Majority of Pakistanis were dejected after hearing the budget speech on the evening of June 3, 2014. Not because there was no relief for the poor. This was not expected by anybody from the pro-rich government. The real cause of disappointment was reiteration of lack of will to tax the rich. On the contrary, the brunt of indirect taxes was further increased on the poor and the salaried class. The government also failed to take any credible measures for revival of the ailing economy.
The major taxation proposals showed that the poor would face more miseries due to regressive taxes, whereas the rich and mighty managed to retain proper personal taxation on their colossal income and wealth -- the Income Support Levy 2013 was abolished. The gigantic bureaucratic apparatus -- epitome of bad governance -- got raises in pay and pension. Not a single step has been taken to curtail enormous perks and benefits of the public office-holders, judges, high-ranking civil-military official -- these could have been monetized to save billions.
All independent economists are unanimous that the government of Pakistan Muslim League-Nawaz in its second budget has failed to meet the economic challenges of the day. Even after one year, no proper strategy has been prepared to initiate long overdue fundamental reforms and solve basic issues like power shortage and infrastructure development on priority basis. Thus, it was nothing but the 67th bureaucrat-controlled budget containing the same old rhetoric about an illusory economic revival and development!
What should the budget 2014-15 have been like? This question was never discussed in public or even within the party. Our political parties have yet not learnt that they need to have select committees working on various matters to produce well-thought-of, well-debated and well-researched policies. Since no such exercise was undertaken by the PML-N, the budget 2014-15, as usual, was prepared in the same old style -- routine and archaic.
While preparing this important document, nobody realised that at this juncture of history, Pakistan needs class stability to avoid chaos, civic strife, lawlessness and religious obscurantism. The burgeoning debt servicing, increased military budget, high inflation, unjust tax system, wasteful expenses, industrial slowdown, recession, inefficiency and bad governance pose serious challenges to our survival. But, in the budget no serious effort is made to address these challenges -- the budget-makers were more interested in tinkering with figures here and there to balance the books through foreign and domestic resources (some purely imaginary or unrealistic).
The budget has failed to provide steps to bridge the tax gap of over Rs4000 billion. Tax potential of Pakistan is not less than Rs8 trillion. The simple calculation is: suppose we have 5 million individuals having annual taxable income of Rs1.5 million (a very conservative estimate), total income tax collection from them comes to Rs1750 billion. If we add income tax from corporate bodies, other non-individual taxpayers and individuals having income between Rs400,000 to Rs1,000,000, the gross figure comes to Rs. 4500 billion -- the budget 2014-15 fixed direct taxes target only at 1180 billion. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30 per cent of actual potential. The real potential of indirect taxes is not less than Rs3500 billion. The budget did not outline any measures to bridge the prevalent tax gap.
The fundamental tax reform of making the FBR an efficient organisation, run by professionals, was again ignored. No step was also taken to introduce an independent and efficient tax appellate system so that tax obligations are judiciously imposed rather than through arbitrariness and highhandedness. The FBR, having failed to force millions to file income tax and sales tax returns, keeps on creating huge demands against the existing filers. This is the reason why people do not file returns as they say that once you do so then you are under constant threat of being blackmailed by officials and in case you do not oblige, you are subjected to arbitrary orders.
The real issue of non-taxation of super-rich who owe billions to the national exchequer is conspicuous by its absence in the Finance Bill 2014. The real challenge of enforcement of tax laws compelling all persons having income of Rs400,000 or more to file tax returns was not addressed by the finance minister effectively.
For the last many years, the FBR has miserably failed to tap the real revenue potential, which is not less than Rs8 trillion and this has adversely affected the provinces as they mainly depend on what the federal government collects and transfers to them from the divisible pool. Pakistan is thus, caught in a dilemma: federal government is unwilling to grant the provinces their legitimate taxation rights (for example sales tax on goods) while collecting too little to meet their overall financial demands. The size of the cake -- divisible pool -- is so small that nothing substantial can be done for the welfare of the poor masses, no matter in which part of the country they live.
The goal of generating sufficient resources from the rich for the less-privileged remained unattended in the budget. The earmarking of taxes at the local government level to solve woes of the poor has been ignored completely. No provincial government is ready to meet its constitutional obligation envisaged in Article 140A: "Each Province shall, by law, establish a local government system and devolve political, administrative and financial responsibility and authority to the elected representatives of the local governments."
Track record of the federal government shows remote possibility of collecting tax revenues of even Rs5 trillion (target fixed for next fiscal year is just Rs2810 billion) in the coming three years to give enough fiscal space both to the federation and the provinces to come out of the present economic mess, thus providing some relief to the poor, trade and industry. Pakistan will remain under debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, there is an urgent need to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy without taxation rights and equitable distribution of income and wealth is meaningless.
Pakistan cannot come out of perpetual economic and political crises unless the provinces are given true autonomy, ownership of all resources, generation of own revenues (through harmonised sales tax on goods and services within their respective geographical boundaries as is the case in Canada) and exclusive right to utilise self-generated funds for the welfare of their denizens through self-government as enshrined in Article 140A of the Constitution. Budgets, like the one announced for 2014-15, being ritualistic exercises, can never solve the real challenges faced by this country.