In the old mould

The four-time finance minister has opted for a regressive taxation approach

In the old mould


he Pakistan Democratic Movement government presented its second budget on June 9, announcing some ambitious targets to address economic vulnerabilities and accomplish the goal of economic sustainability in the country. The government has set the GDP growth target at 3.5 percent, while expecting 21 percent inflation.

The medium-term micro-economic framework indicates that imports for the FY 2024 are projected at $58.7 billion, whereas the export target is set at $30 billion leaving a huge gap between imports and exports. However, the targets for the FY 2023 were initially projected at $66.4 billion (imports) and $32.4 billion (exports) respectively. These were revised at a later stage and brought down to $54.5 billion and $28 billion, for imports and exports, respectively.

The overall outlay of the budget 2023-24 is Rs 14.46 trillion. This includes both bank and non-bank borrowings of Rs 3.4 trillion, privatisation proceeds of Rs 15 billion, net revenue receipts (both tax and non-tax) of Rs 6.9 trillion and net external receipts of Rs 2.5 trillion. The revenue mobilisation proposals of the government indicate that it is planning to collect Rs 3,759 billion in direct taxes; Rs 1,178 billion in customs duty; Rs 3,538 billion in sales tax; and Rs 725 billion in federal excise duty.

For achieving these targets, the government has introduced a few revenue mobilisation measures, such as improving the regulatory framework, aimed at simplifying trading across the border and boosting cross-border trade.

The initiatives to enhance the ease of doing business are commendable. These include digitisation and use of technology and the introduction of Automated Duty Draw Back Payment System to facilitate exporters. Pakistan Single Window will digitise and facilitate cross-border trade, including measures for automated customs clearance system at all the entry points, such as seaports, dry-ports and land border stations. The government is keen to enhance regional connectivity. It plans to sign agreements with several countries such as China, Uzbekistan, Russia and Tajikistan to enhance cross-border trade.

The government is also planning to expand the track and trace system already implemented in the tobacco, sugar and fertiliser sectors, to the cement industry. The Inland Revenue Enforcement Network (IREN) has been established to stop the illicit movement of tobacco and sugar.

The government claims that broadening the tax base is its priority. It says regional tax offices (RTOs) have registered 912,392 million taxpayers (by March 31, 2023), against a target of 700,000. They are now aiming to raise the number of taxpayers from 1.2 million filers to 3.5 million in FY 2024.

To add value in revenue mobilisation and save time and cost the government’s approach is to introduce soft initiatives. However, these soft measures might not survive the heat of various taxes and duties that will suppress the impact of such measures and raise the cost of doing business, which is a continuous hurdle to industrial as well as revenue growth.

In non-tax revenue measures, Petroleum Levy (PL) budgeted at Rs 869 billion stands out. It is reported that the government is going to raise the PL from Rs 50 to Rs 60 per litre. This raise will spur both inflation and the cost of doing business. The targets for Gas Infrastructure Development Cess and Natural Gas Development Surcharge are Rs 40 billion each.

The projected growth in non-tax revenue is around 83 percent. The government estimates an increase in profits from State Bank of Pakistan alone at Rs 0.7 trillion, contributing around 55 percent to the estimated total growth of Rs 1.3 trillion in non-tax revenue. Suggested orthodox measures will not add any out-of-the-box value but further stress the current taxpayers and the already struggling families to meet their budgetary targets.

These figures show a non-serious attitude towards introducing policy measures to address fiscal challenges through revenue growth although the government is still in the International Monetary Fund’s approved Extended Fund Facility (EFF) having agreed with the lender to initiate structural reforms as a condition. However, despite a lapse of four years, it has failed to honour this commitment.

The focus during the last four years has remained on implementing action items to meet our fiscal needs, which included imposing taxes, surcharge, duties and raising prices of electricity and petroleum products and presenting mini budgets.

However, policy actions, such as privatisation, curtailing of circular debt, reducing the government’s footprint in the state owned enterprises (SOEs), combating corruption, reviewing excessive regulations discouraging people from paying taxes, registering properties and cross-border businesses, streamlining the FDI approval process, investing in human capital and education, initiatives for improving product market accessibility and adoption of information and communication technologies have been ignored.

The divestment of two LNG-based power plants, a development finance institution and a small public bank, agreed with the lender, are still on paper only.

These facts and the budget documents released by the government for the forthcoming financial year indicate that a similar practice will follow in the near future. Fiscal challenges will be met by raising duties and imposing taxes/ surcharge on the current taxpayers. The budget documents lack a strategy to plug leaking of revenue. There is no visible eagerness for privatisation of loss-bearing SOEs and amendments in relevant laws to simplify the process.

Improving governance and curtailing corruption remains a big challenge. The lender was promised a review of the anti-corruption framework and improvement in accountability laws. Though the incumbent government has made certain changes in the accountability law, these have yet to align with international best practices.

Money laundering is another challenge. Though the global watchdog (FATF) removed Pakistan from the list of jurisdictions under increased monitoring, we have yet to comply with some recommendations on technical compliance and effectiveness levels on eleven desired outcomes.

The government’s approach to movement of illicit funds has been passive. This is a matter of concern. In 2023-24, the government is expecting to receive $33 billion from foreign remittances. It has introduced various incentives for overseas Pakistanis. However, there is no mention of preventing the smuggling of greenback, improving border controls and training of officials to enhance their knowledge and awareness on various techniques of currency/ instruments smuggling, utilising modern tools for prevention.

The significant gap between inter-bank and open market dollar rates is promoting the informal remittance system. Effective measures are needed against the operators of alternative remittance system (hundi and hawala).

Persisting with the same exercises/ mistakes will not get us different results. Undoubtedly, the government is facing huge challenges. Still, there is potential to address those as long as there is willingness to adopt best contemporary measures to deal with them. This time the federal budget, prepared by our fourth-time finance minister, was expected to focus on concrete policy measures to help ease the financial burden on the people, paving the way for generating enough revenue for improving social indicators and building infrastructure. However, he has opted for his predecessors’ approach of regressive taxation.

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA

In the old mould