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Revenue crossroads

May 15, 2017


With slippages on non-tax revenue and lower than targeted tax collections, the fiscal deficit in the first nine months of the current financial year has crossed 3.7pc of Gross Domestic Product — a tad lower than the 3.8pc target for the whole year.

In absolute numbers, the budget deficit has amounted to Rs1.238 trillion in nine months against the full-year target of Rs1.276tr.

Going forward, the government would not be expected to impose new taxes next year. Surprisingly it has determined to reduce duties on cigarettes, perhaps for the first time in a decade, as successive increases on taxes and duties on health grounds has reportedly led to massive smuggling, resulting in Rs40 billion in revenue loss this year.

On the other side, however, the gap in tax rates between filers and non-filers is expected to widen by almost double the existing rate.

On the positive side, development spending has picked up pace. This is more apparent in sectors like power and highways where fund utilisation has already crossed 93pc and 87pc of allocations

According to the budget schedule finalised by Finance Minister Ishaq Dar in consultation with related ministries, the national accounts are being finalised today, May 15. This will be followed by a meeting of the Annual Plan Coordination Committee (APCC) on May 17 to finalise the country’s development programme for the next year.

The National Economic Council (NEC) is expected to be held on May 21 to approve the development programme and next year’s macroeconomic indicators so that the economic survey can be released on May 25, a day ahead of the federal budget on May 26.

Based on little higher than 5pc economic growth rate this year, next year’s growth target has been set at 6pc with a focus on public sector investments in CPEC and energy to ‘achieve higher, sustainable and inclusive growth’.

The fiscal deficit in nine months (July 2016 to March 2017) is even higher than 3.4pc of GDP of the same period last financial year when it finally ended at 4.6pc of GDP. If that trend is any indication, it would not be a surprise if the gap between income and expenditure widens close to 4.9pc at the end of the current fiscal year.

Alarmingly with far reaching consequences, the total revenue-to-GDP-ratio has also plummeted to 9.4pc in the first three quarters (July-March) against 9.9pc of GDP in the same period last year.

But that is not all; the tax revenue at Rs2.7tr for the period has struggled at 8pc of GDP compared to 8.3pc of GDP during the same period of last year. Similarly, non-tax revenue also stands at 1.3pc of GDP compared to 1.6pc of last year.

While direct taxes remained unchanged at 2.7pc of GDP (current year Rs892bn compared to Rs795bn of last year), taxes on goods and services and sales tax were down to 3.1pc and 2.7pc of GDP this year compared to 3.4pc and 3pc respectively in the same period last year.

That shows the hard earned gains, on the revenue front over the past four years, of removal of tax exemptions and purported reforms are on a reverse gear. This is upsetting at a time when the government is in the last leg of its budget preparations for the next year — its last and final budget unlikely to show greater fiscal discipline.

One reason was the government’s inability to materialise privatisation proceeds of Rs50bn, it had targeted in budget 2016-17 due to political expediency, which has been a constant source of drain on the federal budget. Secondly, it could not find a favourable environment to generate Rs75bn targeted for the current year through the sale of another 3G licence.

On top of that, the tax authorities attribute about Rs160bn shortfall on account of incentive packages announced for the agriculture and export sectors and lower recoveries because of lower petroleum prices or tax rates and tax breaks given to Chinese investors. The full year impact could be anywhere between Rs190-200bn.

As a consequence, authorities have already scaled down the revenue target from Rs3.62tr to around Rs3.5tr — down by Rs162bn. This is despite the fact that oil related revenue items have mostly shown greater recoveries than targeted.

For example, the government has already netted Rs48bn as natural gas development surcharge in nine months against the full year target of just Rs35bn. Likewise; it is also slightly ahead on petroleum levy collection at Rs120bn in nine months against full-year target of Rs150bn.

The significantly lower current expenditures have not reduced fiscal deficit. Total expenditure stood at 13.1pc of GDP in the first three quarters when compared to13.3pc of GDP at the same period last year.

The current expenditure amounted to 10.8pc of GDP in the first three quarters when compared to 11.4pc of same period last year while mark-up payments were lower at 3.3pc against 3.6pc of GDP last year as defence spending remained unchanged at 1.6pc of GDP.

On the positive side, however, development expenditure has picked up pace. This is more apparent in CPEC related sectors like power and highways where utilisation of funds has already crossed 93pc and 87pc of allocations for the year in first 10 months of the year.

Published in Dawn, The Business and Finance Weekly, May 15th, 2017