June 19, 2006	Monday	Jumadi-ul-Awwal 22, 1427

THREE critical problems of the national economy, acknowledged by one and all are: inflation, poverty and yawning gap between the rich and the poor. The budget for fiscal year 2006-07 did little to neutralise these threats. Let us examine this statement in some detail.

The receipts for the coming financial year have been estimated at Rs1314.778 billion. They are itemised as follows.

The first noticeable differential is between the figures of tax revenue as released in the budget document (Rs840.923 billion) and what was quoted by the CBR sources (Rs835 billion). How would the difference of almost Rs6 billion will be met is not quite clear.

Let us analyse how the various figures of receipts would impact on the three critical issues. First of all, the analysis of gross revenue receipts is called for. Adopting the figures obtained from CBR sources, we take the total revenue receipts as Rs835 billion and the gross revenue receipts at Rs1076.887 billion.

Out of total revenue receipts, Rs574.8 billion are to be collected from indirect taxes. The non-tax revenue of Rs241.887 billion, consisting mostly of petroleum development surcharge, is like any other indirect tax. The only difference is that it goes directly to the ministry of finance and is not routed through the CBR.

Thus the indirect taxes total up to Rs816.786 billion or 75.83 per cent of the gross revenue. The figure of Income Tax estimates (Rs268.2 b) is deceptive as it contains a substantial portion of indirect tax in the shape of presumptive tax regime (PTR).

A couple of years ago, the element of PTR was calculated at 39 per cent. To be on safe side, let us estimate it at 30 per cent this year. By that calculation, Rs80.46 out of income tax estimates would form part of indirect taxes and they would, after this addition, aggregate to Rs897.147 billion or 83.3 per cent of the gross revenue.

The unexplained difference of nearly Rs6 billion between the budgetary figures and those obtained from CBR, it is feared, will be collected through indirect taxes also. This will further push up this percentage. A budget which proposes to collect the gross revenue with such a huge chunk through indirect taxation can not be called poor-friendly. Examination of this point in detail follows a little later.

The second most disturbing feature of the receipt side is that privatisation proceeds are being proposed for utilisation to meet the budgetary deficit. It would be recalled that the government gave a solemn assurance that all the privatisation proceeds will be kept separately for the purpose of retiring the huge debt burden.

Alas, that was not be. It is estimated that so far privatisation proceeds of Rs216.4 billion have been utilised to meet the budgetary deficit.

The other unsettling features of the receipts are the proposed bank borrowings of Rs140 billion and the external receipts of Rs239.3 billion, most likely from the foreign loans. The process had already started with the recent acquisition of $6.5 billion loan from the World Bank. A broken begging bowl, indeed.

Now let us take into account the expenditure side of the budget. A huge outlay of Rs435 billion (also quoted as Rs415 at other place) has been earmarked for public sector development programme (PSDP). This is a welcome development. But the experience of recent past tells us that the allocation was never utilised in totality.

The allocation for the financial year which is about to end, was Rs272 billion. It was revised downwards to Rs228.5 billion. The defence expenditure was also revised, but upwards, from Rs223.5 billion to Rs241.1 billion. Is there any connection between the two revisions? The answer is better be left to the judgment of the reader.

It is learnt that expenditure on the building of GHQ in Islamabad will be met from the PSDP.

The huge outlay for PSDP can bring about some healthy and positive changes in our national life provided it could be utilised fully and transparently. Taking the experience of the past into account, this is an exercise of hoping against hope.

Expenditure on Defence Services has been estimated at Rs250.182 billion, up from last year’s estimate of Rs223.5 billion. This figure is once again deceptive because many heads of expenditure on defence services are met from non-military heads. Expenses incurred on payment of pensions to retired military personnel, on Coast Guards, Border Security Forces, Levies etc are met from the civilian heads of expenditure.

