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Taxes are Hurting the Economy and Poor

Taxes are Hurting the Economy and Poor
Taxes are Hurting the Economy and Poor

Taxes are Hurting the Economy and Poor
Taxes are Hurting the Economy and Poor
The taxes imposed in the budget of financial year 2019-20 are hurting both the economy and poor masses. The slowing economy will not be able to carry the burden of heavy taxes. The economy will suffer as the result of heavy taxes. The rising inflation and price hike is already hurting the poor masses very badly. The PTI government’s first full-year budget imposed a ferocious array of taxes on almost all sectors of the economy, in line with conditions of the International Monetary Fund (IMF) for a bailout package.

The industry and traders are opposing the measures introduced by the PTI government to increase the revenues. The taxmen under the leadership of Shabar Zaidi are aggressively going after the tax evaders. The aggressive campaign and threatening statements from tax authorities have created the strong sense of fear and harassment. The investment is declining. The investors have withheld their money and waiting the dust to settle before making new investments. The automobile sector is already facing severe problems.

The government has set an unrealistic revenue target of Rs 5550 billion. It means an increase of Rs 1450 billion compare to last financial year. The government has imposed new taxes and also adjusted the rates of old taxes to get more revenues. The government has increased income tax rates to a maximum of 35pc from 25pc at present and reduced by half the taxable income bracket to Rs50,000 per month for salaried and Rs33,333 per month for non-salaried. The government has set the target of collecting Rs258bn of additional revenue in the forthcoming year.

The PTI government has also removed the zero-rating facility to five export-oriented sectors, including textiles, and imposition of normal 17pc GST despite strong opposition from the industry. In return, the government has promised speedy refund claims against actual exports. From sales taxes, the government is expecting to raise Rs250bn incremental revenue, via GST rate adjustments in various areas and elimination of zero-rating.

The IMF-dictated budget carries an FBR tax revenue target of Rs5.5 trillion — 35 per cent higher than last year’s. Pakistan saw annual tax revenue increases of around 20pc in recent years, even when the economy grew at above 5pc. How can one expect a 35pc increase with the economy set to grow at only 2.4pc? Worryingly, the budget aims to achieve this large increase more via regressive indirect taxes, which are aimed to raise by 40pc vise a versa only 25pc for direct taxes.

These harsh policies will hurt poor people badly. The well-respected economist and former finance minister, Dr Hafiz Pasha says eight million persons may fall into poverty over the next two years, despite the cosmetic increases in social programme outlays. The depressed local demand, high interest rates, high and rapid increase in taxes, and higher imports costs will also make it tough to restart growth, despite IMF claims. The interest rate hikes to control inflation seem very inept as such hikes work well if inflation is demand-driven and consumer demand is debt-driven. Neither is true here.

The international financial institutions like IMF and World Bank never ever have raised the issue as to why our oppressive tax system burdens the less-privileged Pakistanis? On the contrary, they recommend more regressive and oppressive taxes eagerly supported by our bureaucrats sitting in Ministry of Finance and FBR.

IMF programmes are reviled widely for forcing stabilisation that hurts the poor, but rarely leads to durable and equitable growth; they even reduce growth prospects. States approach the IMF when facing huge external deficits. Sadly, IMF programmes do not focus well on finding durable solutions, and stray into issues not directly linked with them.

Pakistan needs high growth in GDP to increase revenues and to provide much needed relief to the poor masses. But measures taken by the PTI government so far resulted in the slowdown of the economy. The continued interest rate hikes contributing in the rising inflation and ballooning debts. The indirect taxes are contributing in the price hike. The poor and working people is paying the ultimate price of these ill-conceived policies.

The large increase in revenue targets leads one to hope for higher development and social outlays. But a review of outlays quickly dashes these hopes. Of the nearly Rs1.8tr increased overall outlay over last year, nearly Rs1tr will go towards debt servicing, mainly due to high interest rate hikes imposed by the IMF. So the unreasonable fiscal targets have mainly been set up to finance unreasonable interest rate hikes.

Similarly, the IMF expects export revenues to increase by 8pc this year when they actually fell over last year. For taxes, we at least see much noise and chaotic effort in the FBR, but few actual results.

The tax hikes should also have been phased in more slowly given slow growth. On the two occasions Pakistan managed to ignite growth quickly after IMF programmes, it was not mainly due to the programme’s suc­­­­cess, but exogenous factors, i.e. major US aid after 9/11 and CPEC in 2015. Un­­less Pakistan regains its CPEC momentum soon, growth may remain low.

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