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June 13, 2019

Hitting them harder where it hurts the most


June 13, 2019

LAHORE: There were no surprises in the budget 2019-20. The government rhetoric apart, as expected the budget devastated the economics of the common man. It would be a miracle if even half the growth target is met.

This assessment has got nothing to do with any bias against the present regime as it is based on simple fact. The decisions taken were not rational. Take, for instance, the withdrawal of zero-rated duty from the five exporting sectors and continuation of energy subsidy worth Rs40 billion for them.

The planners did not take into account the impact of the withdrawal of the scheme even if the refunds are made exactly as committed by the state.

The rate of sales tax on the purchase of all their inputs is 17 percent, which should be refunded to the exporter by the central bank immediately on the receipt of the an export proceed. The time between the procurement of inputs and the execution of export order is at least three months.

It takes another four months after shipment for export proceeds to materialise. This means that 17 percent of the exporters’ cash would remain stuck for seven months. Now consider the case of regular exporters that execute their orders on monthly basis. They will find 17 percent sales tax paid on each of these exports jammed till the first refund is realised (if there is no bureaucratic snag). It means 17x7 or 119 percent of their cash that is higher than their monthly exports would be stuck, causing liquidity problems for them.

If they arrange this cash from the bank they would get it at 12.5 percent plus 3-4 percent premium from the commercial banks. This would be unbearable for them and make exports expensive. The exports are bound to go down.

This is likely to happen despite the fact that the government would be parting with Rs40 billion worth of subsidy approved for the exporters. The decline in exports would impact the viability of many exporting concerns and some might close down.

If the government was so keen on giving this subsidy it should have studied the impact of withdrawal of zero-rating on exporters. One cannot condone the exporting industries for failing to deposit sales tax on their local sales. However, the rate of sales tax could have been reduced.

Earlier it was 5 percent on local sales and zero on exports. Now it is 17 percent both on local sales and exports. Most probably this step taken by the government would backfire and exports would take another plunge. The question is: are we in a position to bear it?

The economic planners have repeatedly vouched that while finalising taxation proposals they have moved heaven and earth to ensure no more hardships for the common man. Is it really so? Just shielding power consumers using up to 300 units per month is not enough. That segment is the largest consumer of the country as well.

The increase in sugar tax would hit the low-end consumers more. The affluent now-a-days go for non-sugary expensive sweeteners. Most of the revenue generated from higher federal excise duty of edible oil would ultimately come from the poorer consumers. Bakery items would hit common citizen more than the elite that had already been consuming expensive imported confectionaries and other baked delicacies even before the tax was imposed. The additional excise on cement would hit the poorer segments aspiring to build a home. Similarly, the high sales tax on steel products would make construction-grade steel out of the poor’s reach. Raw steel is imported and its prices have already shot up due to high devaluation of rupee. The higher sales tax would have a multiplier impact on its prices. And houses built without steel/iron would be unsafe to live in.

The most cruel joke in the budget is the announcement of meager austerity measures of around Rs23 billion, while the government has slapped new taxes worth over Rs519 billion.

Moreover, it intends to jack up the revenues in the next fiscal with a whooping Rs1,550 billion through enhancement of existing tax rates and other measures.

No assurance has been given by the state that it would not seek any supplementary grant at the end of the year under the head of public administration expenses. The government would certainly collect taxes that it has imposed but to add another Rs1000 billion from other measures would be impossible. The axe would fall on development expenditure.

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