The National Assembly, which is supposed to be a sovereign body is debarred from discussing the Defence Budget. “Defence budget is not a holy cow in India”, remarked the former Indian Finance Minister Mr Yashwant Sinha recently, clearly implying that it is in Pakistan.

Why should there be an increase in the Defence Budget in the days of CBMs and peace initiatives with India is any body’s guess. Or is it that our economic managers and parliamentarians are incapable of resisting the pressure from a powerful lobby?

Expenditure on debt servicing is estimated at Rs296 billion. It cannot be helped given our huge debt— both external and internal. The disturbing aspect of this situation is that we have failed to reduce it. On the contrary, it is on the increase.

The budget estimate under the head Income Tax for the financial year 2006-077 has been shown at Rs268.2 billion as against last year’s estimate of Rs215 billion registering an increase of 24.7 per cent. However, as we have already seen, the contribution of direct tax is less than 17 per cent of the total revenue even when we ignore the contribution made by PTR.

It reflects an unhealthy tax regime. Indirect taxes are inequitable and hit the poor harder for the simple reason that they have a much lesser capability to pay. Providing 15 per cent dearness allowance to the government servants, increasing the pension by 15-20 per cent, increasing the minimum wages from Rs3000 to Rs4000, giving a stipend for the children of workers, paying some expenses for their children’s education, marriage etc are all good measures. But they will all get eaten up by the rampant inflation.

When fuel, gas, electricity etc are expensive and their cost is going up by the day (prices of gas will be enhanced from July 1 this year), the financial burden of the poor cannot be expected to abate. On the contrary, the net of the indirect tax is being extended.

Sales tax will now be levied at retail stage. PTR is to be extended to services and on profit on debt. These measures are against the much-touted policy of taxing the global income announced with the launching of Income Tax Ordinance 2001.

The measures of direct taxation are being progressively watered down. Reduction in corporate rates introduced through Finance Act 2002 are to continue.

Rates of individual taxation have been reduced. Income from salary up to Rs150,000 per annum have been made exempt. This measure will provide relief to the poor.

However, reduction in the rates of ceiling of taxation from 35 to 20 per cent would benefit those who are drawing fat salaries. Reduction in their burden of taxation has no justification. Reportedly, some members of the CBR are drawing salaries and perquisites aggregating to Rs3.6 million per annum. Charity, after all, does begin at home.

Rates of income tax for individuals earning income from sources other than salary have also been reduced. The highest rate was 35 per cent until last year. It is now reduced to 25 per cent. The role and importance of various direct taxes have diminished over the years with corresponding increase in the importance of indirect taxation.

If one remembers, we used to have direct taxes like estate duty, wealth tax and gift tax. They never suited the rich and the powerful. The rich have the benefit of the availability of highly sophisticated professional advice for tax avoidance and tax evasion.

The net result is that the rich is the beneficiary of ever- increasing purchasing power. The fleets of news SUVs, Mercedez Benzes, BMWs which prowl on roads are enough evidence of the enhanced purchasing power of the rich.

Ubiquity of inflation has two reasons: cost-pushed because of higher costs of inputs like fuel, electricity, gas etc., and demand-pulled because of higher purchasing power enjoyed by the rich. As we have seen, both these factors are at work in our economy.

With the rich getting richer and the poor poorer, the chasm between the two is getting wider. Sociologists tell us that such a situation breeds unrest, anger, hatred which eventually lead to violence. A substantial reason of our worsening law and order situation can be traced to the inequity in the distribution of economic goods.

Ad hoc measures like increase in pension or grant of dearness allowance are not a permanent solution for the economic and social problems facing our nation. The strategy of concentrating wealth in fewer hands in the hope of capital formation, investment, greater production and its consequent trickle down effect has been tried in the past, but without any success.

Unless we reduce emphasis on indirect taxation, eliminate unproductive expenditure and tax those who have the capacity to pay, the problems of inflation, poverty and the gap between the have and have-nots will not disappear.

The writer is a former chairman of CBR