The Federal Budget 2024-2025, in our opinion, is a simple recipe for stagflation: persistent high inflation combined with high unemployment and stagnant demand. One fails to identify a single measure or step that reflects any plan for sustainable growth and employment generation.
This budget, in essence, appears to be a cash collection exercise to the tune of Rs 12,970 billion plus Rs 4,000 billion in non-tax revenue under the standard inevitable guidelines of the IMF. They are lenders of the last resort for our sinking economy, but not necessarily knowledgeable partners of our circumstances.
We respect their sincerity of purpose; however, their primary interest is to keep our ship floating as we are a state of 250 million people with nuclear assets. It is our duty to correct our economy by ourselves where we have miserably failed in the last 75 years.
The year to follow does not seem to be different. Our only problem is the positive statements given at the podium by every Finance Minister in the National Assembly for 75 years that a right way forward has been identified and the country will be out of the crisis. Nevertheless, this false hope, which we call illusion, is repeatedly pursued. We feel sorry for the person who presented the budget in the assembly as he has to deal with and defend political expediency.
The worst part of the equation is that major untaxed sectors of the economy such as retailers and wholesalers that represent over 25 to 30 percent of the economy have been left untouched for political reasons. It is considered that ‘Tajir Dost Scheme’ where only 30,000 people out of over 3 million have registered themselves is a success story. There is no measure to bring into the sales tax regime over 3 million unregistered industrial and commercial consumers of electricity and gas. It is a low hanging fruit but not favoured for political reasons.
The whole burden of administrative reforms in tax structure has been shifted in devising tax collection mechanism for non-filers. This absurd concept exists only in Pakistan.
It appears that the government does not seem to be aware that almost all the shopkeepers and unscrupulous industrial and commercial units are filers. The problem of under-declaration is greater than non-declaration’s. The sectors known for under-declaration such as batteries, motor-cycles and white goods are all filers. So this mantra of ‘non-filer’ is another ‘Lal Batti’ which has been lit by the bureaucracy.
Cash position and current expenditure
Taxes collected in the oppressive manner are used in the following manner. The fundamental question is whether the current expenditure, which eats up the entire revenue, and does not add any new investment or job creation, can be afforded by the country. The answer is in the negative, yet our economists and policy makers tend to hide this truth from the people. No country can develop under this economic model:
Local currency default-inevitable
Out of total revenue collected of 17,000 billion rupees 9,700 billion rupees will be used to pay interest on loans. The bulk of such loans are in local currency. This burden on total taxes is expected to increase despite a decrease in policy rate for the reason that there will be additional borrowing to meet the budget deficit.
The primary question is whether or not Pakistan can continue to live in this debt trap. In our view, interest on borrowings that mostly accumulates in balance sheets of local banks, is a book entry whereby an old loan is replaced with a new loan with an addition of past interest.
It is up to the auditors of the banks whether or not keeping in view the state of economy of the sovereign, the said amount can be treated as recoverable. There is definitely a case for local currency loan default. Since the word ‘default’ is not liked by many, therefore, some other cosmetic term may be coined for it.
In layman’s terms, the issue is whether or not the hard-earned oppressive taxation of 17,000 billion rupees is to be used for paying interest to banks, which are again taxed at the rate of over 50%. It is reiterated that these are book entries, which do not mean anything for a real economic solution.
Economics is not a static subject. There has to be a method in arranging matters in this situation. It is also important to note that a substantial part of lending has been made by banks which are in the private sector. In India and China, the major banking sector is still in the public sector. The question is how to reach a solution to get out of this trap.
Messing up with the export sector & current account
The Government of Pakistan for some strange reasons in this precarious current account position has played with two main sectors balancing the current account. These are exports and foreign direct investment.
Exports
Exports have been stagnant for a long time. Pakistan is stuck with annual exports of less than USD 35 billion. There is a definite case that there should not be an exemption or specially reduced rate of tax for income from exports.
However, it is totally senseless that the rate is increased from 1% of the sale proceeds to 55% and 39% (after taking into account Super Tax) for non-company and company cases. There should have been a calibrated increase in tax rate over a period of time. The economic effect of this measure is severe, to say the least.
a. It will be the highest tax rate in the region given that input costs in Pakistan are already not regionally competitive and that all concessional finance, etc., has been withdrawn, exports are going to suffer.
b. No new investment will be forthcoming in the value-added exports sector. Pakistan will miss the last bus by squandering away the opportunity to grab the production moving out of China.
c. The few documented and listed companies will be at a huge disadvantage as compared to unlisted companies and those who maintain double books of accounts. It will only introduce malpractices at FBR (Federal Board of Revenue) level.
d. No substantial increase in tax collection will take place as many companies will be tempted to retain export proceeds abroad and expense those out. Resultantly, tax collection would not increase much except from the few documented companies, and the export proceeds will go down.
e. The ability of listed firms to raise more capital to fund growth from the stock market will substantially reduce.
f. Majority of export-oriented firms already operate at very low margins due to a very high cost of doing business in Pakistan; they won’t get any relief due to the MTR (minimum tax regime).
g. As the cost of doing business will go up substantially, the foreign buyers will start looking to move their imports from other countries.
h. In all, these new proposals will be disastrous with the following consequences:
i. Very little increase in tax collection
ii. Reduction in exports
iii. Closure of part of the export-oriented firms
iv. Increase in joblessness
v. Flight of capital, which is already happening
vi. A big boost to deindustrialization.
vii. The quest for improving Balance of Payment by raising exports will become elusive and Pakistan will forever be at the mercy of IMF.
