close
Tuesday March 19, 2024

Double whammy

By Dr Miftah Ismail
September 26, 2018

The PTI government took two important economic steps last week. First, the Economic Committee of the Cabinet undertook the largest increase in gas prices in the country’s history.

The total annual cost to the consumers for this price increase is estimated to be Rs150 billion. The price increase for domestic consumers ranges from 10.5 percent to 143 percent and for industry and commercial consumers it is 40 percent, and finally for electricity producers it is 57 percent. Of course, this huge increase in the price of gas for power producers means that soon Nepra will allow electricity tariffs for consumers to go up, which will cause further inflation.

There is a misconception that the price of gas is going up because LNG is becoming more expensive due to devaluation and the rising price of oil. This is not true as LNG price is ring-fenced and passed on only to LNG consumers, and does not affect the price of domestic gas. And what is really surprising is that the cost of domestic gas to Sui companies is still less than Rs400 per mmbtu – so the incredible increase in selling price is not justified.

The day after the gas price increase, Finance Minister Asad Umer announced a mini-budget which not only made some changes in taxes and expenditures but essentially turned upside down the difficult measures the PML-N had announced, to considerable acclaim, to widen the tax net.

The PML-N had taken four main steps: first, we announced an amnesty scheme as a result of which not only did we generate revenues of around Rs100 billion but we also brought more than Rs2 trillion of wealth into the tax net. As a result of this scheme, tax collections in future years will keep increasing.

Most of the undeclared or illegal wealth in Pakistan is stored or hidden in land, as the official price is but a fraction of the actual cost of land. Therefore, the second step we took was to allow the FBR to buy land at twice the rate at which it would be registered and in three years at only 50 percent more than the registration price. The reason was that we wanted land to be declared closer and closer to its actual value. This is the only way forward to reduce the illegal and undocumented accumulation of wealth in Pakistan, and to let our economy grow faster. There is essentially no tax implication for the owners in this but it would bring a lot of wealth into productive use. It is now being said that the PTI will do away with this provision. If true, it would be most unfortunate and amount to playing into the hands of land developers.

The third step we took was to disallow non-taxpayers from buying properties, new or imported cars or holding foreign currency accounts. The idea was to slowly – over the next few years – choke the avenues for investment and business for non-taxpayers and bring them into the tax net. Again, it makes no sense that this step is being reversed due to lobbying by vested interests. It is now heartening to note, though, that after Leader of the Opposition Shehbaz Sharif’s cutting criticism of this reversal, the finance minister has indicated that he will rethink this step.

And the fourth and last big step we took was to reduce income tax rates for salaried and non-salaried professionals and business individuals so that more and more people find it easy to come into the tax net. We also eliminated income tax for those earning only Rs100,000 per month and reduced the rate to 5 percent for incomes between Rs100,000 and Rs200,000. The PTI has kept these provisions but raised the rate back to 29 percent for business individuals and 25 percent for salaried individuals from the reduced rates of 15 percent.

The mini-budget has also imposed new taxes of Rs93 billion, including indirect taxes totalling at least Rs70 billion. This is the highest imposition of indirect taxes in the history of mini-budgets in Pakistan. And it goes against the PTI’s stated policy of not relying on indirect taxes.

The PTI government has done a good job by exempting five export-oriented sectors of the economy from the big gas price increase. The finance minister has said that it will cost the government Rs44 billion. However, surprisingly, the government has not increased the budget for subsidy. Which means that the budget deficit target given by the PTI is unrealistic on day one and will be more than what they have projected.

The finance minister was quite critical of the previous budget estimate of provincial surplus of Rs286 billion. He said that, given the deficit the provinces ran a year ago, it was wrong of the PML-N to project a surplus. This suggested that the PTI budget would refine it and make a more realistic surplus projection. However, quite surprisingly, the mini-budget has the exact same number as given by the PML-N. Either the PTI should have come up with a different number or it should not have criticised the previous government’s estimate.

The PTI government has also slashed the development budget (PSDP) by Rs225, bringing it down from the Rs800 billion allocated by the PML-N to Rs575 billion. It says it will spend a further Rs150 billion using an “innovative method” – meaning that it will transfer the debt from government books to the books of the government’s wholly-owned companies.

Overall, it seems to me that the new budget will usher in a era of inflation in Pakistan. Whether the mini-budget, along with devaluation, will be able to mitigate our current account deficit remains to be seen.

The writer has served as federal minister for finance, revenue and economic Affairs. Twitter: @MiftahIsmail