Fiscal PolicyStay updated with Business News, Pakistan news, Current world news and latest world news with Business Recorder..http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy.htmlSun, 26 Oct 2014 04:14:42 +0000SRA Framework 2.0en-gbWhat’s in a name?http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/15140-whats-in-a-name.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/15140-whats-in-a-name.html“Tis but thy name, that is my enemy,” said Juliet Capulet, upon learning that the love of her life came from mortal enemies of her own clan. Continuing to address the object of her desire, “What’s in a name? That which we call a rose, by any other name would smell as sweet.”

It is not often that a situation in contemporary times resembles this famous scene from the 16th century play as closely as the relationship between the IMF and Pakistan’s economic managers.

Simply replace the “star cross’d” lovers with Pakistan’s soft-spoken, hard-hitting finance minister and the IMF’s head honcho on the stand-by arrangement, and Sheikh appears to be wooing the Fund with a similar reasoning.

After all, an indirect tax collected at every stage based on the differential between input and output values will generate the same amount of revenues for the government, regardless of whether it is called value-added tax, reformed GST or plain-old general sales tax.

The controversy-prone RGST label was never an adequate name for the tax measures to be introduced in the upcoming budget since the object of the exercise is simply to restore the Sales Tax Act of 1990 to its original, unadulterated form.

So what did the name change accomplish? For one, it allowed the government’s boisterous coalition partners to claim victory over the ‘villainous’ RGST in favour of the oppressed and burdened masses.

Secondly, by passing the buck forward through Statutory Regulatory Orders (SRO) instead of a bill tabled in the Parliament, the government quietly stepped back on its promise to lower the sales tax rate from 17 percent to 15 percent.

Various studies on the subject have proven that raising the tax rate is detrimental to any attempts to increase the tax net as prospective tax payers are incentivised to dodge the taxman.

BR research recently highlighted that the country’s tax gap is not only gigantic (79 percent of GDP), but has also mushroomed over the past four years.

However, a senior tax official brushed aside these concerns, calling the rising gap a ‘figment of calculations’. After all, talk of tax efficiency is just not romantic enough to warrant a place in this tale.

When Pakistan’s economic managers approached the IMF’s balcony (or window), looking for a friend with deep pockets, the Fund had two main demands. According to the IMF, this union would only sustain if the government could broaden the tax base and reduce its dependence on the central bank for deficit financing.

And in all honesty, the envisioned tax structure and its implementation can serve the country well as it encourages documentation of the economy. Initial estimates suggest that the tax-to-GDP ratio could improve to 12.5 percent within the next 3 years from the current (and abysmally low) level of 9.5 percent.

But just as Romeo and Juliet suffered a terrible fate because of their ill-tempered relatives, the country’s revenue collections may also be jeopardized by the powerful lobbyists and cronies already queuing up for exemptions and zero-ratings for their sectors.

The present government and its successors must empower revenue collectors and refrain from introducing ill-contrived exemptions, especially since the implementation of the NFC award has shifted the onus from the federal to provincial governments.

Reducing the number of tax slabs to three is a positive step, but economic managers should also consider lowering the basic sales tax rate to 15 percent to encourage non-filers to enter the tax umbrella.

Failing this, the current romance between the government and the IMF may end quite tragically.

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admin@brecorder.com (Administrator)Fiscal PolicyTue, 24 May 2011 09:06:25 +0000
Can pay, won’t pay!http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/11126-can-pay-wont-pay.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/11126-can-pay-wont-pay.htmlBy virtue of agriculture being a provincial subject, each province has in place a presumptive regime for the collection of income taxes from this sector. Going by the dictionary of Provincial laws, agricultural income consists of rents received from property used for agricultural purposes and income derived from cultivation or from owner-occupied buildings on the property.

However, the quantum of revenue generated through these taxes has so far been paltry. Official data show that in FY06, total revenue collected under this head by Punjab made up only 2.1 percent of the total revenue generated by the provincial government and the contribution of agricultural income tax in other provinces is equally dismal.

Lack of oversight and unjustifiable exemptions are among the biggest reasons behind the insignificant contributions to revenue from the agriculture sector, despite its significant contribution to the economy.

