Budget in the shadow of corona crisis

Asad Malik

The government has multifaceted challenges in next financial year 2020-2021, its economic team tried to push through the simplification of the tax regime, ease of doing business and Covid-19 response as cross-cutting themes.

It would be a tough call indeed as every segment of the population — from government servants to the armed forces, from labourers to employers and from the poor to big businesses — wants a helping hand amid the economic contraction.

However, the tax gap in Pakistan had been estimated at 50 percent, which immediately required removal of enforcement weaknesses, and huge revenue leakages in the taxation system through policy changes in the coming budget 2020-21. This means that the Federal Board of Revenue (FBR) is presently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent.

The biggest challenge for budget makers on tax mobilisation front faced by the FBR is bridging this tax gap through automation and introduction of tax intelligence system and levying taxes on the rich, rather than enhancing the rates of the existing ones, especially the indirect taxes-already made us uncompetitive in the world.

For instance, if presumptive tax is imposed on turnover/receipts, the collection will be around Rs800 billion from all businesses and profession other than companies and employees that will keep on paying taxes under the existing tax rates and system.

Though, the government economic team has considered a number of ways for improving the tax structure of the country with the help of effective data gathering and reconciliation mechanism, however, the challenges are huge.

While the Pakistan Tehreek-i-Insaf (PTI) has focused on pro people and business friendly budget, the FBR is being tasked to collect Rs5,100 billion in revenue, which will be around 30 percent higher than the estimated collection of Rs3,900 billion in the current fiscal year ending June 30.

Prime Minister Imran Khan has said that it would be a coronavirus relief budget and Finance Adviser Dr Abdul Hafeez Shaikh stressed that the government was trying to announce a tax-free budget.

Ministry of Finance former adviser Dr Khaqan Hassan Najeeb said the government was in need of higher revenues in order to spend more on healthcare in these testing times.

He suggested that the targeted revenue could be collected by plugging tax leakages, curtailing expenditure on sectors other than healthcare, such as no increase in government employees’ salary this year and shifting focus to increasing the savings rate to finance the budget deficit rather than increasing borrowing.

The Covid-19 disease has made the situation uncertain and impacted tax collection. There are different scenarios one is optimistic that economic activities would get normalised soon and the pessimistic view is nothing would get fixed.

The economy is facing one of the most challenging years in history. It braved many boom-and-bust cycles, but the national economic output, measured by gross domestic product (GDP), never turned negative since 1951-52.

For a change, provincial cash surpluses may not be available to the centre this year after almost a decade. The revenue shortfall of almost Rs1.6 trillion is too big and has already slashed the pie. The four provinces had promised together about one percent of GDP as surplus to the centre this year out of their joint share of over Rs3.25tr, which now appears compromised around Rs2.2tr.

Next year will be no different given the continuation of the Covid-19 impact at least in the first half. As the current fiscal year will be concluding at a record 9.5pc fiscal deficit, the outlook for 2020-21 can be anything but hunky-dory. The survival and stability will, therefore, be the key challenge in the next fiscal year.

As we conclude the fiscal year on June 30, the economy is officially estimated to have contracted about 0.4 per cent against a growth target of 3.3pc. This is, however, far better performance in view of the doomsday scenarios projected by the lenders’ community until a couple of weeks ago. All the targets for the real economy were missed this year by a wide margin. In fact, most of the indicators have gone in the opposite direction. The slide is quite steep when seen against the backdrop of 5.8pc growth just two years ago.

GDP itself is now valued at around $265 billion compared to $280bn last year and $313bn at the end of 2017-18. The assessment of economic performance by the National Accounts Committee is based on the actual output data for the first three quarters along with the Covid-19 impact in the fourth quarter. Various assumptions for subsidies, grants and support to the vulnerable are still changing and so are the savings on account of interest payments as monetary policy finally takes an accommodating stance — an over five percentage points’ cut is estimated to have a cumulative Rs265 billion cushion so far.

In his 2012 budget speech, the incumbent advisor on finance Dr Abdul Hafeez Shaikh had lamented that even after the injection of Rs1.25tr in five years the power sector remained a source of concern. Since then, another trillion rupees have gone down the same drain and the circular debt has monstrously moved past Rs2tr again. Its financing and limiting subsidies remain central to the survival of the IMF programme. Simultaneously, revenues remain the central challenge. A depressed economy can hardly afford more tax burden. After quite some time, the Federal Board of Revenue (FBR) appears to be not in the driving seat — it is not as much the adjudicator of its own cause as it used to be. With support from some heavyweights in the prime minister’s think tank on the economy, economic ministries — finance, industries and commerce — keep on challenging the taxation proposals.

Dr Shaikh has repeatedly pushed back taxation files that suggest increased tax compliance cost and insisted to the extent of irritation the ideas relating to the simplification of businesses rather than business strangulation. The revenue policy themes are generally coming up from the think tank, the World Bank, the National Tariff Commission and tax consultants so that the FBR is relegated to the role of an implementing agency instead of policymaker.

For example, a lot of debate is still going on about how to limit the number of taxes to five or six, which are high revenue-yielding instruments instead of 40-45 taxes and duties with questionable cost-benefit ratios.

In this context, the minimum tax regime of the FBR is now in question. It promised guaranteed revenue flows, but is leading businesses to show losses through double book-keeping for tax evasion. Enforcement mechanisms, therefore, are also coming under scrutiny now.

At the same time, no ministry, agency or stakeholder wants to be tutored on budget making, fiscal, monetary and revenue strategy and yet have to mould their stances because members of the think tank and private revenue experts have direct access to all power corridors even though the traditional revenue advisory commission could not be operationalised this year.

Both the prime minister and his adviser on finance have shunned proposals even for a slight increase in tax rates because of the economic downturn and want to continue with the stimulus approach. Dr Shaikh, Dr Ishrat Husain, Shaukat Tarin and Razak Dawood have called into question the number of taxes like customs duty, additional customs duty and regulatory duty. They are instead building pressure for the enforcement side to check smuggling and effectively recover collections from bottlers, cigarette suppliers and similar consumer goods of which contraband, duplicate and substandard products flood the markets.

It is in this background that at least 2,000 tariff lines are expected to see total abolition or a substantial cut in additional customs and regulatory duties on raw material and intermediary goods used by export sectors. It has been acknowledged that there was no need for a new tax – all taxes were already in place and will start accruing as soon as businesses resume operations.

On this, the economic team is also banking on bridging the 50pc tax gap — the difference between potential and actual collection — through the enforcement mechanism with expert advice from the private sector. A 15-20pc success could add Rs.400-500bn in additional revenue without new measures. For this, capacity-based taxation for traders and small businesses across the country is under review.

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