When it comes to constraints to economic growth, most point towards the country’s inability to design and execute important structural reforms related to energy, taxation, and loss making public sector enterprises.

For starting economic growth and creation of new jobs, two immediate reforms are needed: a) energy reforms to support private sector’s pursuit for growth; and b) tax reforms to finance growing government expenditure.

A recent survey conducted by Sustainable Development Policy Institute (SDPI) focused on the perception of household and enterprises regarding tax and energy sector reforms.

The respondents to the survey (in support of these reforms) say they are willing to pay additional bills if they are assured that no loadshedding would be done. They are also willing to pay 10 per cent additional taxes if the tax amount is invested in local-level education and health initiatives in their region.

The survey was carried out in 3,800 households across Balochistan, Khyber Pakhtunkhwa, Punjab, and Sindh. The districts included Faisalabad, Hyderabad, Karachi, Multan, Peshawar, Rawalpindi and Quetta. In the same districts, 300 firms were also surveyed, including both formal and informal sector entities.

Eenergy reforms:

At the household-level, it is clear that power consumers are not prepared for the sudden hike in electricity prices. 53 per cent respondents said the prices had become too high for their household budget and 71 per cent of these respondents have reduced the amount of power being utilised. Many have reported cutting back their household expenditures towards food, health, and education.

At the same time, there are large numbers of respondents, who have the ability and are willing to pay a higher unit price in lieu of a reduction in loadshedding. Karachi was the only district where no one agreed to pay beyond PKR 5,000. This perhaps is because of low incidence of loadshedding being faced by Karachi after the privatisation of Karachi Electric Supply Corporation (KESC).

Comparing this to Faisalabad -- a city faced with prolonged power outages and resulting riots -- one can observe 75 per cent willing respondents having the ability to pay beyond PKR 5,000 followed by Rawalpindi and Quetta at 67 per cent and 50 per cent respectively.

Around 42 per cent respondents have witnessed instances of electricity and gas theft in their areas. This is important as 51 per cent felt that the single most important step to overcome the energy crisis is to reduce theft, and transmission and distribution losses.

A large number of households said a long-term energy sector strategy should focus on bringing down power tariffs, investments in hydro power, strategy for energy conservation and protecting supply to households and export-oriented industry.

Unfortunately, when subsidies are provided with over an indefinite timeline, people start perceiving such allowances as their right.

Under a well-managed energy sector, only a lifeline block consuming less than 100 units of power is allowed a subsidy. Contrary to this, it has been observed that several layers of subsidies are provided in Pakistan for energy usage in residential, agricultural, and industrial sectors.

Some policy reccomendations for the government based on the findings can help start a useful discourse on energy sector reforms. First, legal amendments may be undertaken to ensure effective punishment in case of energy theft. Second, the government should correct the perception at the community level that power sector defaulters are above the law. Finally, privatisation of DISCOs may be expedited followed by GENCOs. Until this is done, GENCOs and IPPs should compete for fuel, based on their efficiency levels.

Tax reforms:

Pakistan has the lowest levels of tax collection with respect to income levels in the world, even compared to countries with similar levels of per-capita income such as Bangladesh and India. In the sample of formal sector firms, we found 96 per cent firms registered with Federal or Provincial Board of Revenues and only 4 per cent were not registered. The informal sector entities, however, did not see much benefit in such registration and feared intrusion if they were formally part of revenue authority’s record.

Pakistan’s corporate sector expects better communication and outreach from the FBR. 77 per cent firm-level respondents, despite having complaints, have never conveyed their grievances to the FBR. Many believe seeking help may imply future intrusion and possible harassment.

There are 70 per cent respondents seeking external help in filing their tax returns. Out of these, 47 per cent resort to tax agents, 30 per cent seek help from tax lawyers, and 14 per cent had accountants to file tax returns. Only 3 per cent seek help from the FBR for filing their tax returns. The FBR should ideally be the only guiding source for the taxpayers.

There were 21 per cent respondents who occasionally provided in-kind or monetary gifts to officials during the recent past. However, 10 per cent respondents have paid such bribes during all of their engagements with the tax officials. A substantial portion of the business community (46 per cent) was of the view that tax collection can be increased by curbing corruption.

There were 74 per cent respondents who think the corporate tax rate is high, keeping in view depressed growth in the economy. Similarly, 15 per cent of the respondents were of the view that compliance with corporate taxation rules should be simplified. Among the respondents favouring GST (in comparison to VAT), 54 per cent said that compliance in case of GST is easier. There were 14 per cent who view lesser government interference under the GST regime.

Among the informal enterprises, 57 per cent stated that no scheme will compel them to register with the tax authorities. However, 24 per cent stated that they may register for GST if amnesty is granted for past years. There are 9 per cent who will register for both income tax and GST if similar amnesty is granted.

These findings provide important points for tax authorities. First, tax authorities need to design innovative outreach programmes in order to lessen the trust deficit. These programmes, if carefully designed, can help the public in understanding how paying taxes can improve service delivery.

Second, the number of firms registered with SECP has grown overtime. The taxpayers’ facilitation units require expansion in order to cater to the demands of an expanding tax paying segment. Tax administration measures that put in place smart ICT tools can help minimise human interference and corruption. Third, the documentation on corporate taxes needs further simplification. It is difficult for small-scale enterprise to comply at an affordable transactions cost.

Fourth, in case of indirect taxation, a long-term strategy for transitioning towards VAT should be put in place. Fifth, it is important to correct perceptions regarding corruption. The leadership at the revenue authorities should keep a closer contact with business associations. Prompt ICT-enabled grievance redressal will help in bridging the high levels of trust deficit.