It is totally non-comprehensible that a country, which immediately needs foreign exchange and new job opportunities can take this disastrous step.
It is clearly understood that there will be no tax on exports from Export Processing Zone and Special Economic Zone; unlike the view given by some firms using a very strict application of the law.
Foreign Direct Investment
The rate of tax and cost of doing business are two main negative sectors with respect to foreign investment in Pakistan. In the budget the policy makers have further spoiled the case on both counts. Increase in the rate of tax is a direct contributory to the cost of doing business in Pakistan.
Then by taxing the capital gains on long-term investment Pakistan has been made a place for earning hot money instead of long-term investment. This is the reason for positive movement in the stock exchange after the budget.
Oppressive taxation
Pakistan embarked upon a road to international competitiveness and tax rates were brought down in phases to a reasonable level. This incentive was however reversed by imposition of Super Tax two years ago. Although initially Super Tax was supposedly to be a one-time levy to tackle precarious economic situation in 2021 due to the unprecedented floods in the country, it, as usual, became a norm and now it is a part of the tax system. During this year, the tax rate for the non-corporate sector which comprises all small and medium-sized business representing over 70% of the economy has been increased from 45% to 55%.
This may be the highest rate in any part of the world. Tax rate in Sweden and Finland, the ideal welfare states, is around 32 percent. This is a sure recipe for tax evasion, corruption and non-documentation. The worst-hit people in this case will be professionals, who are not allowed to incorporate like Chartered Accountants, lawyers, etc. Since the highest slab is applicable for income above Rs 500 million therefore it will lead to fragmentation of businesses.
The myth of ‘non-filer’
In simple words, a person who is a non-filer is effectively a ‘felon’ as a legal requirement has not been fulfilled. The penalty for a non-filer should be severe instead of making their existence valid by prescribing a higher rate of withholding or collection of tax from them. In this manner such persons are being wrongly legitimized. The budget document can be called a document relating to ‘non-filer’.
The policymakers are under the misimpression that the majority of the people who evade taxes are non-filers. The evasion is at the highest level with the persons who are filers. Almost all the big wholesalers and dealers are filers with a very low tax offered in their returns. If the government is instituting a system that everyone should be a filer then it should also ensure that filing is made at the correct amount. Since there is no check or mechanism to check tax evasion this system is expected to be counter-productive.
Abuse of Petroleum Levy
Tax on POL is a VAT and there is no reason that such an amount be charged by way of a non-adjustable levy. This has been done in the budget. Furthermore, it is not equitable that by placing a VAT subject to allocation to provinces be shifted to the Federal Government for vested reasons.
Government playing in stock exchange
Through an amendment it has been proposed that the income of any mutual fund where more than 50% of assets are invested in Government Securities is to be taxed at the rate of 25% instead of 15%. This means that funds will move out to other stocks where the rate is 15%.
This also means that the cost of borrowing for the government will be increased for the reason that such mutual funds would not be investing in government securities. There is no need for the government to play around with such matters, which lead to speculation in the stock exchange.
Tax on subsidy
Subsidy is provided to various entities under the implementation agreement with the government. This amount is exempt from tax for the logical reason as the amount of the subsidy would have to be increased if tax is to be borne by the recipient. Through the Finance Bill this exemption has been withdrawn. It means in order to meet the tax target an effective increase has been made in the amount of subsidies. These are useless book entries.
Conclusion
In summary, it is our view that the budget as proposed needs a substantive revision. This does not represent an economic plan. It is the cash flow of an insolvent entity. There is nothing wrong with being insolvent. It is bad not to recognize reality and continue spending money without care.
In contrast to the statement in the parliament that a right step has been taken through this budget it is our considered opinion that the life of a common man will become more difficult in the following year. It is totally not conceivable how it can be claimed that after collecting an oppressive tax of Rs 17,000 billion out of which 7,000 billion is paid to provinces, with spending of around 17,000 billion on current non-productive purposes, requiring additional borrowing of around Rs 7,000 billion will not lead to fuel inflation. This beginner’s economics is known even to an undergraduate student.
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Head of 2023-2024 2024-2025
Expense (Rs in Billions) (Rs in Billions)
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Interest
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Local 7211 8736
Foreign 1040 1038
Pension 821 1014
Defence 1854 2122
Subsidies 1071 1363
Grants including BISP 1482 1776
Civil Government & others 753 839
Current Expenditure 14232 17203
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Copyright Business Recorder, 2024
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