Ministry sees new taxes as only way out of crisis


http://dawn.com/2008/04/06/top7.htm

By Ihtasham ul Haque

ISLAMABAD, April 5: At a time when the new government has yet to settle down, the finance ministry has been forced to propose taxes on agricultural and services sectors as the only way out of growing financial difficulties.

Dawn learnt on Saturday that the measure was proposed after the ministry acknowledged that the previous government had not achieved fiscal consolidation -– a key to macro-economic stability.

Sources also said that economic experts had warned the new coalition government that a ‘loose’ fiscal policy could lead to inflation, interest rate hike and crowding out of private investment, all of which can in turn hamper growth and poverty reduction efforts.

The sources said that experts of the PPP and PML-N had advised the new government to formulate its fiscal policy soon to avoid serious economic problems.

Finance Minister Ishaq Dar is busy finalising a white paper that will incorporate recommendations of these experts and is likely to be presented in parliament this month.

The sources said the government had also been advised not to limit the tax collection effort to the centre alone. They said that provincial governments would have to do much more to increase the provincial tax-to-GDP ratio from 0.5 per cent to 1 per cent of GDP in the medium term.

TAX ON AGRICULTURE: A new “fiscal policy statement”, to be prepared by the ministry of finance, has suggested expansion of the tax net to the agricultural and services sectors.

“As private sector savings are often low in developing countries, a sound fiscal policy can play a central role in mobilising resources by raising revenue and reducing less productive spending. The importance of sound and rule-based fiscal policy, therefore, cannot be over-emphasised in a developing country like Pakistan,” the document says.

The paper calls upon the government to base the taxation structure on moderate rates and a wider base through rationalisation of exemptions.

The report reveals some important structural shifts in patterns of revenue and expenditure.

On the revenue side, it says, the tax-to-GDP or revenue -to-GDP ratio exhibits a decline over the past one and half decade. On the expenditure side, total expenditure and its components also exhibits a decline as percentage of GDP.

Fiscal deficit as percentage of GDP also declined during the same period. However, reduction in fiscal deficit owes mainly to sharper reduction in expenditure -– more so development expenditure –- rather than improvement in revenue effort.

The official report is unsure whether the government could achieve a target of bringing down the fiscal deficit to four per cent of the GDP (Rs399 billion). The government has also projected a revenue surplus of Rs98 billion or just under one per cent of GDP.