While Pakistan’s policy debate hovers around political machinations and power configurations, the neglected issue of economic recovery remains central to the viability of country’s future. We are sandwiched between two economic giants who are growing despite the global recession. China has eradicated absolute poverty after decades of high growth rates and effective social policies. India’s GDP growth rate is projected to be 9 percent this year. Both India and China have also improved tax administration, enhanced their revenue generation capacity and implemented economic reforms, which are likely to result in long-term sustainable growth rates. India needs years to catch up with its issues of hunger, poverty and inequity, but its progress appears to be in the right direction.

What have we done to ourselves? We have no consensus on economic reform and tackling poverty. We are living with the lowest growth rates of our history and perennial inflation with little prospects of change. Had it not been for Pakistan’s resilient population, its formidable remittances and the mammoth black economy, we would have faced an economic collapse and resultant, massive social unrest. Having said this, inflation has eaten into the purchasing power of the population. The fixed-income groups and the poor in Pakistan have suffered the most.

Inflation

The causes of the rising price levels are manifold: the increasing budget deficit, the withdrawal of subsidies, the manipulative behaviour of hoarders in the commodities market and excessive borrowing of the government to finance its operations. The government had borrowed almost a quarter of the total money supply so as to finance its needs for a short period of five months. This is illustrative of a textbook case of the excessive printing of money leading to inflation. All these factors make one thing clear: it is misgovernance that is actually leading to inflation.

The rise of the informal economy in our case has also wreaked havoc on the stability of pricing mechanisms. If there was ever a need of accelerating the documentation of economy, it is now.

This is perhaps why the introduction of RGST is a much-needed reform. Admittedly, the RGST will cause a one-off round of inflationary pressure given the indirect nature of the tax. However, the reality is that the opposition to RGST is being mounted in the name of the poor by powerful lobbies. RGST reforms have caused uproar in the business community, fuelled by sections of the print and electronic media. While many politicians have run with hares and hunted with the hounds on the issue of RGST, only a few have debated the actual nature of the reforms. Unfortunately, this issue has turned into another populist rhetoric platform, standing on which politicians and political actors are likely to gain some short-term mileage.

The ‘exemptions’ culture

Pakistan’s power culture celebrates exemptions: from standing in a queue at the airports to respecting traffic lights. Similarly, the rich and the powerful have created a web of tax-exemptions. The RGST package will withdraw many of these state favours. There are no new taxes being implemented in the form of the RGST. While pegging the rate at 15 percent — brought down from 17 percent in many cases — only the exemptions are being withdrawn largely sparing the food items.

The list of proposed withdrawal of sales tax exemptions forwarded to the government by the Federal Bureau of Revenue (FBR) includes computer software, aircrafts, ships, defense stores, tractors, bulldozers, live animals and live poultry, vegetable ghee, cattle feed and fruit juices among others.

Still, there are a few exemptions that are being retained. The proposed list of retained exemptions include wheat, pulses, vegetables, peas, newspapers, books, ambulances, fire-fighting trucks, artificial parts of the body and glucoses testing equipments. Relief goods will also be exempted as authorized by the government.

It is nothing short of falsifying facts when various TV anchors lament the prospective increase in prices of vegetables, etc, and blame it all on the RGST.

Why do we need the RGST?

It is true that being an indirect tax, the withdrawal of exemptions in various commodities will lead to a rise in prices but at the same time it will also expedite the much-needed documentation of the economy. Let’s face it. We have to increase our revenues in order to control the burgeoning deficit, which has already been contributing to rising price levels. Inflation is a real issue regardless of the RGST. No doubt, the placement of progressive taxes is the best way to go but in order to increase the tax base and to document the different sectors of the economy at every stage of the supply chain, the reforms in the general sales tax were inevitable.

According to the finance minister, in total Rs40 billion will be generated from the 10 percent flood surcharge, while Rs25 billion will be raised from the withdrawal of GST exemptions on goods and services. RGST will also increase the number of taxpayers if properly implemented. This will lead to an increase in our tax-to-GDP ratio, which is unfortunately one of the lowest in the world.

Perhaps a valid critique of RGST is that mechanisms to implement this bill are weak, which leads to issues of tax evasion and corruption.

Beyond RGST

If RGST is passed in the National Assembly, the government will have to fix the issues of capacity and institutional mechanisms.

Suffice it to say, bolder steps will be required in the future to expand the revenue base of the economy. This would include increasing the agricultural sector taxes. The problem with this sector is that most legislators in the provincial assemblies represent the landowning classes. Furthermore, provinces have little capacity to implement an effective tax regime. But this should not undermine the much-needed reform and debate on this must continue. However, to present agricultural income tax as a substitute for RGST is a fallacy at best.

At the same time, Pakistan would need to manage expenditures, especially on the current side (administration, defence and debt-servicing) and find an alternative paradigm for development spending, which has been a victim of contractors’ greed and the major source of rents and malfeasance.

Political opportunism

As mentioned above, the coalition partners have used the RGST as a tool to bolster their position within the power matrix. The Awami National Party (ANP) is the only political party that has supported the PPP in imposing the RGST.

The Pakistan Muslim League Nawaz (PML-N), Pakistan Muslim League Quaid-e-Azam, (PML-Q) and the Muttahida Qaumi Movement (MQM) have rejected the RGST. The Jamiat Ulema-e-Islam (Fazlur Rehman) (JUI-F) sits on the fence and is gaining brownies in the form of the chairmanship of the Council for Islamic Ideology and perhaps more in the days to come. The MQM chief Altaf Hussain has repeatedly called for taxing the landlords instead of imposing RGST. PML-N, PML-Q and JUI-F have also reiterated the need to check corruption within the current tax collection system instead of burdening the common man through the proposed reforms.

The Bill was passed through the Senate as the recommendations by the Senate Standing Committee on RGST were approved on the 26th November 2010. The Committee made 15 recommendations to the GST Bill 2010 and four recommendations as an amendment to the Finance Bill 2010. It proposed exemptions for food items, medicines and stationary for education purposes. PML-Q’s walkout helped the government. Intriguingly, Ishaq Dar, a senator belonging to PML-N, a party that has been a vociferous opponent of the RGST bill, signed the bill in the Finance committee.

The RGST Bill is likely to be tabled in the National Assembly on 18th December 2010, where recommendations from the National Assembly Standing Committee on Finance will be debated.

It is unclear whether the government will be able to get the bill passed through the NA. However, the government will try to negotiate with its recalcitrant allies, i.e. MQM and JUI-F to seek their support. Otherwise, there are signs that PPP has entered into a pact with PML-Q for tacit support. Already, a PML-Q MNA has been appointed as the Chairman ERRA and the process of including PML-Q legislators in the Cabinet might continue. PML-Q could simply walk out of the NA proceedings, which will provide the government with a majority at the time of the voting.

Ideally speaking, given the importance of this reform, the federal government ought to restart dialogue with PML-N. Given that the Punjab province is being ruled by PML-N, such a course of action will augment political stability. If we want to revive the economy and improve our long-term prospects, hard reforms will need to be taken. RGST may be the first step in this direction. Otherwise, we will continue to be a rentier state, dependent on the global strategic games and life-support mechanisms such as the IMF.

The writer is a policy adviser and writer based in Lahore. He blogs at www.razarumi.com. Email: razarumi@gmail.com

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