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The budget passed by the incumbent government has a strong implicit stamp of Pakistan Muslim League-N’s (PML-N’s) archetype financial czar, Ishaq Dar. There are inherent anti-documentation and anti-export/anti-manufacturing biases, which were also the case during 2013-18.

The government has imposed supertax on sectors which are already heavily taxed while there is an inherent amnesty in the form of fixed tax regime for retailers (excluding Tier 1). It seems that Dar is running the show from behind the curtains, and he is mulling the option to return and run the economy from the forefront while Miftah is being framed as a scapegoat.

The fundamental issues of the economy have been aggravated. The government is further taxing the already overtaxed. The country’s basic economic problem is of lack of investment and lack of export competitiveness. The steps taken could potentially further erode the incentive of capital accumulation and incentives for enhancing exports. The manufacturing sector is badly hit. The industrialists are not at all happy. The investment potential in the industrial sector could further erode.

The government has not only increased the burden of taxation on the manufacturing sector which is not even 15 percent of the economy while at the same time FBR’s (Federal Board of Revenue’s) efforts (under the Pakistan Tehreek-e-Insaf government) to bring retailers and traders in the tax net have been relegated the backburner.

A fixed tax regime for retailers (excluding Tier 1) has been introduced. Tax experts have described this as the worst possible tax regime. These will be taxed on the basis of electricity bill to be treated as the final tax liability. Maximum tax liability for these retailers would be Rs360,000 per year, which would imply that a retailer’s (excluding Tier-1) maximum income is considered as Rs233,000/month (or Rs2.8 million/year).

Now that this a clear discrimination against the manufacturing sector where an additional 10 percent tax is being imposed while the retailers are having a party. Then there is no additional tax on huge trading sector. The incentives are perverse with discouragement against documentation and operating in the formal manufacturing sector. Incentives have been introduced that encourage operating in the grey. The manufacturers have greater incentive to show lower profitability by lowering documented sales.

FBR, in the past two years or so, had expedited the efforts of ‘track and trace’ to lower the incidence of undocumented sales. Under the new regime, it no longer appears to be a priority. Then the overall efforts for digitization have been decelerated through ending reduced taxes and other incentives. There was a drive on retail and supply chain digitization which was happening with the focus by FBR and finance ministry. The then finance minister, Shaukat Tarin, was pushing for it as well. Now the new finance minister has a bigger fish to fry and then there are internal party rifts for the hot seat which has put these efforts for documentation and digitization simply on the backburner.

Then to comply with the IMF’s (International Monetary Fund’s) condition of having higher revenues to compensate for the subsidy rolled out in the last few months on the petroleum products and to fund subsidy on utility stores and others, a supertax has been imposed on already taxes sectors.

The supertax of 10 percent is imposed on thirteen industries and 1-4 percent supertax on income over certain threshold has been introduced. However, effectively, the tax is going to be collected from a handful of companies. Back of the envelope calculations show that 80-90 percent of the supertax will be collected from 25-30 companies that are already heavily taxed. It is proposed that revenues from supertax shall be used to fund subsidy for utility stores. Historically, these have proven ineffective for poverty alleviation. USC subsidies create price distortions in a country where lack of compliance and enforcement is rife, and could potentially result in corruption.

Anyhow, irrespective of the usage of the collection, higher tax on manufacturing while lowering the priority on retail and trade would result in lower investment in productive sectors. The policies are like what were in the past PML-N regime — during which the goods export to GDP ratio declined from 10.6 percent in FY13 to 6 percent in FY17. There were higher taxes on raw material and intermediate goods. The import tariff policy was lopsided. Tax refunds for exporters used to be stuck. The currency was kept overvalued and precious SBP (State Bank of Pakistan) foreign exchange reserves were burned to keep currency artificially overvalued at a time when oil prices were at their decade low.

There are signs that similar policies could be back, especially if Dar is back. Miftah, on the other hand, is the proponent of a pro-export policy and industrialization. However, he no longer seems like the main decision-maker. And while during his small tenure (so far) the difficult decisions are being taken, it appears that he is not in good books of the party leadership and perhaps Dar is turning this into an opportunity to make a comeback. The word in the PML-N power corridors is that Dar got the go-ahead from the party leadership to return to Pakistan.

Dar’s decision to return and take over the reins of economic management depends on the result of by-elections on 17th July. And if he is back with full control, the country might see an illusion of improvement in the next few quarters, especially if global commodity prices recede. Otherwise, his illusion of magic may end. However, in any case, exporters and manufacturers are not happy, and with good reason.

Copyright Business Recorder, 2022

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder


Comments are closed.

Basharat Mian Jul 04, 2022 01:27pm
Sir Is it your opinion or analysis of Pak economy?
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Nasim Beg Jul 04, 2022 02:14pm
I would disagree with your interpretation of the actions taken. These are all very pragmatic decisions, designed to avoid a default that was staring us in the face. The documentation etc can wait, as it is, we should expect high levels of discontent owing to the commodity super cycle and the ensuing inflation. No point adding on traders etc to the fray at this point in time. I would think that it is a pragmatic Dr. Ismail, who has acted, and is not influenced by Mr. Dar.
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Hussain Naqvi Jul 05, 2022 12:10am
As an HOD of Business Recorder research pls write a comprehensive article on how Pakistan can overcome the financial crisis. Thank you.
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Moyglur Jul 08, 2022 03:16pm
@Nasim Beg, no point in taxing businesses who get away by not paying any tax? The logical conclusion here is that legitimate businesses will go bankrupt or will not invest further, which will result in a lower tax collection down the road. Utter incompetence.
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