Shabbar Zaidi, former chairman of Federal Board of Revenue (FBR), has stated that it is impossible to raise tax revenue without increasing documentation in the economy given that tax filers are not declaring their entire income (inclusive of not declaring all their bank accounts), while speaking on “Paisa bolta hai”, an Aaj television programme. Waheed Shahzad Butt, a tax lawyer, pointed out that out of the 2.8 million filers in this country one million are below the taxable limit while a province-wise analysis reveals that the largest number of filers are in Punjab, 60 percent of the total, but their contribution to tax collected is only 35 percent while in Sindh tax filers are 27 percent of the total and their contribution is at 45 percent and suggested FBR assigns officials dealing with assessment and enforcement to investigate this anomaly.

Zaidi further acknowledged that he was perhaps the most empowered FBR chairman as he had unstinting support of Prime Minister Imran Khan but added that no one can sort FBR without sorting out the economy; and admitted that during his tenure he was forced to grant concessions to traders.

The linkage between Gross Domestic Product (GDP) growth rate and tax collections is well established in economic theory. In this context it is relevant to note that monetary policy was severely contractionary during Zaidi’s short tenure as Chairman FBR (a discount rate of 13.25 percent from 20 July 2019 to March 2020); additionally, the then newly inducted economic team leaders pledged to the International Monetary Fund (IMF) to raise tax collections to 5.5 trillion rupees, from the 3.8 trillion rupees the year before, with a projected GDP growth rate of only 1.5 percent. This unrealistic target may have accounted for Zaidi’s decision to amend the previous administration’s determination to declare the Final tax rates under the final tax regime (FTR) as minimum tax rates and withdrawing the facility of FTR altogether. If the idea was to restore the linkage between asset formation, declared income and tax paid by withdrawing the FTR the retention of such high withholding tax rates that contained the element of escaping scrutiny from FBR, as minimum tax rates has created severe hardship for trade and industry in general and the honest taxpayer in particular. This emphasis on raising collections by resorting to arbitrary minimum tax rates has therefore led to a flawed policy that undermined any attempt to render the tax system fair, equitable and non-anomalous.

The IMF’s rationale for raising the tax target so significantly was based on its flawed assumption that the undocumented would be brought into the tax net within one tax year. Haroon Akhtar Khan, Special Assistant on Revenue in the PML-N administration stated on the programme that documentation is an ongoing process and would take time adding that the PTI government should have built on the PML-N success (with a tax to GDP ratio of 11.4 percent) rather than trashing the gains of its predecessors. One would hope that this is a lesson learned by the incumbent government because building on a predecessor’s success is sound political as well as economic advice.

It is the persistent failure to document the economy that accounts for successive governments, including the incumbent, to rely heavily on indirect taxes as a source of revenue whose incidence is greater on the poor relative to the rich. This includes taxes imposed at the import stage, withholding taxes (accounting for over 70 percent of all direct taxes collected but which are largely in the sales tax mode and therefore inappropriately credited under direct taxes) and advance tax.

Zaidi stated that the focus must shift away from sorting out the FBR to sorting out the economy and this can be fully supported. At present, the failure to check prices of basic food items during the past two years is leaving the Khan administration open to severe criticism by the opposition as well as the general public. And no doubt accounts for the conclusion drawn from a recent survey carried out by the France-based Ipsos that three in four Pakistanis express dissatisfaction with the way things are going and describe the current economic situation as ‘bad”.

Over the weekend, the federal information minister, Shibli Faraz, vigorously defended the government’s economic performance; however, at the end of the day it is what each rupee earned can buy today as opposed to two years ago that would determine the extent of consumer satisfaction with the ongoing economic policies; to argue that prices of sugar, wheat, potato, tomato, etc, are rising due to policies of over two years ago is no longer cutting any ice with the general public. And disturbingly for the government, current account deficit containment, the only major achievement of the government’s economic team, is unlikely to feature in our kitchen budgets.