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Balancing the budget

The pickup in the Pakistan economy is largely a result of fiscal incentives at the back of high deficits, debt deferral of approximately $3.6 billion by the G20, concessional credit to the private sector of 5 percent of GDP and an increase in demand through income support programmes. The foremost desire of economic managers in Budget 2022 is to strengthen the green shoots in the economy and push for a higher growth trajectory. A noble goal indeed.

In some sense, the idea is to spend our way out of the contractionary and Covid dip to a more sustainable growth, with Budget 2022 jacking up developmental spending at the federal level to Rs900 billion, and overall to Rs2,102 billion. Ambitious spending is likely to add incremental GDP. For context, Budget 2022 sets a development-to-GDP outlay at 3.9 percent – still catching up to the 4.7 percent spent earlier. Key areas of spending include food, water, energy, road infrastructure, climate change, regional equalization and CPEC promotion. All good ideas indeed. Current spending, especially subsidies, have been jacked up to Rs 682 billion, with a major share of Rs596 billion for the power sector. Increase in subsidy can slow the growth in circular debt and delay a rise in tariff.

Revenue target for the FBR is set at Rs5,829 billion for FY22 – an uphill task without new measures. Autonomous growth may bump revenues to Rs5,300 billion, leaving a shortfall of Rs529 billion. Budget 2022 thus proposes a total of Rs506 billion in measures. Enforcement measures of Rs242 billion include broadening, track and trace, and point of sales while removing harassment. In addition, new net taxation measures of Rs264 billion are proposed. Gross taxes of Rs383 billion include Rs116 billion in income tax, Rs215 billion in sales tax (ST) and Federal Excise Duty (FED) and Rs52 billion in customs duty (CD). Proposed concessions of Rs119 billion include Rs58 billion in income tax, Rs19 billion in ST and FED and Rs42 billion in CD.

Key revenue measures need detailed scrutiny. ST measures focus on the following: an upping to the standard rate of 17 percent for items like LNG, silver and gold jewelry, fat-filled milk. Removal of zero-rating on crude oil leading to ST of 17 percent at the import stage. Withdrawal of exemptions and a levy of 17 percent ST on imported luxury food items. Levy of 17 percent ST on online platforms delivering to the comfort of our homes – a nascent industry which could have been protected. Moving ST on sugar to retail level, adding Rs7 per kilogram to its price. The combined impact of the above is Rs105 billion. Economic modeling can apprise us of the inflationary impact of these measures.

Proposed FEDs on mobile calls, SMS and internet data fetching Rs100 billion stand withdrawn – requiring new measures. New corporate income tax measures include withdrawal of exemptions of Rs80 billion through an Ordinance in March 2021. Two main proposals include withdrawal of 100 percent tax credit for new industrial undertaking and taxing inter-corporate dividend at 15 percent. In addition, interest income, property income and capital gains have been brought into normal income regime, adding Rs10 billion – a step in the right direction.

On the CD side, an effort is made to remove anomalies from the cascading structure of tariff, enhance import substitution through rationalization of tariff on industrial raw materials and intermediate materials, and promote export-oriented manufacturing. Duty enhancement measures include mobile phones, bigger cars, tyres, luxury goods and MS petrol. In all, the proposed revenue measures for FY22 will increase indirect taxation to 62.5 percent, surpassing the estimated 58.8 percent in FY21 – a less than desirable direction.

Budget 2022 makes an aspiring effort at business supportive measures. Twelve withholding taxes have been withdrawn on bank transactions, travel, marginal financing, CNG and petroleum products – a positive for income tax filers. Turnover tax is reduced to 1.25 percent, easing burden on businesses. For small cars of 850cc, ST, CD, ADC and RD rates have been reduced – but a thinking on public transport may be more useful. The IT sector’s export of services has been rightly zero rated and electric vehicles have been incentivized.

The threshold for registration of ST for cottage industry has increased to Rs10 million. Where this helps lessen regulation, it creates more informality in the economy. The above measures are the correct realization to improve the declining investment-to-GDP ratio of 15.3 percent in FY21. Reduction on capital gains tax to 12.5 percent may need reconsideration, given the concentration of wealth in the country. Privatization proceeds at Rs252 billion are a good omen – likely to come from the two RLNG power plants. It is though unclear why the privatization money is being treated as non-tax revenue instead of capital transfers.

The average Joe in the country is looking for earth-shattering moves in the budget. Ideas likely to touch the low and average earners include a reduction in tax liability by 25 percent for women entrepreneurs, interest-free loans, increase of minimum wage to Rs20,000, salary increase of 10 percent, and simplification and special taxation regime for SMEs with a hope of people becoming entrepreneurs. Ehsaas, a decade-old success story, has an enhanced spending of Rs100 billion and a vertical and horizontal expansion. It is likely that small farmers may get a new direct subsidy. Cheap credit for housing is also ongoing.

Areas needing further rethink are the budgeted amounts of the petroleum levy at Rs610 billion (requiring a price hike), a whopping provincial surplus at Rs570 billion, a mark-up payment of Rs3,060 billion – 36 percent of the budget (upward trajectory needs a break), and rising pensions at Rs480 billion (reforms to break the growth are a must). Salary structure rationalization of high earners and some distributive new ideas need a serious revisit; $26 billion of export of goods is hardly enough. Modelling for higher exports with policy push can be considered.

With incentives to industries, a push on agriculture, an attempt to reach the vulnerable, and yet a quantum of new revenues to satisfy international partners – a balancing act is certainly being attempted. However, a lot of active day-to-day management is the elephant in the room.

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

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Twitter: @KhaqanNajeeb