I am writing this article to capture my first impressions from these conversations.

The Finance Bill 2023 is the continuation of an old ritual where the finance ministry and its constituent divisions spend countless days and months to allocate revenue and expenditures.

While presenting the bill, Finance Minister Ishaq Dar faced a number of complex challenges: almost zero per cent growth rate, increased incidence of poverty where 20 million people were added in the headcount to 95 million now, historically high inflation of 37%, significant shortfall in tax revenue, a coalition government facing elections, and no guarantee of IMF agreement.

It is clear from the budget speech that he has made a decent effort to make everyone happy. He has managed to increase the development spending significantly by doubling the new allocation from Rs567 billion of the revised PSDP to Rs1,150 billion of the budgeted PSDP.

He has promised a primary surplus to the tune of 0.4% of GDP – one of the key conditions of the IMF from the budgetary exercise. He has committed to increase revenue by more than 28%, from the current year’s collection of Rs7,000 billion to Rs9,200 billion.

He has also proposed to increase the scope of Benazir Income Support Programme to 9 million families and increase the salaries of government employees by more than 30%. He has also announced an increase in the minimum wage to Rs32,000.

The finance minister has announced incentives for various agriculture and industrial sectors through tax and duty exemptions in the hope of uplifting the economic growth rate.

One of the questions which was asked on our Space session was how the government would meet the ambitious tax revenue collection target.

To answer this, one needs to look no further other than the expansion of super tax to all sectors with a minimum annual income of Rs150 million. This limit was Rs500 million when the super tax was first introduced as a temporary measure.

It seems now that effectively the super tax has become integrated with the income tax of medium to large firms – previously it was levied only on large firms.

Super tax is clearly an anti-business measure and with this change, it will encourage greater tax evasion. Most of the family-owned companies will resort to splitting their businesses to ensure that their annual income does not increase to Rs150 million.

Obviously, it is not possible for firms to shut down or re-allocate their capital in a short run, however, it will deter formation of new companies and new investment.

The government must withdraw the super tax on all firms immediately. This measure will prove to be a single most important tool to help raise the level of confidence and working capital for the bulk of our businesses.

It is interesting to compare super tax with the increase in the SMEs’ turnover threshold from Rs250 million to Rs800 million. This is where the bulk of trading enterprises operate.

By a sleight of hand, our financial wizard has promised significant relief to traders while penalising industrial and manufacturing firms.

The increase in government salaries is being welcome, however, I contend that the increase in salaries should be a function of increased skills and productivity.

In this context, it is a better strategy to lay off the lower level of government employees, offer them re-training and help them regain employment or start a business. This will push the government to increase productivity from a smarter government.

The extraordinary rise in inflation, including food inflation, which has taken place in the last one year, is mostly a function of supply constraints.

Import restrictions, flour price hike, 40% devaluation of Pakistani rupee and constant rise in petrol and utility prices have added significantly to the core inflation.

This inflation is largely responsible for pushing additional 20 million people under the absolute poverty line and no cash transfer can mitigate it. In fact, it may be inflationary itself.

The government must lift import restrictions and control on exchange rate immediately and reduce indirect tax rates including customs duty to bring inflation down.

Tax gaps ought to be addressed by reducing tax exemptions and not by increasing tax rates. As the latest tax expenditure report reveals, these exemptions have increased from 2.69% in 2020-21 to 3.36% of GDP in 2021-22.

The tax revenue forgone is estimated at Rs2,240 billion. While the government has reduced income tax exemptions, which grew only by 1.77%, sales tax exemptions increased by 75% and customs duty exemptions by 52%.

This is where the powerful organisations, institutions, and politically connected firms gain the most by throwing the working class and entrepreneurs under the bus.

The Finance Bill is replete with scores of exemptions on the basis of discrimination across industry, product, institution, usage and location.

The budget has continued to legalise tax evasion by the non-filer category. The non-filer category must be disbanded immediately and those not filing tax return must be prosecuted as per law instead of offering them amnesties.

No nation has taxed its way to prosperity. We have been advocating for a low-rate, flat and broad-based tax structure with minimal or no exemptions.

Everyone should pay the same level of income tax as a percentage irrespective of the source of income. Everyone should pay the same level of sales tax upon consumption and not at the level of import or manufacturing.

