; on the other, it intends to levy 0.6 percent tax on cash withdrawals from banks by non-filers. This, in the past, has proven disastrous, leading to depletion of bank deposits and an increase in money circulation. The tax machinery is not at all willing to enforce tax compliance on those having taxable income and end the “non-filer” regime. The legislators want to encourage and protect the informal economy and shady transactions (proposing that no questions will be asked for inward bank remittance up to $100,000). There is nothing in the Finance Bill 2023 that aims at documentation of the economy and revamping the tax system.

An equitable tax system ensures that tax payments are based on the amount of benefits received from government services — the Norwegian social democracy model is a good example to quote and follow. In social democracies, the cost of government services is apportioned amongst individuals according to the benefits they enjoy. In economic terms, this is called “benefit principle.” It presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. This approach is completely missing in the Finance Bill 2023 and the overall tax policy.

The tax policy should be aimed at achieving the cherished goal of distributive justice. The government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. Its welfare-oriented schemes may also include subsidised/ free medical and educational facilities, low-cost housing and drinking water availability in rural areas, land improvement schemes and employment guarantee programmes. Once people see the tangible benefits of their taxes, there will be better tax compliance. Taxes cannot be collected by legislating obnoxiously high rates, harsh measures and irrational policies as contained in the Finance Bill 2023. Through its actions, the government must demonstrate to the taxpayers that money collected from them fairly and justly is spent for collective welfare and not self-aggrandisement.

Despite resorting to all kinds of highhandedness, blocking of refunds and unjust withholding taxes, the Federal Board of Revenue (FBR) has failed to improve the tax-to-GDP ratio. It is going to decline this year from the existing 9 percent as the FBR is unlikely to be able to collect Rs 7,400 billion — the original target for the fiscal year 2022-23 was Rs 7,460 billion, it was later revised to Rs 7,640 billion after mini- budget levying additional taxes of Rs 170 billion through the Finance (Supplementary) Act, 2023.

The revenues projected for the forthcoming fiscal year 2023-24 are not enough to meet the current expenditure, what to speak of funding the development outlay of Rs 950 billion. The net income of the federal government, after transfers to the provinces under the 7^th National Finance Commission (NFC) Award is Rs 6,887 billion. Thus, even for the payment of interest of Rs 7,303 billion, Rs 416 billon will have to be borrowed. All other current and developmental expenses will be met from costly borrowing, both internal and external. This is the worst one can expect from any budget. The unsustainable accumulation of debts by successive governments has pushed the country into a deadly debt trap for which no remedial measures are suggested in the budget 2023-24.

There is nothing in the Finance Bill 2023 to ensure the collection of taxes of Rs 16 trillion — the real tax potential of Pakistan at the federal level even under the given economic conditions (Budget 2023-24: The way forward, The News on Sunday, June 4, 2023). This potential can increase manifold if we achieve rapid industrial and commercial growth, with overall economic growth rate of 7 percent to 9 percent over next ten years. Such a growth rate would not only increase tax-to-GDP ratio to 25 percent but also eliminate our dependence on borrowing. A fair and efficient collection of taxes can also reduce economic inequalities through redistribution of income and wealth — the cherished goal of a social democracy for a better human society, and peace and tranquility.

There is general consensus that the existing tax policy has been stifling economic growth and widening the rich-poor divide. It needs to be reformulated to provide an equitable, pragmatic and investment-oriented environment, integrating efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives.

One hopes that politicians in the parliament will reconsider the budget 2023-24 and the Finance Bill 2023 and show the courage to achieve a sensible balance between income, capital and consumption taxes. One also hopes that they have the guts to spend – not on some ill-designed populist programmes but – on important investments in creating human capital (e.g., education, training and health), and necessary public infrastructure to increase productivity of the economy that will bring the desired growth and prosperity for all.

The writer, an advocate of the Supreme Court, is adjunct faculty at the Lahore University of Management Sciences (LUMS), a member of the advisory board and a visiting senior fellow of the Pakistan Institute of Development Economics (PIDE)