Revamping taxation system and privatizing SOEs are crucial for economic prosperity
The taxation system of Pakistan not only incentivizes people to stay out of the tax system but also contributes to decorporatization, said Mr. Fawad Hasan Fawad – Federal Minister for Privatization, while speaking at the 3rd “Pakistan Prosperity Forum” organized by the Policy Research Institute of Market Economy (PRIME).
In the keynote address, Mr. Shahid Hafeez Kardar- Former Governor State Bank of Pakistan, highlighted that rationalization of public expenditures is crucial for the sustainability of public finances. Dr. Nadia Tahir stressed upon the importance of fiscal prudence by sharing that fiscal spending has not resulted in economic growth in Pakistan.
The Forum was attended by the representatives of the government, IMF, business community, academia, and media.
Speakers presented the diagnosis of the economic challenges by focusing on the debt crisis caused by unrestrained spending and suggested reforms to build an agenda for sustained economic growth.
Mr. Fawad Hasan Fawad informed the audience that the current state of the public sector is unsustainable and contributes to the deterioration in the business environment in the country. In 3 years from 2018-2021, the government spent Rs. 2.54 trillion in terms of subsidies, grants, and loans to keep commercial SOEs operational. The size of the government has increased by more than three times in the last couple of decades.
Mr. Fawad highlighted the flaws in the country’s taxation system by informing that around 93 percent of the collected tax revenue is either voluntary or withholding; whereas, only 7 percent is actually collected by FBR. Moreover, FBR sends recovery notices to individuals worth billions of rupees while the actual collection is a mere few hundred million. Since 2016, the tax burden on corporate taxpayers has increased by more than 40 percent on average. Such a burden has not only contributed to encouraging people to stay out of the tax system but also decorporatization.
The public sector reforms should include bureaucratic reforms and taxation system reforms. These two areas are crucial for improving performance of the state. He stressed that the reform should not increase in the size of the federal and provincial governments, and the power of state functionaries. The reforms also need to focus on building the capacity of the state to regulate markets from where the government exists and the private sector takes over.
Mr. Shahid Hafeez Kardar highlighted that the wasteful expenditures on low-priority, and poorly designed projects have made the debt unsustainable. While addressing the Forum, Mr. Kardar said that borrowing is not harmful if utilized in productive activities and generating assets. He informed that Pakistan’s Gross Public Debt is 667 percent of revenues, and external debt is 232 percent of exports.
The overhaul of the economy requires rationalization of government expenditures, moving towards a contributory pension system, reducing the footprint of the government in the economy, rationalizing tariff structure by phasing out protection of industries and revamping the taxation system by reducing the rates and number of taxes.
Mr. Rizwan Rawji – Businessmen, presented the Charter of Economy prepared by PRIME and highlighted that political stability and strong political will hold critical importance in promoting economic prosperity. The economic woes such as the balance of payment crisis, unsustainable debt, and inflation are only due to misaligned fiscal policies of the governments. Currently, out of 5 million tax filers, less than 3 million pay tax, and a significant portion of sales tax is collected from a mere 400 entities. Mr. Rawji suggested that reforms envisaged in the Charter of Economy are based on the pillars of economic prosperity, which are: low and broad-based tax rates, spending restraints, low footprint of the government in the economy, privatization of loss-making SOEs, tariff rationalization, and sound money.
Mr. Ali Salman – Executive Director PRIME, remarked that the size of the government and its presence in the economy need to be reduced to improve fiscal sustainability and create an enabling business environment in the country.
The speakers had a consensus that reforms should start from the restructuring and resizing of the government to reduce its presence in the economy. The reforms should be complemented by restricting the public spending and focusing on revamping the taxation system by reducing the number and rates of taxes to broaden the tax base.
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