A bold decision that means a lot to IMF

Taxes are justified as they fund activities that are considered necessary and beneficial to society. It can be argued that a government forfeits its right to stay in power if it fails to impose taxes for three fundamental reasons – generate revenues, regulate behaviour and redistribute wealth – on its citizens.Without revenues, the government cannot sustain itself – it cannot pay for all the public goods, safety nets, and agencies or institutions it controls without money. Governments also use this money to meet defence needs.Reality is a bitter pill to swallow. President Zardari has taken a bold decision to promulgate three ordinances that would impose taxes contained in the Finance Amendment Bill 2010 tabled in parliament in November and never submitted for passage given the unlikelihood of its approval with the opposition and coalition partners publicly opposing it. His is a profoundly tough decision in the face of dogged resistance these taxation measures have received from all the political parties except for the one he himself heads – the PPP.These Ordinances envisage a 15 percent surcharge on existing taxpayers for the balance period of FY11. Increase in special excise duty from 1 to 2.5 percent on all imports, withdrawal of sales tax exemption on fertiliser, tractor and pesticide sectors abolishment of zero-rated facility on import of plant, machinery and equipment as well as domestic sale of cloth and garment.

The concessional sales tax rate of 8 percent will continue on sugar not on the assumed ex-factory of Rs 28 per kg but on market price (Rs 55-58) of the commodity. The total revenue expected as a consequence of the promulgation of the Ordinance, which seeks to buy time till July 1, 2011 with a view to adhering to a commitment made with the IMF, is forecast at 53 billion rupees till the end of the current fiscal year on 30 June 2011. The ordinances also makes it mandatory for the government to bring down its expenditure, albeit symbolically, by imposing a ban on governmental purchase of durable goods as well as fresh recruitment and a 50 percent reduction in expenses related to travel and office stationery. This will help government save as much as Rs 1 billion in the remaining period of fiscal 2010-11.Be that as it may, the taxation measures in these Ordinances would definitely meet the main IMF’s condition to reduce the fiscal deficit to 5.3 percent of the GDP. We hope that the Fund would appreciate the bold move and not get hung up on RGST.

While members of the opposition and some of the government’s coalition partners may well accuse the President of circumventing parliament by promulgating the ordinance yet the critical factor is the need to understand that the government has no other viable option at this point in time. To suggest that the government curtail corruption, as recommended by the PML (N) in its 10-point agenda, and thereby reduce the pressure on scarce budgetary resources may sound great in theory but is unlikely to bear fruit in the short-term defined as the next three months, which is the validity of the ordinance. In addition, to suggest that the government begins to tax the income of the rich landlords is very sound advice, however with the resistance in the national and provincial assemblies to the imposition of such a tax and with the constitution delegating this subject as a provincial subject this proposal too is unlikely to be implemented any time in the short term. Additionally the opposition parties as well as some members of the coalition have suggested to the government to reduce its wasteful expenditure. However, it is critical to understand that the bulk of the current expenditure is on defence and debt servicing of domestic and foreign debt – expenditure items that the government is simply not in a position to slash. Thus Business Recorder lauds the decision taken by the President to promulgate the ordinance, a bold decision that may have some negative political repercussions, but it must be borne in mind that the onus of taking unpopular decisions, by definition, rests with the government of the day and not with the opposition or coalition partners.

Understandably, these ordinances, however, have not included the provision of another money bill pending in parliament since November namely the Reformed General Sales Tax (RGST). The opposition to this tax has been surreal given that it seeks to bring the undocumented sector, widely acknowledged as illegal, into the tax net. However, informed sources have revealed that the Ministry of Finance has assured the IMF that RGST would be implemented from next fiscal year claiming that all the provinces are on board. In other words the government remains on course to implement all the conditions it agreed to with the IMF team in November of 2008 and which led to the approval of the 11.3 billion dollar Stand-By Arrangement. The agreed reforms must not be viewed as an anathema, but as a means to bring our own house in order sooner rather than later. The promulgation of these ordinances abundantly shows that the country’s leadership has embraced the Fund’s programme in letter and spirit, and now with diligence and sincerity of purpose can hope to achieve financial and economic stability in due course. It has also demonstrated its willingness to meet Fund’s historic demands for transparency and structural reforms as a pre-condition for financial assistance.

While hailing the bold moves we would like to express a note of caution. Can exemptions on zero-rated concessions provided to business sectors through a Money Bill (ie Finance Bill) be amended through an ordinance? Withdrawing a concession provided through a Statutory Regulatory Order (SRO) is another matter because the government reserves the right to grant or withdraw sector-specific duty exemptions and concessions, and other protections under SROs. It has to be seen whether any amendment to Money Bill through an ordinance does not militate against the constitutional provisions – Brecorder