Money Matters

Weighing up returns

By Ihtasham Ul Haque
Mon, 05, 17


The Pakistan Muslim League-Nawaz (PML-N) government is contemplating various proposals to make available required funds for its populist fifth and last budget to be presented in the national assembly on May 26 this year. The bigger challenge, however is, how to bridge the growing gap between income and the expenditure in the presence of falling revenues in order to present any viable annual budget.

The officials of the ministry of finance and the Federal Board of Revenue (FBR) are burning mid night oil to manage new resources to achieve the proposed Rs4 trillion (Rs4,000 billion) revenue collection target being set in 2017-16. The current revenue collection target of Rs3,610 billion, it is said, is highly unlikely to be achieved, leaving behind an expected Rs150-200 billion revenue shortfall by June 30, this year.

Now, when revenue shortfall is being predicted both by the official and unofficial quarters, why is the government planning to set Rs4 trillion revenue collection target in the next budget?

The matter gets worse on the face of finance minister Ishaq Dar’s statement made in Washington last week that the government has no plans to introduce new taxes in the budget. How would the government accomplish its task without imposing new taxes is an important question, particularly in the backdrop of creeping new tax exemptions being offered to Chinese companies under the $54 billion China-Pakistan Economic Corridor (CPEC) projects.

Earlier, the government had withdrawn close to Rs480 billion tax exemptions under the three-year $6.6 billion International Monitory Fund (IMF) Extended Fund Facility (EFF) programme. And now, with more tax breaks roughly amounting to Rs200 billion being offered to Chinese as well as couple of other Pakistani companies, preparing a sustainable budget seems to be a tall order.

The job, insiders maintain, cannot be realised without imposing indirect taxes, if not direct taxes. Indirect taxes still are part of 65 percent overall taxes, which usually come under the garb of mini budgets besides through upward revision in various utilities including petroleum, power and gas etc during any financial year.

Generally, it is believed that the government, like always, would seek substantial local and foreign borrowing to meet its budgetary requirements amid slowdown in revenue growth and higher expenditure that is needed for the election year. The government is struggling to get rid of its image problem, for which it wants to shower benefits on the people. It is a strategy for the government to win the fast approaching election in the year 2018, though many politicians, including Pakistan Tehreek-e-Insaf’s Imran Khan and Sheikh Rashid, as well as Pakistan Peoples’ Party’s Asif Ali Zardari, see that happening in 2017.

The new budget would be presented by the current government in the wake of lofty promises they made before and after the 2013 elections. One of those promises was the complete elimination of load shedding by the year 2018. In the face of suffering close to 18 and 20 hours of load shedding, the failure to address the electricity problem, could harm the PML-N government dearly in the coming days and months. The public backlash could appear in the form of defeat for the government in polls.

According to the finance minister Ishaq Dar, the new budget will be pro-growth and pro-poor, with the added objective of ensuring an improved environment for the ease of doing business and increasing financial inclusion aimed at achieving higher, sustainable, and inclusive economic growth.     

The new tax exemptions being given to projects under the CPEC are one time propositions, which means they will be over with their completion, unlike the previous exemptions that had recurring impact on the already fragile revenue collection. Nonetheless, the CPEC projects have significance in terms of giving reduced revenues, which will certainly have an impact in meeting the revenue collection targets as well as restricting fiscal deficit.

Officials often plead for extending tax benefits to the Chinese companies by saying that the government of Pakistan is bound to abide by clause 4 of the CPEC framework agreement that promised preferential conditions to help improve cash flows of major investors, including the China Gezhouba Group and China Three Gorges Corporation.

There is no doubt that the economic corridor  projects have both short and long term significance when it comes to the transformation of the infrastructure and energy sectors, which is why the government of Pakistan maintains it ought to extend tax breaks to the Chinese firms.

The issue needs a lot more careful consideration, especially since the government- both in the centre and in the federating units –has failed in better mobilisation of tax collection as well as in broadening the tax base. It is worth noting here that when the 7th National Finance Commission (NFC) Award was announced on December 30, 2009, both the federal and provincial governments had committed to achieving minimum 15 percent tax-to-GDP ratio by 2015-15 against the 9.3 percent prevailing in 2000-10. The 7th NFC award was finalised with a hope that the additional tax-to-GDP ratio would help meet the funding requirements of both the federal and provincial governments. However, the previous and the current governments failed to add the necessary 5.7 percent tax-to-GDP ratio. Why was the state not able to augment revenue with additional tax?

A report prepared by the NFC is an eye opener. The report said that all the five governments failed to deliver on their promises to increase their tax-to-GDP ratio to 15 percent in five years.

Interestingly, the federal government admitted to its failure and said it could increase only 0.2 percent of the tax-to-GDP ratio against the target of 3.95 percent in five years. This meagre increase resulted in a very slight increase from 9.4 percent in 2013-13 to 9.5 percent in 2015-16.

At that time, finance minister and all the four provincial finance ministers had promised to find out new resource mobilisation. The then finance minister Shaukat Aziz and four provincial finance ministers assured of working hard to find out new tax avenues without putting much burden on the common man. While the centre looked for improving tax slabs and tax the untaxed sectors, the provinces at that time vowed to increase their income by adequately collecting real estate tax and by sufficiently taxing the farm income.

Unfortunately, it did not happen and the result was that new resource mobilisation remained the major issue in bridging the yawning gap between income and expenditure. While Punjab has shown slight improvement in its tax collection effort, the other three provinces have been disappointing in this regard.

The NFC report wondered why the federal government’s efforts showed a negligent 0.2 percent revenue growth despite taking a number of initiatives including doing away with a big number of Statutory Regulation Orders (SROs), the objective of which was to broaden the tax net.

The good, thing, however, was that number of tax filers increased from 700,000 to one million during the last financial year. But the number of tax payers could not increase beyond 2.2 million.

Whenever the new financial year arrives, every government tries to haphazardly increase revenue by imposing new taxes or by rationalising them. The end result remains disappointing as one does not see a political will on the part of the rulers to increase tax income. One of the major sectors – agriculture continues to be effectively out of the tax net due to the strong lobby in the parliament also supported by the bureaucracy due to its vested interest.

Pakistani economist, Dr Mehboob ul Haq (late) used to say that “landed gentry” ears Rs600 billion annually but does not pay Rs10 billion as part of its tax on farm income. He said this almost 30 years ago and there is no action till today to effectively charge tax on agriculture income. The issue has been dubbed as a provincial subject, therefore cannot be touched by the federal government.

There exists an opinion within the government that seeks to amend the Constitution to make farm income a federal subject. Agriculture still forms part of 22 percent of the $300 billion economy. Is it not a shame that hardly Rs2 to Rs3 billion are collected annually through tax on agriculture income? Bigger agriculturists do not keep their thousands of acres of land in their name to avoid being taxed. Effectively, this tax starts on 12 acres and above, but it is no secret that this all is a big joke to avoid paying taxes.

Those who differ with Dar, including independent economists say that GDP growth rate is hovering between 3 to 4 percent for the last four years and that 5 percent plus growth rate is misleading.

The officials of the Pakistan Bureau of Statistics are alleged to work out growth and other macroeconomic figures on the dictates of the finance minister by manipulating growth numbers. These economists often argue that if there is a 5 percent plus growth rate, it does not reflect in the people’s day to day living in terms of jobs, poverty eradication and improvement in other economic indicators. When would the finance minister satisfy his opponents and critics over these growth numbers is yet to be seen.

The writer is a senior journalist based in Islamabad