It''''s a long journey

12 Jun, 2019

The basic framework of the budget is right. The efforts are to undo the impact of presumptive regime which was religiously followed by Dar. The policy direction is to reverse the impact of deindustrialization by reducing the duty on raw material and intermediate goods. The question is on the capacity and flexibility of the system to implement tall orders, especially in taxation.
There is no blanket increase in taxation on any sector or group directly or indirectly. There is no new super tax, no increase in corporate tax, and surprisingly GST rates have been kept unchanged as well. The individual taxes which were too relaxed in the last regime are tightened with upper slabs increased to 35 percent - higher than corporate income tax.
The holes are attempted to be plugged by ending exemptions. There is health tax on tobacco and aerated drinks. The non filer distinction is abolished in real estate. The idea is to record transactions on real values with an objective to discourage parking of grey money. The steps taken require parallel efforts to curb money laundering, and to document the economy.
Basically, the conditions of IMF and FATF have been included in the finance bill, and rightly so. The asset declaration scheme is at lucrative rates to document the benami accounts and properties. The message is to take it and file your returns to regularize your assets, and pay tax on future income. The crackdown on top politicians in last two days demonstrates the PM''''s resolve on corruption.
The question is on ability to implement and on the tax elasticity of the sectors where exemptions are removed. The ability of tax machinery to generate budgeted taxes, both direct and indirect. It is an experiment and results are yet to be seen. The exercise is done in haste as the new team did not have time and reverse calculations have seemingly been made to match ambitious IMF''''s targets.
The steps could be counterproductive as it may reduce sales to lower the collection from even the existing levels. The economic growth could be compromised and unemployment could rise in the process. Exports could fall in the textile sector. But that risk has to be taken for bringing economy out of the shackles of rent seekers.
The speech of Revenue Minister stated that there are 341,000 industrial electricity and gas connections, but only 40,000 are sales tax registered. In case of commercial consumers, out of 3.1 million commercial consumers, only 1.4 million pay tax. The gap is huge and has to be plugged.
The FBR in its existing shape does not have the resolve to do so, and its giving a cold shoulder to the new Chairman. The implementation is going to be tough. The fear is that if the quarterly targets are not met, the IMF may ask for mini budget - to increase GST and other tax rates. It would be interesting to see how the government would react.
The challenges would also be on keeping expenditure low - the planned austerity, especially, if India keeps on bullying. On development, the allocation is increased from this year, but it will get the first cut in case of missing targets. The overall deficit is budgeted at Rs 3.2 trillion - 7.2 percent of GDP assuming 1 percent surplus from the provinces.
The economic growth is going is targeted at 2.4 and 3.0 percent in the next two years before getting up to 4.5 percent in FY22. If the stabilization, documentation and industrialization plan continues, the five percent plus growth will be seen in the last year of this term.

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