According to the Agriculture Census 2000, 85 percent of the total cultivable land in Punjab is exempt from agricultural income tax (AIT) because landholdings of up to 12.5 acres are considered to be ‘subsistence level’ and are thus exempt from AIT. Similarly, in Sindh, AIT is charged at different rates depending on the area under cultivation.

While proponents of the status quo have long-argued in favour of maintaining the current slabs, tax experts, including government officials, contend that minimum limits for taxable acreage are extremely high.

Renowned tax expert Shabbar Zaidi highlighted that, “The study being quoted as justification for maintaining the minimum taxable landholding at 12.5 acres was conducted in 2001,” asserting that since then the income of agriculturists has surged on the back of rising crop yields and commodity prices.

Market sources reveal that at present, the average annual rate of rent on agricultural land in Punjab is more than Rs50,000 per acre. In other words, if the rental income from farm land is Rs50,000 per acre, any individual who has rented out six acres of agricultural land receives Rs300,000 per annum. Yet, by virtue of the 12.5 acre-floor rule, this income is barred from being taxed since the land holding falls in the ‘subsistence level’.

Following the doctrine of equitable taxation, if income of more than Rs300,000 earned in other documented sectors is taxable, then the same criteria should apply to agricultural income.

In an earlier interview with BR research, Jehangir Khan Tareen had highlighted that even though an agricultural income tax collection mechanism is in place, it is not enforced because of a “lack of political will”. Elaborating on his response, Tareen said that as long as influential landlords and politicians do not pay taxes, others cannot be compelled to meet their obligations either.

To put this statement into perspective, consider the ultimatum issued to the Sindh government by the Sindh Cotton Association during a press conference in Hyderabad last week. Representatives of cotton growers warned legislators that if agriculturists or middlemen working with them are subjected to taxation, they would withdraw support for the local politicians in the next elections.

Incidentally, none of the participants mentioned the economic viability of their businesses or the reasoning for their inability to pay taxes.

Viewed in the context of crop yield and prices, it may be noted that the current price of raw cotton or phutti in Punjab is about Rs5900 per maund, while in Sindh, the same is priced about Rs5500 per maund. Similarly, the support price for wheat, as announced in budget FY11 is Rs 950 per 40kg. In fact, increases in the prices of wheat, cotton, rice and other crops have outpaced inflation in recent times, further bolstering incomes in the agriculture sector.

Mindful of the lack of political will, Finance Minister Hafeez Sheikh has stressed that tax reforms will take place, regardless of politicking. Yet actions speak louder than words and the government’s quick back-stepping on other tax reforms hints that any plans to increase the tax burden on the agriculture sector will remain on the back burner for now.

It is regrettable that just as blanket subsidies have continued on electricity and fuel prices on the pretext of guarding the financially vulnerable; unrealistic floors on agricultural income tax will also persist on the excuse of subsistence level earnings.

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smurtazag@hotmail.com (Syed Murtaza Gheblehzadeh)Fiscal PolicyThu, 14 Apr 2011 05:34:38 +0000
Tax stalemate http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/10853-tax-stalemate-.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/10853-tax-stalemate-.htmlFormulators of the national budget appear caught between a rock and a hard place as they scramble to produce a budget that not only curbs the widening gulf between government revenues and expenditures; but also face the unenviable task of improving documentation of the economy, and consequently, the tax net.

Fears that the government will resort to increasing the burden of taxes on those already paying taxes appear well-founded based on the government’s inability to break the tax impasse in recent times. The annual budget for FY10 failed to add any significant number of tax payers to the ledgers of the Federal Board of Revenue as policymakers cut corners in favour of taxing the already taxed.

The ‘FY12 Tax Proposal’ report published by the Overseas Investors Chamber of Commerce and Industry (OICCI) voices the same apprehensions of stakeholders, explicitly calling on the government to expand its resource pool instead of continuing the legacy of burdening the existing tax payers.

Starting from the emphasis on bringing agriculture sector into the tax net, which accounts for 22 percent of the GDP and just contributes 1 percent of the total tax revenue, the report stresses on increasing documentation to bring more business into the tax rate. The report also urges the government to improve coordination and linkages between various government departments.

With regard to industry-specific proposals presented in the report, the OICCI suggests bringing auto dealer network under wholesale/ retail mode. Presently, auto dealers are just acting as agents between auto assemblers and customers.

