Money Matters

A big jolt

Money Matters
By Aadil Jilani
Mon, 06, 22

Prime Minister Shehbaz Sharif imposed a “draconian” super tax on large-scale profitable industries of Pakistan in desperation to resume the International Monetary Fund (IMF) bailout package and generate billions for next year. The government urgently needs to finance the current account deficit, debt repayments and boost forex reserves to resolve the chronic balance of payment crisis.

A big jolt

Prime Minister Shehbaz Sharif imposed a “draconian” super tax on large-scale profitable industries of Pakistan in desperation to resume the International Monetary Fund (IMF) bailout package and generate billions for next year. The government urgently needs to finance the current account deficit, debt repayments and boost forex reserves to resolve the chronic balance of payment crisis.

This raises some pertinent questions. The top most being, what is super tax? Historically, super tax used to be part of the Income Tax Ordinance 1979 and was later treated as a “levy” for Income Tax Ordinance 2001. The objective of the said tax is being charged temporarily for the specific purpose defined in the Act. But ironically, our policymakers become habitual of such short-term approaches, which is a departure from the fair and equitable taxation system. Consequently, they are relying more on fulfilling tax collection targets and burdening the existing taxpayers.

Why is the federal government imposing a super tax? The answer to this can simply be that it is doing so in a desperate move to revive the IMF programme. This government has taken some unpopular “Contractionary Measures”, including a mammoth rise in petroleum, diesel, gas and power tariff hikes to phase-out energy subsidies (though highest in the region) leading to an economic meltdown and stagflation.

Therefore, the government imposed a one-time 10 percent tax named “super-tax” on large-scale industries in retrospective effect on the outgoing fiscal year to raise over Rs400 billion for fiscal deficit financing.

According to Finance Minister Miftah Ismail, such tough contractionary measures were needed “to phase out the previous four record budget deficits under PTI government”.

On whom is the super tax being imposed?

According to the federal government, a super tax will be levied in the Finance Bill 2022 on 13 sectors which include; sugar, steel, cement, oil and gas, fertiliser, cigarettes, chemical, automobiles, banks, textile, LNG terminals, beverages, and aviation sectors.

In addition to the above,

The poverty Alleviation one-time tax levied in the Finance Bill 2022 is as:

1 percent tax on the income between Rs150 million to Rs199.99 million

2 percent tax on the income between Rs200 million to Rs249.99 million

3 percent tax on the income between Rs250 million to Rs299.99 million

4 percent tax on the income of Rs300 million and above

Outlook

This super tax is “draconian” and would negatively affect the corporate and financial sectors, which are then viewed as the backbone of the financial and economic engine, and significantly contribute to the economic development of the country.

Imposition of 10 percent super tax, when hyperinflation and commodity super cycles were already elevating the cost of doing business, and dollar, petrol, diesel and energy prices were at a historic high, it would be detrimental to growth. On top of it, the worldwide average statutory corporate income tax rate, across 180 jurisdictions, is 23.54 percent as compared to above 50 percent in Pakistan, which is too high.

It is expected that this would increase layoffs, and increase the poverty rate in Pakistan as contract-based employees will face the brunt. This would also hit foreign investments in the corporate sector and potential inflows in equities, which are needed for the country to restrict external account deterioration.

Cost of the industrial sectors that were already facing the brunt of monetary tightening and historic energy and petroleum prices would go up. This would hit private sector borrowing capacity negatively, eroding competitiveness with the rest of the world.

This super tax is controversial and cannot be the part of money bill. In my humble opinion, when the purpose of the said revenue source is clearly defined in section 4B of the Income Tax Ordinance 2001, revenue can only be accounted for as “poverty alleviation”.

The utilisation of Rs400 billion meant for poverty alleviation as claimed by the finance minister, if raised for fiscal deficit financing, would be a gross violation of section 4B of the Income-tax Ordinance, 2001.

The federal government would have to come up with a separate provisioning. Imposing levy in retrospective effect for FY22, and then diverting it to another source for fiscal deficit financing is prohibited as happened in the case of GIDC (Gas Infrastructure Development Cess) case, pending for years in courts.

This GIDC was imposed by the then PPP government in 2011 on gas companies. However, the funds were actually to be used for the infrastructure development of the IPI project. PHC (Peshawer High Court,) then declared in 2013 that the GIDC is unconstitutional, and the raised funds were to be remitted back. Later, the GIDC act 2015 was introduced by the then PML-N government after the SC verdict saying it is a cess or fee and hence cannot be a tax, still sub judice in courts.

Having said this, in the purview of the above, separate provisions are needed and cannot be part of the money bill in the retrospective effect. Therefore, Section 4B of the Income Tax Ordinance, 2001 would be challenged in the court as in the case of GIDC, pending for years. Therefore, deficit financing of Rs400 billion will remain controversial and uncertain.

In the context of the above, despite IMF “viewpoint”, it does not cement the agreed revised Federal Budget FY23 (yet to be disclosed with clarity). The more things remain uncertain, the more it triggers underlying fault lines and inflates dollar value and trust deficit.

The newly elected government is chasing politically and economically a difficult balance between fulfilling the IMF’s tough conditions and meeting public expectations in the election year. Posting high economic growth of 5 percent, controlling consumer price index (CPI) inflation at 11.5 percent, and fiscal deficit to 4.9 percent while undergoing inflationary phenomenon is an uphill task for policymakers.

The planning commission has projected growth of 5 percent for 2022-23 as a result of “contractionary” fiscal policies to be pursued in the upcoming budget. The effects of high inflation and fears of rising cost pressure due to anticipated hikes in the policy rates and deterioration in current account deficit would be a gigantic task for next year.

Federal government must curtail massive current expenditures, cut down ministries to half, restrict unnecessary protocols of the officials, freeze foreign trips unless needed urgently, take aggressive austerity measures and shift to a four-day work-week balance for energy conservation instead of pressing existing taxpayers.

An equitable, fair, transparent taxation system is needed for sustainable economic growth. Corporate income tax should be reduced gradually and made competitive. The federal government should bring untaxed sectors, including the agriculture sector (22.68 percent of GDP) and wholesale retail trade (18 percent of GDP). Only these two sectors make put around 41.51 percent of the GDP out of the tax net.

This will also reduce 20-30 percent AC, electricity bills and petroleum costs for the private sector and government sectors. The federal government energy import bill skyrocketed to $20 billion from July-May 2021-22. This needs to be cut down. In addition to this, increasing daylight saving culture, early opening and closure of markets and workplaces, and improving employees’ productivity is the need of the hour to fight hyperinflation and large current account deficit.

In addition to hyperinflation of 29 percent and historic dollar, petrol and diesel prices—-10 percent super tax on 13 biggest sectors is considered as one of the biggest jolts for a decade for Pakistan’s financial and corporate sector. This will sink the economy and collapse the high growth of around 6 percent to below 2 percent if not revisited.

Therefore, this budget does not address the IMF’s larger objectives. It is better to go back to the drawing board and revisit budget targets now than to waste time and dollars and put the economy in a further mess later.


– The writer is a data-driven economist