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The two unpopular decisions - GST and farm tax

Economic Outlook

Anjum Ibrahim

Totalitarian regimes are able to take unpopular decisions because voter support is neither the basis of their power nor, indeed, the prime motivation for their establishment. In marked contrast democracies are hesitant to take unpopular decisions, even those that are acknowledged to be in the long term interest of the country.

This is a major argument used in support of a totalitarian regime, specially in those countries which are undergoing an economic crisis, and is considered to be of special relevance to Pakistan in the year 2000 for obvious reasons.

So what is it that the people of any country want? Low inflation, high employment levels and provision of basic social and physical infrastructural facilities. In Pakistan lack of finances and high levels of corruption, both in terms of nepotism in appointments and skimming off state funds, account for the failure of successive governments to make a difference and alleviate poverty levels. A revenue generation which has remained static reflecting low tax elasticity forced Pakistani governments to rely on borrowing, both from within and outside the country. Donors as a standard normal adjunct to extending aid, identified a number of reforms, unpopular to say the least, including upgrading of utility rates, ending of subsidies, cutting down on non-development expenditure and allowing GST to replace tariffs as the main source of revenue. Effective implementation of such a reform package would alienate the common man, pressure groups, including the bureaucrats and the armed forces, the traders and the industrialists. Thus it is little wonder that Mian Sahib, like his predecessor Benazir Bhutto, resisted the reforms and abandoned them soon after receiving the due tranche. This time around, so argue the pro-government stalwarts, things will be different and unpopular decisions will be taken because they are in the long term interests of the nation.

Two reforms that eluded former governments, even though they were repeatedly acknowledged as being able to provide the basis of a more prosperous Pakistan, were the levy of GST on the one hand, and a tax on the income of rich landlords on the other. Organized resistance by the traders against GST and by rich landlords in the nation's assemblies were the root cause for the failure of democratically elected Pakistani governments to effectively levy these two taxes.

It is well known that the traders' resistance is based on their refusal to have the true extent of their wealth documented, which would automatically imply considerable rise in income tax payable, and the rich landlords' resistance on their refusal to start paying a tax that they have always been exempt from. But the rationale they present for their resistance is 'national interest': an invocation that is standard normal in this country for people who equate national interest with their own interests - be it political or financial. Thus paying GST, traders argue, would mean higher prices for the consumers. And they add that GST also makes them susceptible to the wiles of the corrupt tax officials and, needless to say, all assurances that their complaints against such officials would be promptly dealt with are ignored because that is not the main reason for their resistance. Farmers on the other hand talk of their contribution to the GNP, which is more than 50 percent, and argue that because they are the largest contributors to sales tax, as they consist of over 60 percent of the population of the country, a tax on their income could be defined as double taxation. Again ignored is the subsidy allocated to the farm sector and the fact that it is only the rich farmers that are targeted to be taxed and not the middle income or poor farmers. In short, if these two pressure groups are to be believed then taxing them would be against national interest. And they are willing to back their resistance with threats of closures.

Things will change, so promised the new military leadership. GST will be levied, they promised. And so will farm income tax. Initially it was promised that farm tax will be levied at the beginning of the next fiscal year by the provinces, as it was a provincial subject, but then critics argued that it was constitutionally a provincial subject and the constitution was in abeyance and so the unpopular decision must be taken at the federal level. Perhaps in response to this, the government appointed an expert group led by Dr Tariq Siddiqui, Vice Chancellor of Quaid-i-Azam University, to chalk out a formula before June 2000 to tax farm income. Representatives of all the provinces will, reportedly, be members of this group and will provide valuable input as to what has already taken place in each province in this regard. There is little doubt that the report, when completed, will provide useful insights into who to tax and how to tax them in the interests of equity and maximisation of farm output. But, then again, there are a number of research studies on how to tax the rich farmers available to the government and the main problem lies not in lack of studies but in lack of political will.

During our decade of democracy the main problem was not with lack of expert research or, indeed, lack of identification of the problems in different sectors and what policy measures to adopt to solve them expeditiously but with the lack of political will to take on powerful pressure groups. That, so far, the present government has not succeeded either may have more to do with the little time, three odd months, that they have been in power rather than a lack of political will. Only time will tell whether the new regime succeeds in scaling the walls of resistance or succumbs to pressure groups like its predecessors. The fact that the army itself is a pressure group that resisted any attempts in the past to scale down its huge annual budgetary allocations perhaps might be used as an argument by those who want things to continue as before. And yet the army sensitive to its present role might just surprise everyone.