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May 22, 2020

Enigma: Taking on titanic targets with a no-tax budget?

Business

May 22, 2020

LAHORE: It is an enigma for experts as they just cannot wrap their minds around the idea the government aims to achieve revenue target of Rs4.8 trillion as dictated by International Monetary Fund (IMF) without imposing new taxes in the Budget FY2021 and instead is promising more facilitation to businesses.

It is true that the economic planners are groping in dark as they have no precise idea about the actual hit the economy will take because of pandemic. However, they certainly know that even under the best scenario it would not be possible to achieve the revenue target of Rs4.8 trillion. They were way behind this figure in the first eight months of this fiscal when there was no pandemic. The economic recovery, once the current crisis, is over will be slow. We may end up with the closure of numerous industries. Asad Umer has already predicted that about a million small enterprises were facing complete wipeout because of pandemic.

The current financial crisis is of different nature than all earlier ones faced by this country. The manufacturing sector and other businesses were already making efforts to survive before the pandemic. Their finances were not in good shape. High inflation, high interest rates and massive depreciation of our currency had taken its toll on the viability of many businesses.

Auto sector had posted over 40 percent negative growth in pre-pandemic months, textile sector growth was hardly two percent. Retail sales were down as the inflation-bitten consumers were hardly left with consumable surplus.

The pandemic has multiplied that depression. Pakistan would be posting its first negative growth in more than six decades. Government’s hands are already full because of the ongoing huge expenses on healthcare system. The businesses would limp for a while before posting some growth.

The taxes would come from the incomes of the industries, services sector and individuals. Incomes of the individuals are on decline or static as companies have either reduced the salaries of their employees, while those that are still posting growth have withheld increments. Many businesses including manufacturers and service providers have pruned their workforce. Those rendered jobless are unlikely to be employed soon.

Business activities would remain subdued for a considerable period next year. Some lucrative businesses like marriage halls and restaurants have not been operative for the last two months.

Hotels are without guests. Majority of these sectors would find it hard to resume business as they booked heavy losses as their edible stocks went bad, the marriage halls in addition had to return advances took for booking their halls.

The pandemic had hit at a time when the marriage halls were fully booked for two to four days a week. The hotels that maintained their empty rooms incurred heavy expenses and those that would have to spend lot of money to make the rooms livable. Transporters are also in bad shape as are the airlines. Industries would be lucky if they operate on even 60 percent of their installed capacity next fiscal.

Increasing revenues next fiscal with these ground realities would be impossible if the finance adviser lives up to his promise of no new taxation next fiscal. He has been careful not to promise that the tax rates would not be enhanced. You do not levy any new taxes, but you can still increase the percentage at which current taxes are being collected. He has promised more imports of industrial inputs at zero rate. Will he be able to satisfy the trade and industry? He lacks resources to dole out more than what the government has already announced. The government has already subsidised some loans for all businessmen. The State Bank of Pakistan has brought down the policy rate to 8 percent, but businessmen are not satisfied as they want it to be as low as 5 percent.

The government has to collect taxes to manage state affairs. It is in a tight corner. Collecting taxes according to its target would only be possible if the economic activities accelerate. But with projected growth rate of under two percent next fiscal achieving the revenue target would be impossible.

Moreover, it has to also part with a bulk of tax revenue under national finance award. The debt servicing burden largely comes from domestic debt. This burden has subsided after decline of 5.75 percent in policy rates. The military expenses, however, would have to be increased. Corona virus related expenditures and subsidies would be much higher than the relief the government received on debt servicing because of lower interest rates.