Demonetising Rs5,000 Note to Boost Taxes
KARACHI: Pakistan finds itself at a pivotal moment, transitioning from economic instability to a renewed sense of optimism. While this sentiment is encouraging, it alone is insufficient to uplift the purchasing power and reduce poverty for millions. To achieve sustainable economic growth, the country must undertake bold structural reforms and enforce resolute policies.
The Need for Structural Reforms
The Role of the IMF Programme
Even with the ongoing three-year International Monetary Fund (IMF) programme, aimed at stabilising the economy, achieving a sustainable 5-6% growth will require more than just temporary measures. Structural reforms and strong policy enforcement are essential for long-term stability.
Under the IMF programme, progress has been made in various areas such as external trade, remittances, foreign reserves, and monetary policy. However, significant challenges remain, particularly in optimising energy utilisation by disconnecting captive power plants and addressing shortfalls in tax collection.
Addressing Tax Collection Challenges
The primary challenge in tax collection stems from flawed economic assumptions about imports and inflation. However, the real issue lies in taxing untapped sectors of the economy. Pakistan’s economic and strategic aspirations cannot be realised until fair taxation is enforced across all sectors.
Currently, the nearly 40% corporate tax rate, compounded by multiple indirect taxes, discourages industrialisation and job creation. Expanding the tax net to include traders, wholesalers, landlords, real estate, gold holdings, and service providers is imperative.
High Currency Circulation: A Barrier to Formalisation
The Impact of Cash Dependency
A key deterrent to formalisation in Pakistan’s economy is the prevalent use of cash. High currency circulation enables tax evasion and undermines documentation. To combat this issue, demonetisation of Rs5,000 notes presents a pragmatic solution to reduce cash dependency and promote digital transactions.
Benefits of Demonetisation
With increased digital activity, tax revenues will rise through improved wealth turnover, enhanced data accessibility, and automated tax deductions. This transition will also help curtail illicit trade, smuggling, and corruption, while fostering growth in the IT and export sectors.
Though demonetisation might cause short-term economic disruptions, mitigation measures like interest rate cuts can ease the impact. The long-term benefits include a more formalised economy and alignment with global trends in digitisation and compliance.
Learning from India’s Experience
India’s Demonetisation Success
India’s experience with demonetisation provides valuable insights. After demonetising high-value currency notes and adopting the Universal Payment Interface (UPI), the share of the informal economy dropped from 50% in 2017 to less than 20%.
Pakistan’s Digital Transformation
Pakistan’s Raast system offers a robust foundation for a similar transformation. Its ID-linked framework enables secure digital transactions for all citizens, promoting financial inclusion and reducing reliance on cash.
Despite recent reductions in cash circulation from 13% to 8% of gross domestic product (GDP), further progress is possible. Reducing this to 4-6%, coupled with enhanced financial inclusion, can significantly improve tax compliance and economic efficiency.
The Path Forward: Comprehensive Reforms
Addressing Real Estate and Gold Trading
For demonetisation to be successful, real estate transactions must be conducted at market values, and gold/commodity trading needs to be documented. Starting with the removal of Rs5,000 notes and then Rs1,000 notes, if necessary, can set the stage for a systemic change.
Implementing Structural Reforms
In addition to demonetisation, the government must focus on implementing structural reforms that have been extensively debated and finalised. These reforms include:
- Modernising the Federal Board of Revenue (FBR): Separating tax collection from fiscal policy, splitting customs and indirect taxes into independent entities, and establishing oversight boards to monitor performance.
- Reforming Tax and Tariff Policies: Adopting comprehensive proposals developed by independent economists and tax experts, rather than relying on regressive tax measures.
- Privatising Loss-Making State-Owned Enterprises (SOEs): Advancing the privatisation plans for entities like Pakistan International Airlines (PIA) and Pakistan Steel Mills.
Overcoming Short-Term Pain for Long-Term Gain
Mitigating Economic Disruptions
While some short-term economic disruptions are inevitable with demonetisation, the reform will ultimately result in a more formalised and efficient economy. Mitigation measures such as interest rate cuts can help ease the transition.
Ensuring Sustainable and Equitable Growth
Curtailing the use of cash in the black economy is essential for sustainable and equitable growth. This bold step will signal Pakistan’s readiness for a new era of fiscal discipline, digitisation, and inclusive growth. It is time to lay the foundation for a prosperous future, underpinned by fair taxation and structural reforms.
Conclusion
In conclusion, demonetising the Rs5,000 note is a crucial step towards boosting tax revenues and promoting a formalised economy in Pakistan. By reducing cash dependency and encouraging digital transactions, the country can achieve greater financial inclusion, improved tax compliance, and sustainable economic growth. To ensure the success of this initiative, the government must also focus on implementing comprehensive structural reforms and addressing the challenges in tax collection.
As Pakistan moves forward, it is essential to prioritise these reforms and create a more transparent and equitable economic environment. This will not only enhance the country’s economic performance but also improve the living standards of its citizens.
FAQs
1. Why is demonetisation of the Rs5,000 note necessary?
Demonetisation of the Rs5,000 note is necessary to reduce cash dependency, promote digital transactions, and enhance tax compliance. High currency circulation enables tax evasion and undermines economic documentation.
2. What are the expected benefits of demonetisation?
The expected benefits of demonetisation include increased tax revenues through improved wealth turnover, enhanced data accessibility, and automated tax deductions. It will also help curtail illicit trade, smuggling, and corruption, while fostering growth in the IT and export sectors.
3. How can the government mitigate the short-term economic disruptions caused by demonetisation?
The government can mitigate short-term economic disruptions caused by demonetisation through measures such as interest rate cuts, which can ease the transition to a more formalised economy.
4. What role does digital transformation play in the success of demonetisation?
Digital transformation plays a crucial role in the success of demonetisation by enabling secure and efficient digital transactions. Systems like Pakistan’s Raast provide a robust foundation for promoting financial inclusion and reducing reliance on cash.
5. What other structural reforms are necessary to support demonetisation?
Other necessary structural reforms include modernising the Federal Board of Revenue (FBR), adopting comprehensive tax and tariff policies, and privatising loss-making state-owned enterprises (SOEs). These reforms will help create a more transparent and equitable economic environment.