Under the proposed mechanism, dealers will maintain inventories of automotives, which would reduce delivery times and do away with the ‘own’ money system.

To make alternations in the existing supply chain system, the OICCI has made a pitch for reduction in turnover and withholding taxes since the commission earned by a dealer on a car sale is very nominal compared to the amount of taxes.

The report also mentions that distributors of fast moving consumer goods also face high withholding taxes which limit documentation as currently they earn a nominal margin on the company list price and incur high operating expenditures.

Industry experts believe that the wholesale retail mechanism will encourage documentation, as sub dealers will also become a part of the supply chain and help the government increase tax revenue by taxing distributors’ net profits.

Tax consultants opine that, in addition to the rationalisation of withholding tax, growth in tax revenue depends on how successful is the government in bringing more and more trading business on to the paper and tax their net profits – a move much-needed for effective implementation of RGST.

Ultimately it boils down to the same thing – that without taking tough and stringent measures to improve documentation, it would not be possible for the government to equalise and rationalise the tax burden amongst all profit-making segments of the economy.

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smurtazag@hotmail.com (Syed Murtaza Gheblehzadeh)Fiscal PolicyTue, 12 Apr 2011 05:51:18 +0000
ADB’s fiscal rounduphttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/10437-adbs-fiscal-roundup.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/10437-adbs-fiscal-roundup.htmlThe Asian Development Bank has reinforced what many economists in the country already feared: an impending economic fiasco, with fiscal problems leading the way.

The report, titled “Asian Development Outlook 2011”, recalled the fiscal faux pas committed by the country’s government, with the fiscal deficit widening from 5.3 percent of GDP in FY09 to 6.3 percent in FY10.

The decline in tax revenues is largely to be blamed for the deterioration of the fiscal position, with the tax-to-GDP ratio hitting a 30-year low of 9 percent in FY10.

The expenditure side also played its part, with rigid budgetary outlays (interest, security, pension payments) taking up 82 percent of FBR’s tax receipts. The overrun had to be covered via a drop in public sector development programme (PSDP), while loss-making SOEs continued to wreak further havoc.

Another key area warranting particular attention is the debt quandary of Pakistan. While the government’s domestic debt stood at a hefty 37 percent of GDP, external debt was not far behind at 32 percent in FY10.

Debt service payments highlight the gravity of having such a sizeable debt portfolio even more. The heavy interest payments accounted for over 40 percent of FBR’s tax revenue last fiscal year.

As the country trudges along through FY11, it would be idealistic to expect any sweeping improvement, especially since the July-August floods left a deep mark on the country’s economic tell-tales.

The ADB criticised the tax revenue target set at the beginning of FY11 as being a tad unrealistic, even if RGST had been imposed, considering a 26 percent growth in tax receipts was envisaged for FY11 against a 5-year average growth of 14 percent in tax revenues.

With RGST falling prey to political strife, the fiscal front seems to be bracing itself for another doom scenario. A 50 percent increase in government wages, way-higher-than-anticipated power sector subsidies, and energy-related circular debt will maintain the strain on the government’s fiscal wallet.

In such a scenario, PSDP continues to play the role of the scapegoat, with less than 25 percent of the earmarked Rs280 billion in the federal budget made available for PSDP activities in 1HFY11.

And the scarcity of funding sources leads to another economic menace – excessive government borrowing from the banking system. By 12 February 2011, government borrowing from the banking system had gone up to Rs379 billion in FY11, compared to Rs330 billion for FY10 as a whole.

But behold the optimism of the ADB: the bank is expectant of a fiscal recovery in FY12, hopeful that the political environment will sober up to facilitate better revenue generation and fiscal management. Needless to say, there remains a question to the practicality of ADB’s expectations, especially regards the political front.

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smurtazag@hotmail.com (Syed Murtaza Gheblehzadeh)Fiscal PolicyFri, 08 Apr 2011 05:08:13 +0000
Tax and the trust deficit http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/9655-tax-and-the-trust-deficit-.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/9655-tax-and-the-trust-deficit-.html

If there is one thing the present government is consistent in, it’s inconsistency. For the nth time, in its three years of rule, the government has taken back one of its earlier decisions – this time choosing to give the sales tax amnesty to the export-oriented sectors.

