Budgets to nowhere

Published June 10, 2016
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

FOR most federal budgets in the country’s history, one has to ask the ‘what-if?’ question. What if this particular budget had not been presented; what difference would it have made to the nation? To be sure, most budgets are a mixed bag on their own, containing a sprinkling of positive measures for the economy interspersed with a slew of less well-thought-out ones.

On this score, the federal budget for 2016-17 — as it stands prior to the passage of the finance bill — offers at least two positive policy steps, both relating to growth. For exporters, it brings the good news of restoration of zero-rating for sales tax for the five major sectors. For the farm sector, which has been under stress for the past two years, the budget contains relief measures.

Of course, the utility of these budgetary measures is largely contingent on their implementation. In the case of the zero-rating for the five export sectors, which was removed a few years ago, the restoration was announced by the prime minister nearly six months ago but has yet to be acted upon. Its implementation requires the issuance of an SRO and is not contingent on the passage of the finance bill. Similarly, on the matter of the nearly Rs200 billion export refunds that have not been paid, the finance minister has made a commitment on the floor of the house for the past two years to clear the backlog within three months — which has yet to be honoured.

Beyond individual measures, what is the ‘grand design’ of the budget? This is a question I have repeatedly posed in this column in the past six years. For a political party that made claims to having spent its time in opposition carefully planning management of the economy and addressing its myriad challenges when in government, a fourth consecutive budget should be an opportunity to virtually seal the implementation of its vision for the economy.


Revenue generation through predatory taxation appears to be the sole vision.


Each budget has a ‘pivot’ or a centre of gravity. It may seek the revival of industry, promote exports, lower the cost of doing business, promote the country’s international competitiveness, or embark on a wide-ranging revamp of the taxation system. One of the truly path-breaking budgets in our recent history was the one presented by an earlier PML-N government in 1992-93. It broke the statist mould of the economy by placing the private sector front and centre via a process of deregulation, liberalisation, and privatisation. (In hindsight, we now know because of Panama Papers that some of the policy measures were also self-serving: allowing the ruling political elite to secret money from Pakistan to offshore financial centres).

However, unlike the past, the four federal budgets presented by the current PML-N government have had one pivot: revenue generation without tax reform. This has had the only one natural outcome possible — indiscriminate and ‘predatory’ taxation which has burdened existing taxpayers. Hence, while tax revenue has increased nearly 60pc in the last three years, more than 95pc of this has come from an increase in tax rates, the levy of new taxes on existing taxpayers, and the withholding of genuine tax refunds.

The big-ticket items that have delivered major gains in tax revenue during this period include the Gas Infrastructure Development Cess, the increase in the standard rate of sales tax from 16pc to 17pc, an across-the-board increase in customs tariffs, imposition of a minimum tariff on machinery and other essential items that previously enjoyed 0pc customs duty, and an increase in the sales tax rate on petroleum products (mainly high-speed diesel). In addition, the removal of zero rating of export sectors, the levy of a range of new withholding taxes, removal of exemptions and the introduction of a super tax round off the main measures that yielded the additional revenue.

All told, the Federal Board of Revenue (FBR) estimates place the ‘new measures’ since 2013-14 (ie additional taxation) at close to Rs1 trillion. This is an unprecedented level of sustained taxation of existing taxpayers in Pakistan’s recent history. What about the most important element of tax collection — widening the net and collecting from a larger pool of eligible taxpayers? According to an FBR statement filed with the Senate standing committee on finance and revenue for its meeting on April 12 this year, tax “amounting to Rs1.4bn” has been recovered from new taxpayers.

As a result of this flawed revenue-generation strategy and approach, Pakistan’s global ranking on the World Bank’s Cost of Doing Business index has slipped 10 places since 2013 to 138. On the “ease of paying taxes” the country’s rank is now 171st in the world — virtually at rock bottom. On the measures of “number of tax payments” and “number of hours spent on tax matters”, Pakistan’s latest global rank is 168 and 177 respectively.

The other related problem is the approach taken towards documentation of the economy. The government strategy of creating a distinction between tax filers and non-filers and setting up a regime of differential taxes suffers from a fundamental flaw: it is adopting an approach that is not ‘first-best’ (which would be the reform of the FBR), and has been tried unsuccessfully since the 1990s in the case of sales tax. At its worst, this approach of trying to earn revenue without fixing the FBR is formalising the status quo and is providing the wrong incentive to non-filers — that they can pay a nominal differential and continue to legally stay out of the tax net.

The government’s flawed thinking on tax reform merits a separate discussion. But it is sufficient to say that without tackling the ‘elephant in the room’ — the FBR — no meaningful effort in documenting the economy or improving Pakistan’s dysfunctional tax system will succeed. In the meanwhile, the government will continue to plug its revenue holes through predatory taxation.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, June 10th, 2016

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