IMF's move of 15% GST on medicines:
Alleviating poverty by taxing the poor!

Dr. Ikramul Haq

The most irritating and ironic part of imposition of 15% general sales tax (GST) on retail price of medicines, through a Presidential Ordinance announced on March 21, 2002 [perhaps an official gift on Pakistan Day falling on 23 March], is that it has been imposed under a conditionality of IMF’s three-year Poverty Reduction and Growth Facility (PRGF) loan that is presumably aimed at reducing ever growing poverty in Pakistan. It is a most novel way to reduce poverty by heavily taxing medicines, making these beyond the reach of the poor. Do the IMF and their local lackeys intend to eliminate poverty or the poor? This most lamentable anti-people move has left no doubt in anybody’s mind that their actual intentions as reflected by their actions are diametrically opposite to their tall claims.

Nowhere in the world essential food items and medicines are taxed under GST or VAT (value added tax) regime and if at all it is done so, for meaningful documentation of economy, at a very nominal rate of 1% to 2%. In Pakistan, our most obedient servants of the IMF decided to tax a sector relating to the fundamental needs of the people, at an exorbitant rate of 15% and that too on the retail price instead of trade price, asking the manufacturers and importers to pay the last stage tax at the first stage. This is adding insult to injury. It is like killing two birds with one stone; they want to destroy the drug manufacturers/importers and the consumers at one go.

The health facilities in Pakistan are already inadequate, poor and expensive. The State has never bothered to provide basic health facilities, the allocations in Federal and Provincial budgets to health and education sectors are dismally low compared to defence and law and order, and now imposing unbearable burden of GST has inflicted another fatal blow. Instead of providing meaningful incentives to the health sector, it is strange that the military government under IMF dictates conceded to a condition that is not justifiable on any ground– economic, moral and social. The revenue impact of this disastrous move is admittedly meagre i.e. only Rs. 4 billion, whereas progressive tax (wealth tax having incidence on wealthy classes alone) worth Rs. 6-9 billion has recently been abolished. The rich and mighty, with the connivance of civil-military bureaucracy [most of whom are now either rich themselves or related to them through matrimonial connections of their sons and daughters], is increasingly reducing its own tax burden and shifting the incidence of taxes on the helpless masses of Pakistan.

In case this trend is not checked, the day is not very far when the country faces a civil disobedience movement motivated by a tax revolt. On the one hand the PRGF is [apparently] aimed at reducing poverty in Pakistan (sic) and on the other a disastrous move has been made to push the most needy people of the society towards a situation where they will not have any means to obtain essential drugs, although the State keeps on claiming that it is committed to providing health and education facilities to every citizen. This self-contradictory move unveils the real intentions of the IMF and their local lackeys. They are not interested in alleviating the poverty but to promote consumerism and more revenue for self-aggrandisement.

The question of eliminating all kinds of exemptions available under the Sales Tax Act of 1990, under the conditionalities of PRGF, has never debated or brought to the public’s knowledge simply because of the reason that we do not have any democratic institutions where such issues get open debate and endorsement or rejection. The military regime since its capturing of power in October 1999 is blindly following the international donors in formulating economic and tax regulations resulting into awesome burden for the general people whose economic conditions are worsening and their purchasing power is fast eroding.

This move could have been made acceptable by adopting a middle path. As it was unavoidable under the conditionalities of PRGF, the right course was to impose a nominal GST [between 1 to 2 per cent] on the trade price at each stage to fulfil a contractual obligation with IMF and at the same time avoiding unbearable tax burden for the poor and middle class population.

The claims of the Chairman Central Board of Revenue and Director General of Health, in a joint press conference held soon after the imposition of the GST, that money collected through this tax would be spent on health facilities, is merely an eye wash. Both the gentlemen are certainly aware of the fact that there is no way to locate the source of revenue collections reaching the exchequer. Had it been a matter of allotting additional Rs. 5 billion to the health sector, it could have easily been done from the enormous amount of Rs. 3927 million collected by the CBR in the form of wealth tax in the financial year 1999-2000. This source alone, if not abolished with effect from 1st July 2000, could have brought much larger amount that could have been diverted to vital social sectors like health and education. There is no doubt that wealth tax is a tax on rich and any proceeds from it, if spent on health and education facilities, adequately serves the purpose of redistribution of wealth, which is the most sought for objective of taxes in any civilized society.

Our successive regimes are resorting to eliminate progressive taxes like Estate Duty, Gift Tax, Capital Gain and Wealth Tax, which are essentially taxes on the rich and imposing regressive indirect taxes which take less portion of the income of the rich and a large portion of the income of the poor. What a tragedy that a progressive tax worth Rs. 5-8 billion (although the Department was collecting a very meagre potential of this tax due to inefficiency and corruption) is replaced by an anti-people tax worth Rs. 5 billion with the justification that the entire proceeds will be utilized for the betterment of the health sector. It was more appropriate to give the entire Rs. 5 billion of wealth tax to health and education sectors but that was only possible by first taxing the high and mighty sections of the society, which the CBR is neither willing nor allowed to do. The ruling elite wants to spend (which is again doubtful) an extra Rs. 5 billion on health by robbing the poor, but is not at all willing to contribute a single penny from its colossal (ill-gotten in many cases) wealth.

There is no quarrel about the imposition of GST/VAT on all consumption, which is the only way to document the economy, and not through ill-fated National Survey conducted recently by the CBR stalwarts, pushing the economy to further negativity. Being a consumption tax, the GST/VAT can be used effectively to check wasteful consumption [taxing luxury items at higher rate] by collecting more tax from the rich who are more prone to higher consumption. However, all over the world there is a consensus that essential food items, educational tools/equipment/accessories and medicines are not wasted even if distributed free and that’s why they are not subjected to GST/VAT. In principle, these items are not subjected to any consumption tax as their use is considered an essential human need. Every civilized government keeps the prices of these items within the reach of the less privileged sections of the society, but in Pakistan we are doing the opposite. Over the period of time, successive governments have raised the prices of essential items beyond one’s imagination and today’s Pakistan is one of the most expensive places to live keeping in view the ratio of cost of utilities, food items, education and medicines and the per capita income.

Only 2% rich and mighty of the Pakistani society who own 80% of the wealth of the nation are unaffected by onerous tax moves such as unprecedented 15% GST on medicines, rise in petroleum products and utilities. Their wasteful consumption on luxury goods has never been taxed beyond the standard rate of 15% under the GST/VAT regime to dissuade them from such indulgence. On the contrary, the common man is continuously being over-burdened with exorbitant indirect taxes such as the recent one on medicines. It is understandable in a society like ours where the poor have to pay more than their capacity as the mighty are not paying anything or too less as compared to their potential.

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