The government is ending the distinction between tax filers and non-filers, it announced a day after unveiling its budget.
When non-filers buy a car, for example, they will have to become a filer within 45 days or a tax liability notice will be sent, requiring them to explain their source of income.
The filing process has become automated and it takes six minutes to become a filer, said Adviser to the Prime Minister on Finance, Revenue and Economic Affairs Dr Abdul Hafeez Shaikh during his post-budget conference in Islamabad on Wednesday.
Earlier, the economist said Pakistan has one of the world’s lowest tax-to-GDP ratios because its rich don’t pay taxes. “This can’t work. We will change it even if we have to annoy some people,” he said.
Pakistan’s tax-to-GDP ratio or tax contribution to the economy is less than 11%. Only 2 million people file their income tax returns, of whom 600,000 are salaried people. Because of a low tax base, the government faces a big revenue shortfall to meet its expenses and is left with little to no money to spend on the development of its people and infrastructure.
This fiscal year, the government will spend Rs2,900 billion in interest payments alone. This amount is 52% of the Federal Board of Revenue’s tax collection target. It simply means that the government will spend more than half of its tax revenue on repaying its loans.
Choked on finances, the government is facing a deficit (loss) of Rs3,137 billion since its expenses exceed its revenues by as much.
How will the government increase its revenue?
The adviser said they will introduce a collection of sales tax at the manufacturing level so there is minimum room for tax evasion. This will also make the tax system more efficient.
Increasing import duties on finished goods is another tool the government is using to increase its revenue. “If you want to buy imported products, pay more,” he said, but emphasized that they have exempted 1,655 imported items used as raw materials because they are not produced by Pakistan.
A low tax base leaves little room for the government to spend on development. Because of these fiscal constraints, it has to present an inflationary budget, one that will not only cause prices to go up but also slow down economic growth and hurt job creation.
The government has done what was in its control by reducing its spending and freezing defense spending at last year’s level, Dr Shaikh said. There are certain things that we can’t touch, he added. “We can’t stop loan repayment, nor can we stop transfers to provinces,” he said.
Similarly, the government has to clear the power sector’s inter-corporate debt (circular debt), said Dr Shaikh. “What we can do is bring it down,” he said. The government has reduced it from Rs38 billion a month to Rs26 billion and plans to bring this to zero by December, 2020.
It did not, however, compromise on key areas despite all the problems, Dr Shaikh said, sharing details of expenditures. “We have almost doubled the budget for the social safety net from Rs100 billion to Rs191 billion,” he said. This money will be used for health cards, medical insurance and food and nutrition cards, which will cover the marginalized sections of society, he said.
Besides this, the government will absorb the hike in electricity prices for those who consume less than 300 units. The development budget has also been increased despite financial limitations because it creates jobs and improves infrastructure, he said.