By Abdul Wajid Khan

ISLAMABAD, July 21: A noted economist has underlined three models in practice around the world for the government to increase tax collection.

“These include trust model, power model and slippery-slope model. The government may try these to strengthen its fiscal position,” said Dr Abdul Rashid, noted economist and Director General of International Institute of Islamic Economics at the International Islamic University, Islamabad.

During an interview with WealthPK, he said, “In the trust model, the government takes steps to build confidence among taxpayers that the money collected from the taxes will be spent on their welfare and development. Tax revenues will be used to eradicate poverty, provide health and educational facilities, build basic infrastructure and increase living standard of people.”

He noted that in Pakistan there was a dire need to win the trust of people, including big businessmen, small traders and all other stakeholders, to improve the tax to GDP ratio.

“Those who are paying taxes should be encouraged through different incentives. Campaigns should be launched to make the general public aware that the government require ample resources to build necessary infrastructure, provide better health and educational facilities and eliminate poverty and backwardness,” the economist said.

He said that paying taxes is not only an obligation but also a noble cause because it promotes the welfare of taxpayers.

Abdul Rashid said the power model pertains to the writ of the institutions and key element of this model is accountability. “It means when a person intentionally or unintentionally does not pay tax, what action the government will take to make him accountable, and which hard and soft penalties will be applied to him.”

He said the third model was the combination of trust and power models, which is considered a better option, and Pakistan should adopt it to increase the tax revenue.

“I would always suggest that the government should introduce effective tax rates to increase revenue base. The government should introduce soft changes in FBR laws and make the process of filing tax returns easy and simple.”

The economist also highlighted the renewed political upheaval engulfing the country, which he said would have negative impact on the country’s economic stabilisation efforts.

He cautioned that the gains achieved in the previous financial year in terms of tax collection target and economic growth were being lost. He noted that the targets set in the federal budget for the fiscal year 2022-23 may not be achieved if the political uncertainty persisted. “It is natural that when economy grows, tax collection increases because of surge in production and economic activities in manufacturing, agriculture, industry, services and other sectors,” said Abdul Rashid.

He noted that Pakistan was again facing multiple challenges, including balance of payment problem, currency devaluation and energy crisis.

“These challenges may create problems for the government to meet its economic targets for the next fiscal year.”

“If the government succeeds in ensuring political stability, it will boost business and economic activities, enabling FBR to achieve its tax target for the ongoing financial year,” he elaborated.

It is to be recalled here that FBR had collected net revenue of Rs6,125 billion during the outgoing fiscal year, exceeding the upward revised target of Rs6,100 billion by Rs25 billion.

The government has fixed the economic growth target at 5% and also set a Rs7.4 trillion tax collection target during the ongoing fiscal year.The ministry of finance said despite a significant rise in tax collection during the previous fiscal year, higher current and development expenditures widened the fiscal deficit.

It said due to additional spending under Covid-19 funds for vaccine procurement, circular debt payments, social sector spending, and higher development expenditures, the fiscal sector remained under tremendous pressure.All these factors, along with the global economic challenges posed by the Russia-Ukraine conflict, as well as the impact on international commodities and oil prices, have increased the risk of fiscal slippages during the year.

To offset the inflationary pressure, the government initially tried to provide relief to the masses by maintaining domestic oil prices. However, as international commodity and energy prices continued to rise, provision of such relief acted as a double-edged sword, which will potentially increase the fiscal deficit and reduce fiscal space.

To avoid severe fiscal imbalances and to ensure that fiscal consolidation remains on track, the government has ended subsidy by raising the prices of petroleum products. At the same time, the government is providing targeted subsidies to protect vulnerable segments of society from rising oil and commodity prices.

The ministry of finance said the government is determined to restore fiscal sustainability through effective revenue mobilisation and prudent spending.In this regard, key priorities include increasing the tax-to-GDP ratio through various tax policy and administration reforms, as well as reducing unnecessary spending through austerity measures.

Furthermore, emphasis is put on rationalising untargeted subsidies and reducing the losses of public sector enterprises through improved governance.

Credits: INP-WealthPk