Money Matters

Forgotten promises

By Ihtasham Ul Haque
Mon, 03, 17


The country’s undocumented economy is to face harsh measures in the new budget aimed at limiting cash transactions through further burdening non-tax filers. The objective of the whole exercise is to eradicate distortions from the system, says Prime Minister’s special assistant on revenues, Haroon Akhtar Khan.

“The government will come down hard on tax evaders, but I assure you that the federal budget for 2017-18 will be pro industry, pro agriculture and pro expenditure to greatly facilitate the genuine businessmen and investors,” Khan said. “There was no plan to introduce new taxes, though some adjustments would have to be made and in this entire process, so people would be saved from unnecessary indirect taxes.”

Khan said the culture of cash transactions would significantly be restricted as the government has no sympathy for non-tax filers. “... the violators of tax laws will be dealt with iron hands. No way to succumb to the pressure of the non- filers as we are determined to reform our tax administration.”

Now that the government has given May 26 as the 2107-18 budget announcement date, a number of frantic measures are being proposed by the officials concerned to bridge the gap of Rs1.3 trillion between income and expenditure. They propose taking additional tax measures and by doing away with the remaining tax concessions and exemptions.

Federal planners are reportedly worried over their growing inability to increase revenue, particularly due to the inclusions of development projects related to China-Pakistan Economic Corridor (CPEC) that require matching funds in the new Public Sector Development Programme (PSDP).

However, Khan did not seem to be worried and said the FBR was swiftly minimising revenue shortfalls and would come up to the challenge of achieving some handsome growth in revenues. “Already eight percent revenue growth has been achieved and the entire tax machinery has been geared up to meet the challenge of enhanced revenue collection target during the remaining five months of the current financial year,” he said.

There was 13 percent revenue growth in the month of February, while 21 percent growth was recorded in January. “Overall we hope to achieve 17 percent revenue growth in 2016-17,” he said, and added that the government would also achieve five percent plus GDP growth rate compared to 4.7 percent of last year.

Khan conceded that the first six months of the current fiscal did not witness enough increase in revenues, having hit Rs120 billion, but, ”I assure you the remaining  half of the year will be beyond our expectations in terms of getting increased revenues”.

He said that this would be done in spite of the fact that the government gave Rs180 billion cash relief package to the exporters from the current budget. Moreover, non-tax income of the government, he pointed out, decreased due to fall in the profits of the State Bank of Pakistan (SBP) and public sector corporations.

“Then we have had the non-availability of resources under the US Coalition Support Fund (CSF), besides a hit to the sales tax revenue not coming in the wake of  petroleum development levy due to falling international oil prices, which had to be passed on to our citizens,” the prime minister’s special assistant on revenue said. Additionally, a number of goods were given zero rated duties, besides; a huge financial package was given to the fertiliser industry, and Rs120 billion was floated for the pesticides sector. “Naturally these decisions had financial implications, but we will hopefully fill that revenue gap eventually,” the advisor said.

Khan said the government had out rightly rejected the idea of revising downward the revenue collection target as it would have broken the momentum of all FBR efforts. “I am not much worried about it.”

“Overall fiscal deficit is reducing, our GDP is growing, inflation is manageable, all other development activities are taking place, including under the spectacular CPEC projects,  business is spreading, investment is coming in and when we go in the election next year we would have lots of achievements to win,” he claimed.

Conversely former finance minister Dr Salman Shah was not impressed and said fudging of figures was the hallmark of the Pakistan Muslim League-Nawaz (PML-N) government, and people were being deceived by the rulers.

Shah regretted that presentation of annual budget was a “one off event” that otherwise carried serious economic implications. “Actual reality is different than the presentation of the annual budget which understates expenditure and overstates income,” Shah said

“When your revenues and exports are falling and unnecessary imports are increasing, fiscal and current account deficit is widening, reserves are depleting, local and foreign debt is constantly growing, home remittances are witnessing a dip, who would say that the economy has stabilised,” Shah asked.

According to the IMF, Pakistan is losing Rs3.3 trillion annually, an amount that is higher than the current year’s total tax collection, due to administrative weaknesses, lower tax compliance, and under-reporting. The fund’s one of the recent reports – Selected Issues Paper – says that Pakistan has the potential to mobilise additional tax revenues by an amount as much as, if not more, than what is currently collected.

Pakistan’s tax capacity is estimated is to be 22.5 percent of GDP, which implies a tax revenue gap of more than 11 percent or Rs3.3 trillion. The country’s tax-to-GDP ratio is 11.5 percent and the difference between this ratio and the potential is the gap. Political opponents and critics, however, believe that tax-to-GDP ratio is close to 10 percent and that higher ratio is shown for managing somewhat improved GDP growth rate.

IMF states that narrow tax base, extensive use of tax concessions and exemptions, flaws in revenue administration, low tax compliance through informal activity and under-reporting of formal income results in substantial loss of revenue relative to potential. Pakistan has been told to broaden the weak tax base instead of burdening the existing tax payers.

Previous suggestions made by the IMF and the World Bank, forced the PML-N government to introduce Rs40 billion mini-budget to bridge the shortfall that appeared against the current year’s tax collection target.

Ever since the government took over in 2013, it imposed an unprecedented Rs$1trillion additional taxes which was contrary to its claims made before the election.

Besides 30 percent direct taxes, 70 percent indirect taxes are causing more problems to the people. Critics do not buy the official claim that direct and indirect taxes have been brought down to 35:65 ratio. In fact, they believe that the burden of indirect taxes is increasing, and the government must revamp its tax administration to plug loopholes, leakages, and other unwanted financial irregularities in the FBR to achieve 14.5 percent tax-to-GDP ratio by 2020 to strengthen debt sustainability and resilience to fiscal shocks.

The PML-N election manifesto of 2013 promised to increase tax-to-GDP ratio to 15 percent by 2018. Other political parties had similar election manifestos too, including Pakistan Peoples’ party (PPP) and Thereek-e-Insaf of Pakistan.

Going forward, serious economic strategy has to be planned for the next budget to substantially increase tax-to-GDP ratio from current 11 percent to 17 percent in the next three years. Total debt and liabilities have already increased to colossal Rs22.5 trillion and how would any government ever deal with this dismaying issue is anybody’s guess. On the external front, fresh strategy is needed to build a buffer of reserves not by higher foreign borrowing but by increasing exports, home remittances, and cutting non-essential imports.

The writer is a senior journalist based in Islamabad