While moves likes these show that democracy is working with people having a say in policy-formation due to freedom of expression, freedom of association, and a free media, taking back decisions which shouldn’t have been taken in the first place makes a mockery of its governance.

The case of textiles, in particular, is one that needs a bit more enumeration, being the biggest dollar earning sector.

In this paper’s recently released publication, Industry Review 2010, all textile leaders interviewed said they were in favour of the sales tax under VAT mode. Yet almost everybody opposed it. Why?

Well, that’s because there are structural issues in the taxation system – such as the lack of automation, lack of technical capacity and capability of the tax officials, and the ill-documented nature of the economy. These put formal players at a commercial disadvantage to those operating in the grey economy.

“The cognizance of the issues involved is largely absent at the top level, and that’s why the government had to take the decision back,” says Adnan Mufti, a tax expert at Shekha & Mufti (S&M) Chartered Accountants.

 

But there is another much bigger problem that makes the businessmen shy: rampant corruption.

This view is held not only by textile players, but is almost a commonly shared national belief regarding the corrupt nature of the taxation department.

The June 2010 publication by Transparency International (Pakistan) on corruption perception, which enlisted taxation authorities in the top-ten, somewhat stamps this notion, whereas reports from the ground also point to the same.

“Approximately, 10 percent of the refund has to be paid under-the-table to tax authorities to get the refunds back; in fact, in some cases, this equals 20-30 percent of the refund value,” says Mufti.

Textile players have no option but to make these extra payments to the “undue harassment under the garb of tax jargons,” says Mufti. “When millions of funds get blocked for 6 months then you really have to pay the ‘quickness allowance’, otherwise your financial costs keep going higher and higher,” one textile player based in Lahore told BR Research on the condition of anonymity.

When asked how, then, can the government fill this trust deficit, the response from textile players is simple: improve performance in other sectors, which can then generate a “positive word of mouth about FBR’s performance,” according to another textile maker.

“We just want an affirmation that the FBR will live up to its word as regards timely refunds, and given their historical performance and their performance in other areas such as income tax, we won’t take their word alone,” he said.

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s.rs96@yahoo.com (Shoaib-ur-Rehman Siddiqui)Fiscal PolicyFri, 01 Apr 2011 07:15:54 +0000
No change in discount ratehttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/8622-no-change-in-discount-rate.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/8622-no-change-in-discount-rate.htmlThe macro headlines have been turning positive: inflation is down and is expected to remain below 14 percent for the next two months; the external account is doing unexpectedly well; and more importantly, the government is keeping its promises made to the SBP.

Two months back, Kardar was optimistic that the Ministry of Finance will abstain from inflationary borrowing from the central bank while the government will implement some austerity measures. Today, (as of March 12 to be precise) the government borrowing from the SBP is at Rs110 billion -- below the assured levels of September-end.

The Finance Minister, after a long deliberation with IMF’s team, has also been able to convince President Zardari to take some revenue enhancement as well as expenditure curtailment measures for the rest of the fiscal year. The presidential ordinance came despite tough political opposition -- both from within the party and from the coalition partners.

The current situation suggests that Rs120 billion is estimated to be generated which will bring some sanity to fiscal deficit. However, the gap by no means will retreat to the revised target of 5.2 percent of GDP promised to the Fund. However, it is expected to hover around 6-6.5 percent as against earlier fears of being close to 8 percent of the GDP.

It will be interesting to see the efficacy of these austere measures and financing pattern of deficit during the last quarter. There is nothing to come from the IMF unless RGST is implemented. However, IMF’s nod on showing some fiscal discipline lately may unblock the budgetary support disbursements from other multilateral agencies including the World Bank, ADB and IDB.

In addition, the release of Raymond Davis has eased tensions between Pakistan and US agencies, following which one can expect a handsome amount – close to a billion dollar under CSF – to come in budget accounts under the revenue head before the fiscal year comes to its close. This will also help reign in the fiscal deficit.

These are good enough reasons for the central bank’s monetary policy committee for not to maintain a hawkish stance in Saturday’s policy review. The market is expecting the same, as in the recent T-Bill auctions, the participation has been skewed towards the six-month papers unlike the trend a couple of months back when the participants were primarily interested in the three-month bill. This change in pattern exhibits that the market is not expecting interest rates to go up in the near future.

