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Budget blues

June 20, 2013

“IT’S a budget written by bureaucrats for bureaucrats” goes the refrain in the business community.

No sooner had the finance minister finished his speech, the Karachi Chamber of Commerce was up in arms against a string of measures that they say turn the clock back by more than a decade.

What measures were they talking about? First was, of course, the increase in the sales tax rate from 16 to 17pc.

All this fuss over a single percentage point? The layman can be forgiven for asking this question. But consider that it is believed the increase will bring in about Rs50 billion to Rs60bn of additional revenue. Now remember that the overwhelming majority of sales tax is collected from about 100 registered parties, and you’ll get a sense of the impact the increase is going to have on a small group of admittedly large traders.

Of course, ultimately it’s you and me who’ll pay this tax, and the rest of the population, because indirect taxes of this sort are the most “elastic” — meaning they yield up the fruits of their revenue quickly — and ultimately they are paid by the consuming public.

But beyond the increase in the tax rate, there are a number of measures that have been introduced in the name of “documenting the economy”. Two are particularly important to point out.

First is an incremental sales tax of 2pc on any transaction with a party that is not registered under the Sales Tax Act. So if you’re a company, and you buy some chemicals for a dye — as an example — and the party you’re buying from is not registered, an additional 2pc sales tax will need to be paid on that transaction.

The idea is to encourage you to either buy from a registered party, or tell the unregistered party to either pay up or get themselves registered. The tax is a way of creating an entry barrier into the formal economy, with the assumption that those outside will want to come into the net to avoid the incremental costs of staying outside.

In reality, business leaders say, the impact will be the opposite. The unregistered portion of the economy is now so large that it can actually close the doors on the registered players rather than pay any incremental cost of staying outside. “You want to pay for this consignment in cash?” they’ll ask their customer. If the answer is yes, the price will be quoted accordingly.

But if the answer is “no, I’ll pay by cheque and I’d like an invoice for tax purposes” then the price quoted will be hiked up 2pc, if not more. The unregistered players will simply push the cost of this tax on their registered partners, from where it’ll ultimately travel to us — the consuming public.

The impact of this measure on the price of petrol is a test case. Here you have a classic example of what happens when penalties are used to try and coerce unregistered parties to get themselves registered. The vast majority of petrol pump owners are not registered under the Sales Tax Act, primarily because sales tax on petrol is collected far upstream from the pump, and pump owners are not obliged to charge this tax.

But suddenly, as a result of this measure, because they are unregistered and the oil marketing companies from where they buy the petrol are registered, any sale of petrol to them triggers the penalty of 2pc additional tax. Basically then, the sales tax on petrol and diesel ends up going up by 3pc.

Now either we can expect a massive registration by pump owners, or we can expect the government to introduce a small qualifying clause in the language to exempt petrol and diesel from its ambit, or the consuming public can be left to its own devices in the face of this rather large and entirely unintended hike in price of petrol.

My guess is the measure as a whole will be withdrawn, as we see a rising chorus of voices speaking out against it.

Another measure imposes a tax of 5pc on all those parties that are buying electricity as commercial or industrial consumers, but are not registered companies. Imagine the supreme irony here. You can buy electricity from the government as a commercial or industrial consumer, but as far as the taxman is concerned, you don’t exist.

Again the measure takes a punitive approach. If you want to remain outside the net, it tells you, go ahead but there’ll be a cost.

This measure has not invited a backlash — yet — most probably because there are hardly any vested parties who have the voice to raise their grievances against it in any national forum. Traders have the chambers of commerce, manufacturers have the All Pakistan Textile Mills Association or the Pakistan Business Council. But cottage industry producers have no voice as such.

Yet another measure, that has the business community shaking with trepidation, is the downward devolution of audit powers to the commissioner level and below. “There’s massive corruption down at that level; these powers are more often used only for extortion purposes,” says a chartered accountant who deals with the tax bureaucracy on a daily basis.

During the RGST debates, the PML-N leadership used to say “eliminate corruption before asking the people for taxes”. The question therefore naturally arises: has corruption been eliminated that this bevy of new taxes for the people and powers for the bureaucracy has been introduced so comprehensively?

Yes the government has changed, but the bureaucracy has not. It’s a good thing that the finance minister is showing vigour in the discharge of his obligations, and in communicating his message to the public by appearing on media outlets on a regular basis. These are grounds for encouragement.

But he should explain his thinking behind these documentation measures, if only to reassure a jittery business community which feels that they are being squeezed harder by a revenue-hungry government.

The writer is a Karachi-based journalist covering business and economic policy. Twitter: @khurramhusain