The taxation challenge

27 May, 2019

This is the third week after finalization of IMF programme. The first week was depressing as the as the PTI economic team lost two more wickets of Bajwa and Dhaga, after Asad. The market was unexpectedly down, and currency market was converted into market based mechanism.

On weekend, the new FM came on front and talked about bailing out stock market, and attempted to bring stability. The second week began with a blast of unwarranted 150 bps increase in policy rate, yet the stock market rebounded, and the currency stabilized at the tail end of the week.

Now it seems the exuberance may continue as market players are apparently seeing the light at the end of tunnel. The people will go home and celebrate Eid in fourth week in a good mood, and right after that, the budget is going to be presented in the fifth. That would be a crucial time to see how strong opposition would be and how much potential the middle order (Sheikh, Zaidi and Baqir) has to tackle bouncers in an overcast conditions.

The buzz is that the FBR may budget an additional Rs775 billion in FY20. That is a huge jump and someone has to take the brunt. There could be two strategies, one is to increase the rates on existing tax payers - increase in GST, other indirect taxes higher rates and higher rate on income taxes. The other is to bring non taxing paying into the net - end of tax exemptions, and broadening of tax net by taking non-filers or tax evaders to the task. The final outcome would be a combination of both.

In any case, it would hurt a few segments - ranging from consumers to producers to traders and retailers. Some difficult decisions ought to be taken, and opposition is all geared up to politicize the budget as 'awaam dushman'. The government may be able to survive this session, but the story would not end here. The IMF wants continuation of higher revenue targets in the second and third budget under the IMF programme.

The news is that the individual income tax will be rationalized and the gift given by Miftah is going to be taken back. The expectations are that the lion’s share of increase will come from rationalization of tax rates. The income tax on individuals can at best fetch additional Rs100 billion. There is a case of reduction of corporate tax rate from 35 percent in FY13 to 29 percent in FY19, and the earlier plan was to reduce it to 25 percent by FY23. Now there could be case of increasing it back in a staged manner. Then the super tax could be reinstated on non banking big companies as well.

The other element is to increase the GST on goods. The rate was increased by 1 percentage point each by PPP and PMLN in their respective first budget. Will the PTI increase it to 18 percent now? That is yet to be seen; but the chances are high. This will bring inflation and opposition’s wrath.

Higher targets are likely to be set for provincial taxes as well, and there could be a case of higher GST on services too. Apart from that, taxes on immovable property have huge potential, and the success of amnesty scheme and abolishment of condition of non-filer not buying real estate is the key.

The objective is to reduce the primary fiscal deficit to 0.6 percent of GDP, and the story will continue for three years. Tough job this.

Copyright Business Recorder, 2019

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