For the first time in Pakistan’s chequered history additional revenue measures were annexed to the budget by a sitting government though the budget announced on 10 June has not yet been passed by parliament.
The projected rise in revenue of this budget is well over three quarters of a trillion rupees and ideally merits debate by the finance committee (Senate) that has already ended its deliberations and, as per usual practice, on-sent its recommendations to the House for consideration. Perhaps in an attempt to deflect a request for a re-sitting of the finance committee to deliberate on these new measures the Finance Minister stated on the floor of the House that he has incorporated most of the recommendations put forward by the committee.
In previous years, there was much hullabaloo in the run up to the budget speech followed by recommendations by parliamentarians in the finance committee (many with significant financial interests that they visibly safeguarded) as well as on the floor of the House for amendments - the stronger the opposition the more acrimonious the debate. At the end of the debate the budget was easily passed given that the constitution requires a simple majority for the passage of the finance bill which, by definition, governments have.
However, in most years the budget became inoperative on 1 July, the start of the fiscal year, as governments purposely overstated the Public Sector Development Programme (to show the electorate of their commitment to development), as well as revenue collections both with respect to the divisible pool that in turn upset the provincial budgets considerably, and in terms of other taxes particularly Petroleum and Gas Infrastructure Development Cess.
In years when the country was on an International Monetary Fund (IMF) programme governments typically relied on mini-budgets, read usually more taxes on existing taxpayers, as and when the expenditure revenue shortfall became unsustainable. In some years there were more than two to three mini- budgets announced.
In this context one would hope that the Finance Minister sticks to a budget deficit figure instead of upping it to suit his narrative: the budget documents place the deficit for the current year at 7.1 percent, on a private channel he cited the figure of 8.6 percent and in his speech 8.95 percent “of the old GDP”.
But never in the country’s history has the government upped taxes while the budget has not yet been passed. This decision is proof positive that the budget did not take account of the IMF prior conditions, in spite of the fact that Miftah Ismail, the Finance Minister, stated ad nauseum that all roads lead to the IMF. One would hope that the Prime Minister takes serious note of this lapse on the part of his economic team leaders.
One tax seemingly annexed is a 10 percent supertax on 13 largest industries, that earned more than 300 million rupees in the outgoing year, which is projected to generate 465 billion rupees. In other words, this tax would be liable for the current fiscal year 2021-22 ending on 30 June 2022, that maybe categorized as a mini- budget rather than an annexure to next year’s budget. It will not be applicable on 2022-23 earnings as it is a one-time tax or so tweeted Ismail later on Friday no doubt to forestall any pass-on to the hapless consumers as there is simply too little time given that financial close of 12 of the industries is 30 June excepting banks and financial institutions that close on 31 December.
However, to assume that the assurance that it is a one-off tax would appease concerns of these industries that the tax once imposed and paid would not be a source of revenue in future, especially as Pakistani budgets are continuing to raise current expenditure by about 15 to 20 percent each year with widening revenue shortfalls, is perhaps wishful thinking.
The objective of the supertax is perhaps the opposite of Dar’s decision to eliminate the 480 billion rupees circular energy debt in June 2013 through borrowing from the banks on the second last day of the fiscal year with the intent to place the blame of a widening budget deficit on the Zardari-led government.
The 13 industries include sugar (Prime Minister’s family business), steel, oil and gas, cement, LNG terminals, fertilizer, beverages, cigarettes, banks, automobiles, aviation industry and chemicals. Ismail claimed that his own family business would pay above 200 million rupees in tax, though he did not clarify whether this would be in addition to its existing taxes or whether he has adjusted the benefit the company would receive from a reduction in the customs duty on flavouring powders for food preparations from 11 to 3 percent in the budget 2022-23.
On the face of it the supertax can be supported however time will tell whether this tax would be passed on partially or entirely to the consumers in the forthcoming fiscal year (difficult if not impossible to isolate as inflation would be rising in any case due to a rise in the cost of inputs – capital, energy, transport). This in turn may further erode the value of each rupee earned by the common man and/or the Benazir Income Support Programme beneficiary; and, if not, then there is a need to assess the impact it would have on the financial viability of industrial units that may compel them to decide to relocate their units in other countries with a consequent negative impact on growth and employment.
Be that as it may, the proposal for the supertax was reportedly submitted by the Federal Board of Revenue (FBR) to the IMF staff before the 10 June budget, who insisted that there is a need to raise personal income taxes (a direct tax whose incidence is based on the ability to pay principle).
Second, the government has already reversed the tax exemption limit from 1.2 million (100,000 rupees per month) rupees to 600,000 rupees per annum (50,000 rupees per month). Ismail is on record as having stated that he would not impose a personal income tax on those earning between 100,000 to 200,000 rupees per month (income earners who previously paid a flat rate of 100 rupees). This group of earners constitutes 75 percent of all existing taxpayers, representing a sizeable constituency, and it was the considered opinion of the Finance Ministry and the FBR, reportedly conveyed to the Fund, that it would be preferable to impose the super tax. The fact that this decision has been taken in addition to the supertax highlights the serious shortfalls in the 10 June budget with respect to meeting the IMF prior conditions that were not up for renegotiation as independent economists and the Business Recorder had repeatedly counselled.
However, for the public not to focus on this key taxation measure that would impact on the middle income earners the announcement of a massive raise in taxes on high incomes was also announced notably those earning 150 million rupees per annum would pay an additional one percent tax, those earning 200 million rupees an extra 2 percent, 3 percent in addition for those earning 250 million rupees and 4 percent additional on those earning 300 million rupees per annum. This tax too would be for one year, Ismail claimed on the floor of the House, however if this is under a poverty alleviation tax then it will be challenged in court as it comes under a levy not a tax – a levy which cannot be passed in a finance bill.
Finally, Ismail stated during his speech in parliament that taxes have been imposed on the rich and elite and companies to generate more capital from them so that “we don’t have to beg for money from the world” – a claim that falls by the wayside given his previous statements setting the reliance on external sources at 36 to 37 billion dollars, later upgraded to 42 billion dollars, a historic high. Given that 21 billion dollars is earmarked for loan amortization/interest payments and 5 to 6 billion dollars for strengthening the foreign exchange reserves there is a dire need to slash expenditure massively that would reflect sacrifice by the government that matches that required from the taxpayers — rich and poor alike.
Copyright Business Recorder, 2022