Budget 2022-23 – Amended

In our previous article (BR: 13- 6-2022) we had examined Budget 2022-23 from the point of view of the IMF (International Monetary Programme). Our conclusion was: Evidently, the budget appears to be falling short of the requirements which the Fund would be insisting on. People had presumed that Fund was worried about petroleum subsidies and beyond that there were no deal breakers as much of it was signed off by the outgoing government and then reaffirmed in Doha.

But the fact that the staff level agreement was not reached, the deal still remains uncertain. Going back on budget proposals after negotiations would be embarrassing for the government while the uncertainty about the future of the programme would continue to bedevil the economy.

Unfortunately, the above conclusion was right. In closing the budget, the Finance Minister announced far reaching tax changes in the proposed budget. We would examine what is the extent of new tax measures and whether justified on ground of equity among taxpayers.

In the original budget, revised estimates for FBR revenues is shown as Rs.6000 billion out of which Rs.182 billion collected on account of GST on POL have been excluded assuming continued zero rating of GST during 2022-23. Thus the base level of collection comes to Rs.5818 billion.

For next year, FBR assumed an autonomous growth of 14.3% leading to a revenue of Rs.6649 billion. This was inadequate as the nominal GDP is projected to grow by 16.5% (11.5% inflation and 5% growth) and if revenues are not rising as much as nominal GDP then you would keep taxing more to realize the same amount as before. In addition, new tax measures of Rs.355 billion were taken, which takes the projected revenue to Rs.7004 billion in the original budget. This number represented an increase of 20% over the adjusted revenue of Rs.5818, and 3.5% more than the nominal GDP growth of 16.5%. But against the revised target of Rs.6000, the growth is 16.7%, almost the same as nominal GDP growth.

Now the Government has yielded to the IMF demand and has set up a fresh target of Rs.7470 billion or an additional effort of Rs.466 billion. The measures adopted include a 10% Supertax on selected corporations which had earned significant profits in recent years. This raises the effective corporate tax rate from 29% to 39%.

Budget 2022-23 and the IMF programme

It is estimated that Rs.200 billion would be mobilized from this measure. Furthermore, another area that required substantial revision was personal income tax (PIT), which as we had pointed out was diametrically opposed to what was needed. Rather than taxing more, the budget had uniformly reduced the tax liability across all slabs giving a relief of Rs.47 billion. This has been corrected by restoring the taxable income of Rs.600,000 as opposed to Rs.1,200,000 and progressively higher marginal rates have been applied.

In addition, higher income brackets are also subjected to Supertax from 2 to 4% of their taxable income. Therefore, as against a relief of Rs.47 billion, a net effort of Rs.35 billion is now expected. The additional revenue is worked out at Rs.82 billion by adding the withdrawal of concessions of Rs.47 billion.

Moreover, additional measures on customs and excise duties have also been taken. These measures would provide another Rs.184 billion to make up the required tax effort of Rs.466 billion.

The other most significant tax effort is on account of petroleum levy. The rate of petroleum levy has been increased from Rs.30/Liter to Rs.50/Liter which again was not announced at the time of original budget.

The amended target for PL is now Rs.850 billion indicating an additionality of Rs.100 billion. However, to work out the potential yield from PL we note that the monthly consumption of two main products, petrol and diesel, is 2.3 billion liters or 27.6 billion liters annually. Assuming full levy is imposed with effect from 1 July, the annual collection would be Rs.552 billion due to marginal increase of Rs.20/Liter.

Overall yield from PL is Rs.1380, which is a staggering sum. Reportedly, PL at Rs.50 and GST @ 11% would be imposed from 1 July which means a huge tax effort.

Taken together, this is an unheard level of taxation where the total tax effort exceeds Rs.1000 billion, which is 1.3% of next year’s nominal GDP of Rs.78 trillion, which is unprecedented for a single year. We have following observations.

First, what has happened with the budget process is quite embarrassing and shows our inability to acquit ourselves honorably. There is no parallel in our fiscal history where such massive changes have been enacted during the process of budget approval.

What was in here which was unknown at the time of budget presentation on 10 June? Clearly, the government could have avoided the embarrassment and pain to taxpayers if it were to announce the real budget from the outset. Second, the entire burden of new taxes has been placed on the shoulders of existing taxpayers, which is quite inequitable.

With considerable aversion and disfavor if taxpayers consent to this burden, it must be taken as absolutely a one-off measure for the year and must be withdrawn next year.

Third, it is a bit paradoxical to note that there has been an increase of only Rs.178 billion in the current expenditures relative to revised estimates for 2021-22 and Rs.300 billion in development compared to revised estimates of Rs.500 billion and yet only the tax measures announced have exceeded more than a trillion.

What it means is that the expenditure overruns during the current year have become permanent and new taxation has been resorted to finance them. This is untenable.

Without expenditure rationalization, no sense of fiscal responsibility can be enforced. Fourth, given the dependence on PL and the option of bringing back GST on POL, one should not expect any relief on POL prices even if international prices begin to fall, for the reason that reduced cost would go to make-up the shortfall in these two taxes first before passed on to consumers.

Finally, what is hidden in the maze of above numbers is the harsh reality of unbearable burden of interest payments. Out of the net revenues of Rs.5 trillion a staggering number of Rs.4 trillion (80%) would go for interest payments. Of the remaining expenditures, totaling to Rs.5.5 trillion, 4.5 trillion would be financed through borrowings.

We support the measures because of the Fund programme, which looks imminent because of them. But it is a temporary solution. Our fiscal system is broken. Unless it is fixed at the grass roots level, there is no hope we can put the country on a sustainable path of economic growth.

Copyright Business Recorder, 2022