EDITORIAL: The budgeted tax revenue target for the current year is 4.9 trillion rupees, in synch with the projected revenue for 2020-21 by the International Monetary Fund (IMF) in documents on Rapid Financing Instrument dated April 2020 uploaded on its website. This target, according to Federal Board of Revenue (FBR) sources requesting anonymity, is reminiscent of the 'unrealistic' tax revenue budgetary target of 5.5 trillion rupees (in synch with the IMF's projections in its July 2019 documents) that was challenged by country's independent economists on the grounds that: (i) a growth rate of 1.5 percent would be unable to generate the target; and (ii) reliance on widening the tax net in one year is unlikely to bear fruit because of the anticipated resistance by entrenched interests of the politically influential.
In the ongoing year the growth rate is budgeted at 2.1 percent; however, few independent sources expect this to be realized given that multilaterals, including the IMF, have projected a growth rate of 1 percent which indicates that the Fund remains focused on structural adjustments in key sectors, particularly the poorly performing electricity and tax sectors, thereby requiring the government to raise utility tariffs (to achieve full cost recovery) and tax collections (to contain the budget deficit) - regarded as business dampening policies - rather than pro-growth policies. Disturbingly, to government's team like its predecessors remains focused on raising tariffs or passing on the buck for its poor performance on the hapless consumers instead of improving its own performance and raising taxes rather than revisiting the tax structure regarded as unfair, inequitable and anomalous to meet the revenue target.
Reports indicate that the government is considering raising corporate taxes further and this is likely to push the corporate sector, currently paying the high rate of 29 percent (with an additional 2 percent of profit on workers welfare fund) to take advantage of leakages in the system. The FBR in its attempt to meet the 5.5 trillion rupee target last year did away with presumptive taxation and declared presumptive tax rates as minimum tax which from the FBR perspective may have been akin to having your cake and eating it too but from the business angle it stifled activity. In this instance the government may well have realized it's excess that is manifestly anti-business and realized that raising taxes does not lead to higher tax collections as beyond a certain point the law of diminishing returns comes into play.
In 2018, Asad Umer, the then Finance Minister, had correctly pointed out that the FBR policy-makers had a tendency to introduce tax measures that are easy to collect, including General Sales Tax at source and withholding taxes mainly in the sales tax mode collected by withholding agents, and whose incidence is greater on the poor relative to the rich. He pledged to change this as it was putting excessive burden on existing taxpayers. Two years down the line the reliance on oil/fuel as a source of revenue remains though the finance bill 2020 includes two noteworthy measures: (i) a narrowing of the rate between filers and non-filers which has reduced withholding tax collections, and a (ii) new instrument of agreed assessment that calls for all those cases under litigation to agree to an assessment with the FBR - a decision whose success and/or failure would be evident by the end of the year.
The government's preferred sector to jumpstart the economy, the construction sector, has so far not shown the rise that it has the potential and would need an extention in the amnesty scheme with respect to basic inputs in spite of tax incentives beyond its expiry on 31 December 2020 announced in April 2020. While there is a gestation period for the construction industry to pick up and go full steam ahead, an extension in the amnesty scheme may be resisted by the fund in the ongoing negotiations on the second mandatory review. Any further delay in the tranche release by the IMF would have serious repercussions on access to concessional funding (Pakistan requires around 13 billion dollars to meet its debt obligations in the current year minus the 1.7 billion dollar debt deferment by the G20 to poor countries due to the pandemic) with a consequent rise on reliance on debt instruments (including swap arrangements with China and foreign commercial banks) to shore up reserves. Unfortunately, the country is between the rock and a hard place and it is not yet clear which way it will go: higher taxes on existing taxpayers but at the cost of lower output and/or higher leakages implying higher evasion and consequently lower total collections, higher utility rates at the cost of making our exports uncompetitive because of higher cost of inputs and raising inflation, convince the Fund to raise growth prospects while slashing current expenditure that in the budget is lower only to the extent of the debt relief granted by the G20.
Copyright Business Recorder, 2020
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