Revenue gaps: Tapping tax potential a far better option than borrowing

LAHORE: Some of Pakistan’s infrastructure needs have been addressed through China-Pakistan Economic Corridor (CPEC) projects but there still are yawning gaps that necessitate huge investments in the next two decades.

It goes without saying that revenue has to be generated locally as borrowing is not feasible anymore and sustainable growth is tied to speedy generation of the same through full tax compliance by all the sectors.

Currently manufacturing sector generates most of the tax revenues. There is a general consensus among economists and economic planners that revenue growth potential in Pakistan is high enough to finance future development needs. However, exploitation of this potential needs strong political commitment. Another point to ponder here is the country’s growth has never been smooth. It is always fluctuating between high and low periods of growth. It must also be noted that the high growth has never come from withing but outside in the form of foreign inflows.

Unfortunately, infrastructure was ignored in all of the high growth periods. This time around the foreign assistance or credit was used to finance infrastructure development including CPEC projects.

Sustainable growth needs basic and modern infrastructure. Besides road and rail connectivity the economy would need investment in telecommunication, water reservoirs, and upgrade of the skills of our human resource. The CPEC is half work done and most of the investment came from abroad.

Fortunately, the entire CPEC route is being equipped with a fiber-optic cable that would resolve to some extent teleconnectivity issues. The energy and power issues have almost been resolved. Proposed special industrial economic zones would also need water and skilled workforce and the country lacks both of these resources. Regular investment is needed to resolve these issues.

Pakistan’s capacity to borrow has already reached its peak. This government is still spending almost 30 percent of its revenues for debt servicing.

This spending has hurt developmental investment. The only option left with the government is to substantially increase the revenues. The present regime has almost doubled the revenue generation in last five years from around Rs2000 billion to Rs4000 billion (this years’ target). Still the fiscal deficit is very high that means higher revenue collection is essential.

Tax rates in Pakistan are very high but compliance is extremely low. High tax rates have increased cost of doing business. High sales tax is a huge burden on all consumers particularly the poor. The revenue gaps can be filled because tax potential is high. Take for instance the case of manufacturing sector. The tax compliant manufacturing sector employs only 39 percent of the manufacturing workforce of the country. This means that 61 percent of manufacturing workforce is employed by the informal sector. The formal manufacturing sector accounts for almost 60 percent of all taxes collected in the country. This fact is highlighted by the manufacturers whenever the government raises tax rate.

Though, informal manufacturing sector provides work to 61 percent of the workforce but its output is low because it uses inferior technology, which makes this sector labour-intensive. Still, the informal manufacturing sector could add at least another 30 percent or Rs1250 billion to the exchequer if it is brought into tax net.

It may be difficult to bring traders into tax net but the informal manufacturing sector can be made compliant with little efforts. It is difficult to conceal manufacturing units but these units operate in connivance with the taxmen.

This Rs1250 billion is all that the government of Pakistan needs to plug its budget deficit.

The other options available could bring almost same amount into the revenue vault. The sugar content in our sugarcane for instance is over 11 percent. Most of the mills declare recovery of 8 percent or less. This is 25 percent less than the actual recovery. The sales tax from sugar mills could be increased by 25 percent if the political patronage provided to this industry is withdrawn. More revenue could be collected from checking the under-filing of production. Electronic surveillance is cheap and best option for beverage companies and cements producers. This could add at least Rs200 billion in revenues.

Eliminating tax exemptions could add another Rs300 billion in the national kitty. Cracking down under-invoicing may net Rs500 billion in taxes.

Benami (made, held, done, or transacted in the name of another person) act is pending in the assemblies for years because the most influential segments of society including politicians have benami assets.

These additional revenues should be used to lower the tax rates in Pakistan that would lower costs and improve productivity and bring the inflation down for the consumers.

Monitoring Desk

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