The cut-off yields for the three-month paper are down by 41 bps in the last two months indicating the low market appetite for shorter tenure papers while there is a marginal decline in 6 and 12 months papers showing that market is not expecting a decline in rates as well.

The analyst community, which was expecting a rate hike in last policy review, is following the trend and is also viewing status quo to be maintained this time.

Policy interest rate at 14 percent is too high for current levels of inflation, which has averaged 13.5 percent in the last two months, with the second half average expected to hover around 13 percent. With real interest rates marginally in the positive territory amid signs of discipline at fiscal house, monetary managers should be giving some room for growth to private sector credit by choosing not to tighten the tap.

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s.rs96@yahoo.com (Shoaib-ur-Rehman Siddiqui)Fiscal PolicyFri, 25 Mar 2011 08:33:00 +0000
Longing for long term billshttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/8621-longing-for-long-term-bills.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/8621-longing-for-long-term-bills.html

The Treasury Bill auctions in the third quarter of the current fiscal year concluded with some positive trends, suggesting the strengthening of macroeconomic indictors.

With fundamental factors pointing to a stable interest rate in the upcoming monetary policy, there has been an apparent shift in the market participation pattern during the treasury bill auctions held in 3QFY11.

Aided by a decline in price risk, the 6-month and 12-month papers have surprised the market by drawing investors away from the 3-month counter during the quarter ending March.

Hence, participation in the 3-month paper tailed off to 21 percent (of the total participation level) in the last auction from around 87 percent in the first auction of the quarter. At the same time, participation in the 6-month paper surged to 43 percent from around 8 percent at the start of the quarter.

In addition to reduction in inflationary pressures, the better tone of the market is being attributed to phasing out of government borrowing from the central bank and the recent adoption of a few appropriate corrective fiscal measures to curtail expenditures and jack up revenue generation.

Similarly, the stable interest rate outlook has also talked down the cut-off yields. The cut-off on 3-month paper that had surged to this year’s high of around 13.66 percent in the treasury auction held on January 26th (ahead of last monetary policy), fell to around 13.25 percent in the last treasury bill auction.

The decline is also attributed to a steep fall in the government appetite for 3-month paper as the ratio of the total amount of funds raised from 3-month paper fell to 2 percent in the last auction, as against 93 percent in the first auction held in 3QFY11.

The improvement in investors' temptation for longer tenor bills, along with the improvement in their acceptance ratio protected cut-off yield on 6-month and 12 month papers form a greater fall.

The cut-off yield on the 6-month and 12-month papers declined by 7 bps to 8 bps to 13.64 percent and 13.80 percent, respectively, from the highest cut-off rate touched in the auction held in late January.

In keeping with the government’s growing borrowing dependence from treasury sales, together with maturity of a sizeable portion of the government papers around Rs1149 billion falling in the fourth quarter, the government will likely to be forced to lift up the next quarter’s auction target.

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s.rs96@yahoo.com (Shoaib-ur-Rehman Siddiqui)Fiscal PolicyFri, 25 Mar 2011 08:27:13 +0000
Hafeez takes Pakistan on IMF trackhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/7399-hafeez-takes-pakistan-on-imf-track.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/7399-hafeez-takes-pakistan-on-imf-track.htmlFollowing the parliament’s failure to take the much-needed steps, the President has ordered measures to be taken to curtail the mounting fiscal deficit within 5.3 percent of GDP.

This can be analogous to the bridge finance facility for fiscal support, availed from the IMF in lieu of the delay in FoDP disbursements. However, its fate beyond a quarter depends upon parliament’s support in the coming budget.

Nonetheless, this is a step in the right direction, which comes after a series of long deliberations between the country’s economic managers and the Fund earlier this month. Political leadership of the ruling party has finally been convinced by the finance minister as regards the horrendous consequences of not fulfilling the IMF conditions.

Mind you, the conditions of the Fund, old and new, essentially come from domestic policy experts who recommend different measures to the Fund’s officials, and the latter, in turn, make those recommendations as conditions for the political leadership.

Two and a half years back, when Pakistan went to the IMF and prepared a programme to implement RGST as a reform process to document the economy, advisors of the Tax Administration Reform Project (TARP) suggested that it is imperative to document the economy for increasing the tax-to-GDP ratio and tame fiscal deficit.

