Rewiring Budget 2022

Budgets intuitively have to be about ideas. Ideas shaping expectations of economic agents and giving them real hope about a better future. Ideas nurturing economic growth. Ideas detailing a fiscal framework etched in equitable and simplified taxation mechanisms. Ideas elaborating expenditure management, carved in productive capital allocation not only for roads but to also nurture the entrepreneurs of tomorrow. Ideas ensuring distributive justice for the tens of millions, who find it tough each day of their lives. A tall order indeed!

Federal Budget 2022 for Pakistan must show case ideas beyond fiscal consolidation. However, one cannot overlook the constraints in writing a budget today. A fiscal under stress, leaving little tax rupees to be spend on a growth stimulus, and an over stretched balance sheet of the country needing semblance. That’s what makes the quality of ideas so invaluable in getting it right for the 230 million people.

The budgets of FY19 and FY20 remained firmly in the grip of stabilization policies with a dose of new tax measures estimated at Rs700 billion levied in FY19. Yet the two years ended with high red ink fiscal deficits of 9.1 and 8.1 percent respectively. That’s the harsh reality. Fiscal deficit in FY21 is likely to end higher than an estimated 7.4 percent by the government. The FBR’s revised tax collection target of Rs4,691 billion also looks unlikely, under a cloud of the third wave of Covid-19. A more likely collection of Rs4,500 billion, will slump the FBR’s tax-to-GDP to a meagre 9.8 percent – a substantive fall from 11.2 percent in FY18 – emblematic of our inability to move substantively in the tax arena.

In this humbling backdrop, Budget 2022 can pave way for a true tax reform. Progressive taxation should be the hallmark of tax policy corrections coupled with automation as the corner stone of a tax compliance reform. On the policy side: one, cutting income tax slabs and tax cuts for middle and low-income earners by increasing the exemption limit to Rs700,000. Two, doing away with exemptions for the privileged and a phased move of reduced rate of GST to a more standard rate.

Three, smart transfer pricing audits with a potential recovery of $3 billion. Four, a wealth distributive corporate levy targeting abnormal profits. Five, creating fixed and final taxation of rental income, dividends, interest income and capital gains as advance tax and bringing them into the normal tax regime.

Six, an expanded collection from tobacco, sugar, cement and fertilizer sectors through stamping regime mitigating pilferages. And, seven, mapping the potential of income from agriculture and wholesale trade which contribute over 40 percent in aggregate to GDP but a petty amount of 1.5 percent in direct taxes to the exchequer. In a broadening effort of the tax base a substantive part can come from these sectors; and on a more aggressive view a tax on land, wealth and inheritance even for a year or two can pay for the vulnerable especially during pandemic times; and clarity of recovery on stuck up arrears in taxes is a must.

On the other side, incentives can focus on simplifying tax laws especially for the 5.2 million SMEs; income tax breaks for the digital economy; healthcare expansion; agriculture warehousing and innovation sectors. These are ideas that can firmly anchor the tax policy changes.

An estimated $200 billion of untaxed economy underpins low tax compliance. A move to automation and digitization can make tax administration faceless, risk-based, efficient and growth supportive. Simplified registration and filing processes and new audit risk-based practices should be spelled out. Integrated technology solutions can improve risk management systems and provide real time processing, to help reduce inspection time and facilitate exports. These actions must be detailed with timelines in the proposed Budget 2022.

We need the tax system to work for people and businesses, not against them. Whether we set Rs5,500 billion as a more realistic FBR target for FY22 or use the stipulated Rs5,963 billion is only of consequence if we are able to substantiate it with reform ideas. Surely our domestic revenue mobilization effort will define the country’s level of debt burden inherited by the next generation.

Beyond the FBR, the Petroleum Development Levy (PDL) is a substantive area of revenues with an estimated collection of Rs600 billion in FY22. Given the current rate of PDL, the collection is likely to be less than Rs300 billion. In addition, provinces are to contribute a surplus of around Rs210 billion or 0.45 percent of GDP in FY21. Jacking provincial surplus to a whopping Rs440 billion or 0.83 percent of GDP in FY22, as stipulated in the Budget Strategy paper, is perhaps on the higher side. The above need a re-consideration.

Fiscal repair must also be visible on the current expenditure side. Guidance in three areas can showcase that federal government has a game plan at the minimum. One, a serious direction on budgeted subsidies – of both targeting and adequately budgeting – must be laid out. Two, pension reforms with a way forward on managing a burgeoning bill of Rs490 billion or $3.2 billion in FY22 needs a mention.

Three, a blueprint to slow the growing burden of mark-up payments estimated at about Rs3,060 billion or $19.8 billion in FY22 may be outlined. It can focus on re-profiling of high interest rate debt, moving further on debt service suspension initiative and debt retirement through an indiscriminate divestment program. This is all serious work, but one that can’t be left undone. Development expenditure needs a nudge in Budget 2022 which we will attempt in forthcoming pieces.

Let’s reiterate for visibility. Low tax compliance at around 50 percent haunts us as a nation. The case for the wealthy paying their due share and beyond has never been stronger, and the state must show its unfettered resolve to persuade them through tax policy. We simply cannot fall short in rewiring Budget 2022.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

Email: khaqanhnajeeb@gmail.com

Twitter: @KhaqanNajeeb