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Reform and resistance at the cost of commoners

The firestorm over the Pakistan government’s intent to reform the general sales tax is a result of several factors: resistance from those who will be affected or documented, official prevarication, partisan posturing and opposition grandstanding. It also reflects genuine public fears about price rises in an environment of great economic distress.

The debate on mobilising resources is a welcome development in a country characterised by the absence of a tax culture. But the heat generated in this debate has made the outcome of this critical reform effort rather uncertain.

The test of the government’s resolve to stay the course will come after the Muharram holidays when the bill passed by the Senate Finance Committee is considered by the counterpart body in the National Assembly before being voted upon in the House.

More is at stake than just an economic measure announced by the PPP-led coalition. The reformed GST is a test 
of the government’s capacity to get 
anything of consequence done. If political will is expressed in action rather than in words enforcing this reform 
will be an important benchmark. Failure to assert that will and galvanise parliamentary support to secure the measure can adversely affect both government credibility and a fragile economic recovery.

The RGST has also become a measure of the country’s ability to honour its international commitments. It 
will demonstrate to varied donors whether Pakistan’s own taxpayers can be mobilised when their nations’ taxpayers are repeatedly asked to bail out Islamabad.

Delay over promulgating the RGST and inability to meet other performance criterion have already made the programme with the IMF inoperative. This state of limbo cannot end without meeting commitments among which the RGST was Islamabad’s own proposal to address its chronic revenue shortfall.

Mobilising additional resources is a national imperative urged by Pakistan’s precarious public finances and the fragile state of its economy. A country unable to tax cannot secure its economic future. Without raising revenue external dependence and the growing debt burden cannot be reduced. Nor can badly needed social and physical infrastructure be financed and essential services delivered.

Government borrowing from the central bank to finance the domestic and external deficits is now at a record high – Rs 3 billion a day in recent weeks and averaging 1.7 billion daily since July. This injects a powerful inflationary impulse into the economy and imposes the most pernicious tax on the poor: high prices.

The RGST is being resisted on many grounds. Predictably, the stiffest resistance comes from those who do not want to subject themselves to documentation and potential exposure to income tax down the road.

While a GST has been in place for around two decades the proposed reform removes hundreds of exemptions and replaces its multiple rates by a lower single rate. This helps to mitigate the regressive nature of an indirect tax. Setting a threshold also means those below this will be exempt which will include small retailers. Exemptions on food, education, health services and medicines inject some progressivity to the tax.

Opposition to the RGST has been orchestrated as much by special interests and their political allies as by leaders leveraging public anxiety for partisan benefit. This does not mean there are no grounds for public concern about the reform’s knock-on inflationary effects. But these may be over stated. The furore over the tax does however raise important questions. Could the government have approached the reform differently and articulated its objectives in a manner that mobilised wider support to trump the anticipated resistance?

One view is that official procrastination over the past six months sent mixed signals about government resolve and allowed an air of uncertainty to build up. Had the government gone ahead with the RGST announcement in July rather than wait till November it may have avoided a situation in which vested interests and lobbies had ample time to mount their opposition.

This otherwise persuasive argument overlooks provincial dynamics. As the provinces have to cede to the center the responsibility to collect the services component of the RGST consensus was first needed at the inter-provincial level otherwise the effort would have collapsed.

Then there is the question of packaging the RGST. Had the RGST been accompanied by or wrapped in progressive tax measures such as on wealth, gift and inheritance, it would have taken the sting out of criticism of its regressivity, marked a move towards a more equitable regime and helped to mute opposition.

Instead of owning and aggressively campaigning for the RGST the top political leadership remained invisible, leaving it to finance minister Abdul Hafeez Shaikh to wage this battle on all fronts. While the finance minister has been an able and credible spokesman for reform his political principals have yet to pitch in and expend political capital to ensure that the proposed measure overcomes the opposition at hand.

This unsure and hesitant approach seems to characterise the PPP-led coalition’s style of governance in general. But the government must know that its authority would weaken if it were unable to push through a measure that is badly needed. This will reinforce 
the widespread perception of the government as one that rules but does not govern.

Dr Maleeha Lodhi served as Pakistan’s ambassador to the United States and the United Kingdom