The IMF, whose objective is that the country should have fiscal and financial discipline to safeguard its funding, therefore, started pressing on RGST and other conditions. However, RGST couldn’t follow through due to the dispute over services sales tax between the federation and the federating units.

After a year-long extension sought from the IMF, the last budget promised RGST implementation from November, but could not do so. Now when the provinces are on the same page, the coalition partners have become staunch opponents.

The MQM rightly argues on grounds of equitable taxation system, that agri and real estate income should be taxed first before increasing the burden on the existing urban taxpayers.

Dr. Sheikh, within the federal jurisdiction, attempted to design a midway solution by lifting the exemptions on sales tax of agriculture inputs including fertiliser, pesticides and tractors.

Then is the smart move of keeping GST on sugar at half the rate, but on actual market prices rather than the much lower assumed ex-factory price of Rs28.88/kg. This may create a delicate balance of not hurting consumers as well as producers considerably.

Zero rating on the five export-oriented sectors is restricted to export registered manufacturers cum exporters on export proceeds only. As for their domestic sales, GST will be deducted at factory at normal rates.

This way, the potential conflict of the delay in refunds can subside. However, the withdrawal of exemptions on sales tax on plants, equipment and machinery for export-oriented sectors could only be adjusted through domestic sales, and, if the former is more, refunds have to be made by the FBR.

It will be interesting to see how the next budget deals with measures on GST, as the life of Presidential Ordinances is three months and it has to be endorsed by the Parliament thereafter. This seems like a daunting task in the prevailing political turmoil, as reportedly there is resistance within the party as well. Not to mention other parties are openly criticising the mini budget.

The likely life of other measures, including income surcharge of 15 percent for the last four months of the fiscal year, and the increase in special excise duty by 150 percent is for the rest of the fiscal year.

This step is taken on the basis of showing the IMF some commitment from fiscal side and to bring some sanity on fiscal deficit. The effective tax rate for corporations for FY11, therefore, is going to be 36.75 percent.

The government envisages to raise additional Rs53 billion from all revenue measures to partially compensate expected fall of Rs87 billion from FBR’s budgeted target.

In addition the government has rightly planned to tighten expenditures for the rest of the year by slashing development expenditure, banning fresh recruitment and purchase of durable goods and 50 percent cut in non-salary expenditure.

This is estimated to save Rs67 billion. In total, the fiscal balance is envisaged to improve by Rs120 billion or 0.7 percent of GDP. However, it is unlikely for the government to limit the fiscal deficit to 5.3 percent of GDP and it may reach around 6 percent of GDP.

Reducing the fiscal deficit to a sustainable level is also dependant on reduction of subsidies. The delay in timely rationalising of electricity tariffs has already added to the stocks of circular debt. A hike of two percent every month will impact the flow, and the stock adjustment load will be borne by the budget.

Keeping a lid on borrowing from the State Bank is of paramount importance. Adjusting the existing monetary overhang and firmly resisting fresh money creation will address the very root of our economic mess and help reduce inflation to single digits.

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s.rs96@yahoo.com (Shoaib-ur-Rehman Siddiqui)Fiscal PolicyThu, 17 Mar 2011 08:24:34 +0000
Farming tax http://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/6217-farming-tax-.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/6217-farming-tax-.html

It’s nice to see somebody from the government finally speaking up on the failure in taxing farm income so far.

Media reports suggest that the federal government, led by finance minister Hafeez Shaikh, has been urging the provinces to tax agricultural income, real estate, and wealth, in order to ensure their respective fiscal balance.

The move comes months after the RGST has met a stalemate, amid rising concerns over Pakistan’s failure to tax its elite, a bulk of which is constituted by the agricultural landlords.  Shaikh’s suasion might also be linked to US Secretary of State Hillary Clinton’s earlier remarks that Pakistan must tax its rich if it wants to continue receiving American financial assistance.

There is an imminent need to increase the tax-to-GDP ratio. However, making the farming businesses pay might not result in higher taxes, overnight.  Earlier studies reveal that the taxation of the farming sector would have generated “Rs4-5 billion at the most“, according to former SBP governor Ishrat Hussain.

