Given the abolition of almost half of the withholding txes, the FBR will need to work hard to meet next year’s revenue collection target
The federal budget for fiscal year 2021-22 is just around the coroner. The financial managers are busy negotiating with the International Monetary Fund (IMF) on new tax measures for a broadening of the tax base. Alongside, the government is under pressure from the Fund to withdraw targetted subsidies, particularly for energy sector. Shaukat Tarin, the new finance minister, says he is committed to providing relief to industry in the forthcoming budget. Given that the government is keen on a popular budget, the challenge is to meet the targets set by the IMF and control the inflation.
Inflation is playing an important role in affecting the PTI narrative of resolute action against corruption and corrupt politicians. The government is also considering withdrawal of almost two dozen withholding taxes out of a total of 40. The withholding tax regime, introduced by the past governments, has the easiest tax collection tool. The FBR has always achieved its targets with the help of advance taxes that are adjusted over the financial year or claimed through refunds. With the abolition of almost half of the withholding taxes, the FBR will need to work hard to meet next year’s revenue collection target.
Alongside tax revenue, the federal government is also keen on increasing the non-tax revenue target to Rs 2 trillion in the forthcoming budget. The non-tax revenue is particularly attractive for the federal government as it is not a part of the federal divisible pool. Thus, whatever collection is made in non-tax revenue remains with the federal government for its expenditure. This commitment is expressed in the Medium Term Budget Strategy Paper 2021-22 – 2023-24: “The federal government will continue the existing policy of imposition of levy, cess, surcharges etc over the medium term. However, in order to introduce a new stream of non-tax revenue, a comprehensive revision of existing legal frameworks will be undertaken in consultation with ministries/divisions concerned.
“Necessary amendments in the relevant enabling laws, rules, regulation etc will also be introduced. The newly introduced provisions contained in the Public Finance Management Act, 2019, will also be enforced to ensure optimal collection of non-tax revue and to improve its reporting and reconciliation.”
For the ongoing fiscal year, the non-tax revenue target was fixed at Rs 1.61 trillion. In the nine months from July-March Rs 1.145 trillion was collected. The biggest target was petroleum development levy, which directly impacts on inflation, especially food inflation, and State Bank of Pakistan profit. The target for the ongoing year is Rs 450 billion and Rs 620 billion, respectively. In the nine months period (July-March) the government has collected Rs 369.21 billion and Rs 497.54 billion, respectively. This has encouraged the government to increase the targets for the next year to Rs 1.2 to 1.3 trillion —with Rs 600 billion to Rs 700 billion coming from both petroleum development levy and profits from the SBP.
Economist Dr Naved Hamid, director at the Centre for Research in Economics and Business (CREB) and a professor of economics at the Lahore School of Economics, also the resident director of International Growth Centre (IGC) in Pakistan, believes that increasing the petroleum development levy and meeting the collection targets would not be easy. “Strong political will be required to achieve the ambitious target of Rs 600 to 700 billion petroleum development levy. In the recent past two months, the government has been unable to increase the petroleum prices and reduce the levy component to absorb the increasing petroleum prices”, he says.
The Covid-19 pandemic had reduced the demand for the petroleum products. However, now that travelling restrictions are gradually being lifted with vaccination an increase in global petroleum demand is projected. If the oil producing countries maintain the restrictions on oil production than the global prices of petroleum will increase. In such a scenario it will be very difficult for the government to keep the higher rate of petroleum development levy. Hamid says the increase in petroleum prices will also impact food prices besides increasing tariffs of utilities, including electricity and gas.
This will be something the government will unable to control. The political impact will be difficult for the government to handle as it moves towards election budgets. Historically, the last two budgets of an elected government focus on providing relief to the masses.
Hamid says that non-tax revenue is very attractive for the federal government as it is not part of the federal divisible pool. The federal government is free to spend this revenue without sharing it with the provinces.
Hamid points out that while demand-side inflation can be managed with economic measure strong administrative measures are needed to control supply-side inflation. He says while bumper crops of wheat, sugarcane have been harvested, the prices are still out of control. This indicates administrative weakness resulting in smuggling or cartelisation. Poor governance and weak administration in the Punjab are not going to change. The administrative failures cannot be managed through financial management, he adds. He says financial management of the government has shown good direction and focus. A growth-oriented budget, with increases in salaries and pensions, is likely and faster growth will likely be witnessed. However, more resources will be required to meet the increased current expenditures, he adds.
The writer works for The News. He tweets @Jawwadrizvi and can be reached at: [email protected]