All excise duties should be abolished. Customs duty should become a function of a new industrial policy instead of a revenue measure.

Let’s hope that next year’s budget speech of the finance minister of the newly elected government takes a leaf from these thoughts!

This commission is being led by Ashfaq Tola, and some of the recommendations making their way into the media are very unnerving for policy specialists and the private sector alike.

First, it should be mentioned that just like the previous Tax Reforms Commission, the report of this body has not been made public. The commission itself seems to be working in relative isolation, avoiding any invitation to public forum to speak about their proposals.

We found six proposals from the RRMC, unofficially leaked to news periodicals. The proposals only reflect the short-term needs of a government in crisis, and not much else.

This is an election year, and we really cannot expect much in terms of meaningful tax reforms. Of the six RRMC proposals, three had to do with increasing withholding taxes.

Withholding taxes add an unwelcome compliance burden on businesses and increase complexity of the system. Tax complexity is perhaps the biggest problem facing Pakistan’s economy.

Withholding taxes also eat up working capital and have a detrimental effect on the growth potential and risk preparedness of enterprises. There are also other problematic ideas like advance taxes on long-term reserves of companies.

Tax revenue shortage is not an economy-wide problem, but it is one contained within the organisation, that is our government.

Such proposals, the ones made by RRMC, will work at most for one year, because after that, taxpayers will take counter-measures to reduce their tax burden, even if it means moving into the domain of black and grey economies.

This is something well established by Dr Arthur Laffer through his Laffer Curve, which shows the inverse relationship between high tax rates and tax revenues. These proposals will only serve to lower trust level between taxpayers and the tax collector.

It is highly doubtful that for this specific financial year, the government is as interested in enhancing trust with taxpayers than it is in avoiding default.

For people like us studying these issues in civil society, the biggest threat lies in the fact that a government crisis is being engineered into an economic crisis in front of our very eyes. And it may be so that short-term measures may only work to spread the disease across the whole economy.

Undoubtedly, Pakistan needs a major overhaul of the tax system. That said, less needs to be done and more needs to be undone.

It is just not possible for government machinery to gauge an economy with such precision that it can prioritise or discriminate correctly. That combined with a complex tax system makes such calculations very much irrelevant to any discussions concerning the future of the economy.

In the end, such an approach amounts to guesswork, even when backed by numbers, and complexity without fail leads to unintended consequences.

It is essential that tax exemptions and subsidies are completely done away with. They distort the market and put undue pressure on the government kitty.

The level of progressivity in the present tax regime greatly diminishes the ability of an enterprise to create more productive jobs.

Complexity in taxation may create a few jobs in compliance departments, but it more than proportionately hampers new job creation. In this way, putting a higher tax burden on job creators only works against broadening the tax base.

Government revenues must be restricted to three sources only. These are income tax, sales tax, and customs duty. Tax rates must be harmonised, and these should be fixed for the next five to 10 years.

Predictability in tax policy and stability in tax rates are two key components enabling growth, and hence higher tax revenues in the long run.

It is very important that policy practitioners in the government think long and hard about what needs to be done. We know that the government is worried about short-term revenues, but that is a conversation that brings us back to the root cause of the problem.

Because in the short run, it makes more sense to work on something which is within government’s control, namely the expenditure side of things.

To balance budget, expenditures must be decreased. To balance trade deficit, exports, remittances, and foreign direct investment must replace government liability.

For both things to happen, the government must decrease in size, and it must allow greater freedom for foreign direct investment to flow in. It also needs to significantly reduce import taxation, which is in effect export taxation.

The government must consider the privatisation of commercial SOEs, and unused public land. It must also consider relaxing restrictions and limitations on private international citizens investing in the country.

While each government included privatisation proceeds in its non-tax revenues, the realisation of proceeds has been zilch.

It seems that in bureaucratic circles, the idea of privatisation has lost its appeal. This is partly because of parallel developments in trade liberalisation and technological advancements, and partly due to political factors.

The idea of reforming state-owned enterprises (SOEs) has taken precedence over the will to privatise, and it comes in various forms. SOE reforms also provide multilateral agencies with an excuse to loan out “technical assistance” to the government.

