The PDM-government has imposed a 10 percent direct tax as a ‘super tax’ on large-scale, profitable industries and has labelled the new levy as a ‘poverty alleviation tax’. But how would this tax serve to combat poverty in Pakistan?
Raising the corporate and income tax rate is frequently proposed as a remedy to income disparity since higher-income people tend to hold more business shares than others and may be required to pay more taxes on corporate income. Income inequality assesses how unequally income is distributed within a country. Contrarily, the degree of poverty refers to a person’s ability to afford basic requirements of life, including access to services like healthcare and education. Although the government can use fiscal policy to reduce income inequality in low- and middle-income nations; however, up till now, there is little evidence on how it can eradicate poverty.
Corruption and tax evasion are rampant in Pakistan’s tax collection system. Taxes as a percentage of the GDP are likewise relatively low. When the poor are already suffering from skyrocketing costs amid high inflation, the federal government has urged the wealthiest to carry their weight in taxes to raise more money to pay the nation’s public spending programmes.
Although the government can use fiscal policy to reduce income inequality in low- and middle-income nations; however, up till now, there is little evidence on how it can eradicate poverty.
Several concerns could have prevented the super tax option from being enacted: one is the potential decline in capital investment in machinery, which would lower productivity and overall prosperity. Large industries, which currently pay a high corporate tax of 29 percent and provide millions of jobs nationwide, will be adversely impacted by the enforcement of a 10 percent super tax. The corporate income tax and investment tax will now be higher than 50 percent and 55 percent, respectively. This is the highest in Pakistan’s history as well as in this region. The corporate tax in India and Bangladesh is 25 percent.
In addition, there is no effective system in place in Pakistan to monitor and control the prices of a wide variety of goods and services, as well as the profits made by producers or other businesses. This is the reason why the industry will undoubtedly attempt to pass this levy on to consumers or reduce the wages of the poor. In an uncompetitive market, it would affect the prospective private sector and foreign investment ventures as well as business expansion in the industries.
In a nutshell, the business sector, which is the backbone of the financial and economic systems, would suffer as a result of this super tax. Owing to the ongoing high inflation, it is anticipated that there may be more layoffs and a rise in poverty.
The corporate income tax and investment tax will now be higher than 50 percent and 55 percent, respectively. This is the highest in Pakistan’s history as well as in this region. The corporate tax in India and Bangladesh is 25 percent.
The government has opted for such a straightforward course of action primarily due to the IMF pressure and to address the ongoing balance of payments crisis. Taxing the masses is not the only way to lower the budget deficit; the government must also curtail spending. The government should broaden the tax base to generate revenue, and incremental efforts are required to make the overall taxation system equitable.
The measures are noteworthy if the government implements them to advance the nation’s pursuit of financial independence, sustainable economic growth, and minimal reliance on foreign loans. Poverty can be lessened when taxes are equitable and essential public services like education and healthcare are prioritised in the government spending.
In the current scenario, linking a super tax to the objective of eliminating poverty is primarily a political statement.