Last man standing: Hammad Azhar
Minister of State for Revenue Hammad Azhar has the unenviable job of guiding Pakistan’s tax policy; Soch sat down with him to learn more about revenue collection going forward.
A few months ago, #TeamSoch began an exhaustive examination of the state of Pakistan’s economy. This involved an analysis of our usual twin deficits and a hard look at the players in charge of Naya Pakistan’s economy.
A great idea in theory, until Naya Pakistan’s financial team straight up derailed.
In a space of three weeks, the finance minister, the governor of the State Bank and the chairman of Federal Board of Revenue (FBR) were shown the door — the former FBR Chairman Jehanzeb Khan reportedly learnt about his firing via television. Amidst mass confusion, a new team with some very old faces was announced.
One PTI figure, however, emerged unscathed: Minister of State for Revenue, Hammad Azhar. Along with the newly installed FBR chairman, Shabbar Zaidi, Azhar is responsible for guiding Pakistan’s tax policy.
Neither man has an enviable job: the FBR is on track for the highest revenue shortfall in its history, close to PKR 450 billion at the end of this fiscal year. So far, the only solutions put forward by Pakistan Tehreek-e-Insaf (PTI) and the Board include an exclusive dinner with the prime minister and a Tax Amnesty Scheme. As for broadening our dismal tax net, sources within the FBR say only 20 officers have been assigned to combat that problem — these officers are deployed only in Karachi, Lahore and Islamabad.
On why the revenue shortfall exists
TL;DR: Inshallah, next year’s revenue will be better.
It’s odd but refreshing when a revenue minister admits that tax reform wasn’t the government’s top priority this year. It’s quite a statement in a country where only 1.45 million out of 200 million pay income tax. To be fair, this isn’t the first time Azhar has been blunt about priorities: recently, in a speech at parliament , he sardonically said: “We [PTI] didn’t exactly inherit Sweden’s economy”.
In the video, Azhar explains Pakistan’s economic state for the last year, and connects our decreasing imports with our tax revenue. He also points out that subsidies have impacted indirect tax collection — this is important because almost 88 per cent of tax revenue in Pakistan comes from indirect taxes.
However, Azhar does not present solutions for the ongoing year. Anything that needs to be fixed, will have to wait for next year, according to him. This is unexpected because revenue shortfall has been ongoing for a decade, hence one should anticipate policy objectives that go beyond benami accounts and tax amnesties.
Trickle-down economics and ‘Madina ki Riyasat’
TL;DR: Wealth creation shouldn’t be a problem.
This is a succinct summary of PTI’s economic ideology. Beyond the anti-corruption slogans, PTI’s messaging has always been a variation of ‘greed is good’. PM Imran Khan has maintained that “Having wealth is not a sin”; the now-deposed Asad Umar has always held a right of center, pro-business approach. The packaging may be dissimilar, but the PTI and PMLN have much in common as far as their economic policies go.
Through the video, we learn that PTI has set forth friendly tax policies for the business community — this would be great, if the whole point of tax reform was not to increase our revenue.
Azhar isn’t wrong to fixate over foreign account holders, reportedly those accounts may hold up to USD12 billion, but beyond them, how will taxation policy for businesses change from PMLN to PTI? The agriculture sector comprises one fifth of our Gross Domestic Product, but contributes less than one percent in tax — will the PTI government bring about policies to tax the sector? What does the PTI government believe Madina ki Riyasat translates to in today’s world? These are questions that still remain unanswered.
Defending the tax amnesty scheme
TL;DR: It’s never worked before but we’re different.
The current tax amnesty will last until 30 June 2019 at a rate of 4 per cent on all assets, and 6 percent on assets ‘whitened’ but kept abroad. Under this scheme, anyone declaring assets has to become a tax filer.
There have been eight documented tax amnesties in Pakistan’s history. Some of them, including the first tax amnesty scheme in 1958, were relatively successful and managed to bring in new tax payers. Others, like the 2013 scheme, failed to increase revenue or create new tax payers. In the last decade, each incoming government introduced its own tax amnesty, thereby dampening the point of a tax amnesty.
Amnesty schemes are only useful if they aren’t a recurring theme – which unfortunately they have become in Pakistan. It remains to be seen how PTI’s amnesty scheme will prove more effective than those before it. ‘Reforms first – amnesty later’ might have been a better strategy.
Looking at the informal sector
TL;DR: Pakistan’s size is difficult for the FBR to handle
Instead of getting his hands dirty breaking down Pakistan’s informal sector, Azhar took the conversation towards technology that is meant to end our problems. This faith affirming, ground breaking technology is called PRAL, and is explained in the next clip.
PRAL – the FBR’s answer to revenue
TL;DR: The future is digital.
PRAL stands for Pakistan Revenue Automation Ltd. It is wholly owned by the FBR and has been around since 1994, providing services to both the FBR and the provincial revenue boards. IT specialist Syed Javed is the designated chair of PRAL’s newly constituted board in March 2019, and is in charge of reforming PRAL to meet ‘current standards’ — though neither Javed nor Azhar can qualify what those standards are.
Here is the problem: PTI’s approach towards tax broadening significantly rests on PRAL, but the system can only solve a compliance issue. PRAL can track large company’s tax returns; but what about everybody else? Where are the other billions of rupees needed to address the shortfall? As of yet, there is no tax policy that defines how the informal sector can be brought into the tax net.
Taxpayer dinners are not a gimmick
TL;DR: Symbolism matters
One of the lighter policies of the PTI administration is the Tax payer Dinner: the board compiled a list of top 50 taxpayers in the country and invited them for dinner with PM Khan.
Not everybody approved: the former prime minister Shahid Khaqan Abbasi, fifth on the 2018 list, said it was illegal for the board to publish names and figures. There is a little truth in this since names of tax payers around the world are public knowledge.
Still, strangely enough, this is one of PTI’s smarter moves: nothing makes wealthy Pakistanis more uncomfortable than an open and honest discussion about taxes. The dinner may appear pointless, but it’s a move towards normalising taxation. What remains to be seen is how the list alters if PTI can control benami accounts and income tax figures.
In conclusion, PTI’s approach to taxation
Well, there you have it. Azhar is a strong believer in fairness and equitable taxation, but also a strong believer in supply-side growth, trickle-down economics and wealth creation.
PTI’s approach thus far has been to target corrupt ‘individuals’ and foreign accounts; and for everything else there’s the belief that technology will save the day. But one algorithm cannot solve Pakistan’s tax woes. One could believe in supply side growth, except our export sector has stagnated precisely because it is so heavily subsidized and non-competitive.
Meanwhile, there is no discussion of how to increase basic income tax collection, which would be the easiest way to move reliance away from indirect taxes. Even a discussion about the percentage of Pakistan’s population that is not in the banking sector (that’s 87 per cent) would be worthwhile. Can Hammad Azhar and Shabbar Zaidi deliver on those fronts?
Let’s see over the next four years – or for as long as they’ve got the job.