In a bid to sidestep the challenging process of privatisation, the PTI government embarked on the Malaysian-inspired Sarmaya Pakistan Limited, with the aim of reforming and restructuring the government of Pakistan’s SOEs.

As of now, there are around 212 SOEs (including subsidiaries, trusts, and funds) incorporated by the federal government.

Over the last 10 years, SOEs of a commercial nature (84 out of the total 212 SOEs) have collectively inflicted a loss of over Rs1 trillion on the national exchequer.

While there are certain functions of national importance being performed by some SOEs, by and large SOEs are a burden on the state, and the need to be either deeply restructured, privatised, or liquidated.

In 2021, the government published State-Owned Enterprises Triage: Reforms & Way Forward, led by Dr Ishrat Husain. The SOE triage provides a roadmap for retention, privatisation, or liquidation while laying out a criterion justified on the basis of “national economic interest”, “strategic importance” and commercial significance.

The triage foresaw the SOE Act 2023 and now the draft SOE policy. A central monitoring unit will now be established to assist the process of reforms and restructuring.

The draft SOE policy might be well-meaning. Like other policies, it is built on the assumption that there exists efficient government machinery with the capacity to run complex business operations. It is bound to fail on these grounds alone.

A careful reading of the policy unveils several lacunas, some of which are described here for public knowledge.

Section 7 of the draft policy explains that the SOEs identified specifically in the SOE Triage report would be retained.

Para 7 also refers to monopoly service providers as strategic in nature but fails to clarify whether a monopoly is defined as a 100%, 50%, or 25% of market share.

Instead, a commercial loss-making monopoly should be treated under anti-trust laws, and the federal government should consider disintegrating the functions of large SOEs into separate smaller entities during the course of privatisation.

Para 8 of the policy lays out the conditions for the creation of new state enterprises. It says that an SOE can be created when no private firm is operating in a particular sector, regardless of whether the sector is of strategic significance.

It does not clarify whether the government should consider an international private enterprise as part of the relevant sector.

It states that an SOE can be created when the government is trying to establish a market, but its ambiguity leaves room for the bureaucracy’s authority to define new sectors and markets in a self-serving manner.

Para 8 also appears inconsistent with the limitations put forth by the policy itself, when it states that the government will only retain “strategic” SOEs.

By allowing the creation of a commercial SOE, specifically in a non-monopolistic market context with private sector players, the policy leaves loophole for government expansion into the private sector yet again.

Despite the completion of the SOE Triage, para 10 of the policy appears to create space for each division of the federal government to contest the categories set forth in the triage.

Para 11 vests the initiative of transformation of SOEs to line ministries. This process would be an unnecessary burden and experiment with taxpayer funds.

There is also no guarantee, nor track record of private sector reform under a public sector setting. We propose that privatisation must occur first and restructuring later when new owners can lead that process.

The draft SOE policy does not spell out transformation or reform in the area of human resources.

One of the greatest barriers to privatisation is the judicially, and legislatively protected status of permanent government employees. Downsizing will play a major role in successful SOE reform but no provision in the policy exists to streamline it.

Para 12 is all about rescuing the SOEs facing financial and operational problems. This entire passage creates ambiguity about the privatisation of commercial SOEs.

It indicates that the government does not intend to even privatise sick commercial units. The emphasis of the policy remains on repeated rehabilitation, reconstruction, and reorganisation of sick commercial SOEs.

The threat of delay in privatisation due to the strategic interest of political governments, most notably union appeasement and the middle-class vote, will limit the transformation potential.

The proposed CCoSOE (Cabinet Committee on SOEs) implies that the mandate of the Privatisation Commission may be in danger of being violated eventually.

The entire proposed process under the policy is highly centralised. CCoSOE will continue to rescue sick SOEs until political mileage from SOEs can be curtailed.

The idea of creating a central monitoring unit to oversee the SOE reforms process is a non-starter.

The triage report itself acknowledges the complexity of markets in which SOEs perform and a centralised unit can never have the capacity to advise these SOEs, which are operating in distinct market and bureaucratic conditions.

The federal government would be well advised to privatise highly indebted loss-making commercial SOEs at market offers without going into a transformation phase. All other roads lead to more losses, more corruption, and more uncompetitive markets.