Tax giveaways

Pakistan is ruled by rich leaders ever eager to recklessly spend tax money collected from the poor. And even more eager to foolishly spend borrowed money. Their motto is 'no money, no problem'. Our leaders don't feel the pinch of rising debt or lose sleep over wasteful expenditures.

As a result of this attitude, which has been deeply embedded in generation after generation of civil and military leaders, we have today a culture of entitlement. Every segment of society, especially the privileged private sector and those getting their salary from the government, feels that every year their entitlements must increase. The recipients of largesse are shamelessly oblivious to the fact that each additional rupee spent, or exempted from taxes, is borrowed or begged.

One egregious example - little noticed by the media or debated in parliament - is the tax revenue that is lost as a result of tax incentives given to the business sector. Tax revenue losses are taxes that would have been collected had normal tax rates been applied but that are, instead, exempted with the objective of increasing growth and investment.

Trillions of rupees could have been spent on the welfare of citizens.

The IMF/World Bank had been pressing Pakistan for years to include an estimate of 'tax revenue loss' in the budget to enhance the transparency of such giveaways, but more importantly, to enable parliament to discuss and question this at the time of the budget discussion. Since last year, the Federal Board of Revenue has been providing in budget documents the estimated revenue loss from tax incentives. Alas, our parliament of the rich has so far not shown any interest in such stuff. In fact this year, parliamentarians found an ingenious and fun way to avoid reading the budget documents - they threw them at each other.

In FY20, 'tax giveaways' (identified as 'tax expenditures' in the Finance Bill) amounted to a whopping Rs1.3 trillion, or almost one-third of the taxes collected that year and three per cent of GDP. Had these taxes been collected, Pakistan could have doubled its annual health and education expenditures. Even if half of these had been collected, the Ehsaas programme could have been increased three times. If two years of exempted taxes were collected, we could build the Bhasha dam from our own resources. Each year, tax exemptions approximately equal what we spend on defence. Any way one looks at the giveaways, Pakistan could do so much more for its citizens by collecting some or all of these taxes.

So who benefits from these tax exemptions? Mostly, politically wellconnected businesses producing for the domestic market. According to the details in the Finance Bill, the main beneficiaries in FY20 were general industry (Rs110 billion), poultry (Rs100bn), textiles (Rs80bn), pharmaceuticals (Rs70bn) edible oils (Rs80bn), dairy (Rs50bn), fertiliser (Rs70bn), the petroleum sector (Rs50bn), independent power producers (Rs30bn), agriculture (Rs70bn) and the auto industry (Rs80bn).

There is a tax loss

of Rs40bn resulting from the free trade agreements with China, Indonesia and Malaysia - all three countries with whom our imports far exceed our exports. Other businesses which are provided tens of billions of rupees worth of tax breaks include the construction and sugar industry and the stock market.

Global experience indicates the limited benefits of tax incentives. Because of special-interest lobbying and corruption, the incentives tend to be overly generous and persist because they succeed as a political tool instead of being an effective economic tool. There is little credible evidence that the trillion-rupee tax giveaways, year after year, are having any significant impact on employment, growth, investment, consumer prices or workers' incomes in Pakistan.

Given Pakistan's grim fiscal situation, we can no longer afford to provide generous giveaways without robust evidence that they are good for the economy, and are not just for the owners of businesses. It is imperative that parliament reviews the proposed tax incentives and obligates the government to conduct a cost-benefit evaluation before the next budget. The findings of such evaluation would inform decision-makers whether to continue or withdraw individual tax incentives. A credible evaluation would also draw attention to, and publicise, revenues forgone from wasteful tax incentives that could free up resources for development.

Even if parliament does not take the initiative, the prime minister must require the Ministry of Finance to conduct prior to the next budget an independent costbenefit evaluation of tax giveaways.