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June 11, 2021

A numbers game

LAHORE: Budgets in Pakistan are based on statistical jugglery. At the time of budget presentation revenue estimates are rosy and expenditure statements modest. Within a quarter or so they are revised downward to achieve budget targets.

The budget that will be presented today will be no exception. The previous government had managed to collect over Rs3,950 billion in tax revenues. Two years later in 2019-20 the present regime collected Rs3,908 billion against the original target of Rs5,822 billion that was revised midway to Rs4,200 billion. Even this target was missed. Covid-19 reduced economic activities that resulted in lower tax collection even on revised estimates.

In the current fiscal the original target announced in the budget was Rs5,464 billion after evaluating the economic situation in the country. The target was revised downwards to Rs4,650 billion and the government is well on the way to achieve this revenue collection. Technically the budgetary target will be achieved but it would be far off the mark from the original estimate. Still the tax collection would be around 15 percent higher than last year.

Next fiscal, according to the reports, the government aims to target a revenue of Rs6,000 billion. To achieve this target the federal government would have to collect 26 percent more taxes in 2021-22 than expected tax revenues this fiscal. No government in Pakistan has ever achieved such a high growth in revenues. The closest that any government came was 21 percent once in its five-year term was the last PML-N government. Would it be possible for this government to hit a tax revenue growth record?

Economists estimate the revenue pilferage by the documented sector in the current system is over Rs1,000 billion. This includes massive under-invoicing that deprives the exchequer of hundreds of billions in custom duty and sales tax. Then there are under-filers in the manufacturing sector that evade an equal amount in sales tax. The government lacks the will and the institutional capacity to plug this pilferage, which can be stopped through good governance and technology. But to apply these measures the government needs a strong political will.

No government has ever dared to confront these documented tax evaders and their comrades-in-arms in the bureaucracy. The revenue target would not be achievable without plugging this evasion. The government has already announced it was not levying new taxes. The revenues would have to be generated from within the current economic activities. Otherwise we should be prepared for another revised revenue target next fiscal.

We are not talking about smuggling that goes on unabated, depriving the exchequer of hundreds of billions in revenues. The government lacks the iron fist needed to tackle the smugglers and the retailers that openly sell smuggled items. The oft repeated step of reducing duties to curb smuggling has never worked. The smugglers manage their profits by saving 17 percent sales tax even if the duty is zero.

Exporters do need facilitation but it should not be restricted to textiles. We have some lucrative sectors each of which capable of generating more foreign exchange than textiles. The Halal meat exports from Pakistan have started picking up. Still we are nowhere near India, a non-Muslim country, which generates 12 times more foreign exchange by exporting Halal meat and its preparations. The push that this sector needs should be provided in the budget.

Pharmaceutical is another sunshine industry. The Indian pharmaceutical exports are higher than our textile exports. There should be no refund system. The FBR (Federal Boar of Revenue) has already calculated the use of each sales tax paid input in garments, knitwear, bed wear, towels and fabric. The amount should be calculated on the basis of the export invoice and payment to the exporter as soon as the export proceeds are realised. Bangladesh is doing this. There would be no question of fake refunds and bureaucratic oversight if the system is made transparent and open. In the absence of a fair system our exporters would run from pillar to post for obtaining refunds.

It is in Pakistan’s interest to present a realistic budget based on solid and scientific calculations so that planners do not have to go for midway revisions. The potential for growth is much higher provided the rulers muster the needed political will. It is the resilience of this nation that has kept the country moving even under the worst condition. But resilience has a limit and we have probably reach that.