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Energy and tax reforms
By: Muhammad Adnan

A survey makes an attempt to understand how paying taxes can improve service
delivery, such as regular supply of electricity.

When it comes to constraints to economic growth, most point towards the
country’s inability to design and execute important structural reforms related
to energy, taxation, and loss making public sector enterprises.

For starting economic growth and creation of new jobs, two immediate reforms
are needed: a) energy reforms to support private sector’s pursuit for growth;
and b) tax reforms to finance growing government expenditure.

A recent survey conducted by Sustainable Development Policy Institute (SDPI)
focused on the perception of household and enterprises regarding tax and energy
sector reforms.

The respondents to the survey (in support of these reforms) say they are
willing to pay additional bills if they are assured that no loadshedding would
be done. They are also willing to pay 10 per cent additional taxes if the tax
amount is invested in local-level education and health initiatives in their
region.

The survey was carried out in 3,800 households across Balochistan, Khyber
Pakhtunkhwa, Punjab, and Sindh. The districts included Faisalabad, Hyderabad,
Karachi, Multan, Peshawar, Rawalpindi and Quetta. In the same districts, 300
firms were also surveyed, including both formal and informal sector entities.

Eenergy reforms:

At the household-level, it is clear that power consumers are not prepared
for the sudden hike in electricity prices. 53 per cent respondents said the
prices had become too high for their household budget and 71 per cent of these
respondents have reduced the amount of power being utilised. Many have reported
cutting back their household expenditures towards food, health, and education.

At the same time, there are large numbers of respondents, who have the
ability and are willing to pay a higher unit price in lieu of a reduction in
loadshedding. Karachi was the only district where no one agreed to pay beyond
PKR 5,000. This perhaps is because of low incidence of loadshedding being faced
by Karachi after the privatisation of Karachi Electric Supply Corporation
(KESC).

Comparing this to Faisalabad — a city faced with prolonged power outages and
resulting riots — one can observe 75 per cent willing respondents having the
ability to pay beyond PKR 5,000 followed by Rawalpindi and Quetta at 67 per cent
and 50 per cent respectively.

Around 42 per cent respondents have witnessed instances of electricity and
gas theft in their areas. This is important as 51 per cent felt that the single
most important step to overcome the energy crisis is to reduce theft, and
transmission and distribution losses.

A large number of households said a long-term energy sector strategy should
focus on bringing down power tariffs, investments in hydro power, strategy for
energy conservation and protecting supply to households and export-oriented
industry.

Unfortunately, when subsidies are provided with over an indefinite timeline,
people start perceiving such allowances as their right.

Under a well-managed energy sector, only a lifeline block consuming less
than 100 units of power is allowed a subsidy. Contrary to this, it has been
observed that several layers of subsidies are provided in Pakistan for energy
usage in residential, agricultural, and industrial sectors.

Some policy reccomendations for the government based on the findings can
help start a useful discourse on energy sector reforms. First, legal amendments
may be undertaken to ensure effective punishment in case of energy theft.
Second, the government should correct the perception at the community level
that power sector defaulters are above the law. Finally, privatisation of
DISCOs may be expedited followed by GENCOs. Until this is done, GENCOs and IPPs
should compete for fuel, based on their efficiency levels.

Tax reforms:

Pakistan has the lowest levels of tax collection with respect to income
levels in the world, even compared to countries with similar levels of
per-capita income such as Bangladesh and India. In the sample of formal sector
firms, we found 96 per cent firms registered with Federal or Provincial Board of
Revenues and only 4 per cent were not registered. The informal sector entities,
however, did not see much benefit in such registration and feared intrusion if
they were formally part of revenue authority’s record.

Pakistan’s corporate sector expects better communication and outreach from
the FBR. 77 per cent firm-level respondents, despite having complaints, have
never conveyed their grievances to the FBR. Many believe seeking help may imply
future intrusion and possible harassment.

There are 70 per cent respondents seeking external help in filing their tax
returns. Out of these, 47 per cent resort to tax agents, 30 per cent seek help
from tax lawyers, and 14 per cent had accountants to file tax returns. Only 3
per cent seek help from the FBR for filing their tax returns. The FBR should
ideally be the only guiding source for the taxpayers.

There were 21 per cent respondents who occasionally provided in-kind or
monetary gifts to officials during the recent past. However, 10 per cent
respondents have paid such bribes during all of their engagements with the tax
officials. A substantial portion of the business community (46 per cent) was of
the view that tax collection can be increased by curbing corruption.

There were 74 per cent respondents who think the corporate tax rate is high,
keeping in view depressed growth in the economy. Similarly, 15 per cent of the
respondents were of the view that compliance with corporate taxation rules
should be simplified. Among the respondents favouring GST (in comparison to VAT),
54 per cent said that compliance in case of GST is easier. There were 14 per
cent who view lesser government interference under the GST regime.

Among the informal enterprises, 57 per cent stated that no scheme will
compel them to register with the tax authorities. However, 24 per cent stated
that they may register for GST if amnesty is granted for past years. There are
9 per cent who will register for both income tax and GST if similar amnesty is
granted.

These findings provide important points for tax authorities. First, tax
authorities need to design innovative outreach programmes in order to lessen
the trust deficit. These programmes, if carefully designed, can help the public
in understanding how paying taxes can improve service delivery.

Second, the number of firms registered with SECP has grown overtime. The
taxpayers’ facilitation units require expansion in order to cater to the
demands of an expanding tax paying segment. Tax administration measures that
put in place smart ICT tools can help minimise human interference and
corruption. Third, the documentation on corporate taxes needs further
simplification. It is difficult for small-scale enterprise to comply at an
affordable transactions cost.

Fourth, in case of indirect taxation, a long-term strategy for transitioning
towards VAT should be put in place. Fifth, it is important to correct
perceptions regarding corruption. The leadership at the revenue authorities
should keep a closer contact with business associations. Prompt ICT-enabled
grievance redressal will help in bridging the high levels of trust deficit.

Source: http://tns.thenews.com.pk/energy-tax-reforms/#.U148r1fImad

This article was originally published at:

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.