Today, in the wake of rising farming income levels, that number might be around Rs10-15 billion, which is only about 1 percent of the budgeted tax revenue for FY11 or a little above 2 percent of the direct taxes budgeted for this year.

The idea, however, is to bring the rural economy into the documented sector, and hence increase tax revenues over time by virtue of the benefits of bringing the ancillary businesses into the tax net.

The revenue so collected from these areas should then be spent on the same people from whom it is collected, where top spending avenues should include health, education (including vocational skills), and other infrastructure, preferably routed through the system of local government.

It is pertinent to note that the law related to farming tax exists; for example “there is 15 percent of tax on agri income if you own or lease more than 50 acres of land,” according to Jehangir Tareen.    However, the flat tax is not the full and final liability, it’s a presumptive tax and if the income is more then additional taxes have to be paid

The real problem, however, is that nobody pays taxes, neither in Punjab, nor in Sindh. “There is no political will of provincial governments to collect it,” said Tareen adding that the ‘arthi’ or the middleman also pays zero tax.

Achieving this political will is a daunting task, and any debate on this subject can move towards morality, which is not the main point of discussion here.

But here is something that can be done: since the IMF conditions are prepared in consultation with independent domestic economists, perhaps an advice can be given to the IMF to make agri tax a condition for any further tranche. Then again, when the politicians couldn’t roll out RGST, how could one expect that they tax their own bread and butter?

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s.rs96@yahoo.com (Shoaib-ur-Rehman Siddiqui)Fiscal PolicyWed, 09 Mar 2011 05:29:52 +0000
The finmin’s daydreamshttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/6076-the-finmins-daydreams.htmlhttp://www.brecorder.com/home/br-research/pakistan-macroeconomics/fiscal-policy/6076-the-finmins-daydreams.htmlThe ministry of finance seems to be playing a merry go-round with the IMF, as another round of negotiation resulted in zero concrete conclusions.

Till a few weeks back, there were voices within the MoF that fiscal deficit would be as high as 8-8.5 percent. But that could have well been a tactical move by the politically motivated finance minister to pressurise high ups in the party as well as leadership in the opposition and coalition on taking economic reforms.

However, the move didn’t work out as PML-N parted in Punjab after the expiry of 45 days of its so-called economic agenda, albeit rationalisation of the cabinet and subsidising petroleum and electricity prices were in line with PML-N’s agenda. Tying the knot with PML-Q’s unification bloc gave Sharif brothers just the right escape route to part their way.

Sensing that at a time when the IMF delegation is back on the negotiation table, Hafeez Sheikh, despite the non-materialisation of any reforms, has almost overnight become confidant over confining the fiscal deficit at 5-5.5 percent of GDP.

It was premised on implementing a one-time flood surcharge and additional special excise duty through the presidential order, which can only increase revenues by 0.3 percent of GDP. However, the President’s office denied any such fiscal measure to be taken, as it would mean the bypassing of the parliament.

The Finmin also lobbied to increase the petroleum prices after a lull of three months by 10 percent to partially match the international prices hike in the past four months. But as expected, it turned out be a political move and the decision to revert half of the hike came in just three days.

The MoF officials are reportedly saying that there is no immediate need for IMF funds. That’s true! IMF’s remaining tranches have nothing left for fiscal bridge financing, it’s all for balance of support. With reserves covering 6months of imports and the bonanza in cotton products and other commodities exports pricing, there is no need of an immediate cushion of further reserves until the time the government will have to start paying back the IMF.

But this conclusion is a no brainer. This seems like a mere statement to make up for the failure to convince the fund’s delegation. IMF’s nod is imperative for fiscal support, and for poverty alleviation programmes committed by the World Bank, Asian Development Bank and Islamic Development Bank.

The other multilateral agencies’ support has been put on hold on account of non-compliance to IMF’s conditions. It appears now that any measure is not possible before the budget, but with the weak political standing of the government, hoping for meaningful steps even in the budget would be akin to living in a fool’s paradise.

Nonetheless, be prepared for fiscal deficit of 6.5-7 percent. And keep your fingers crossed on economic stability amidst policy inaction.

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smurtazag@hotmail.com (Syed Murtaza Gheblehzadeh)Fiscal PolicyTue, 08 Mar 2011 06:13:12 +0000