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Mini-budget: still a work in progress

Updated March 11, 2019

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Why does the tax machinery not go after the buyers of new vehicles and force them to become return-filing taxpayers? — Illustration by Dawn
Why does the tax machinery not go after the buyers of new vehicles and force them to become return-filing taxpayers? — Illustration by Dawn

The National Assembly passed the second mini-budget of the current fiscal year last week with a rare 45-day gap following its presentation. Instead of considering recommendations made by the Senate, Finance Minister Asad Umar rushed through many amendments to the Jan 23 document.

The Senate Standing Committee on Finance, Revenue and Economic Affairs had proposed about 55 amendments to the Finance Supplementary Second Amendment Bill of Jan 23. But none of them appeared to have impressed the finance minister. He did not refer to any recommendation even in passing as the National Assembly passed the money bill amid the opposition’s boycott.

Read more: Editorial: A not so mini budget

He had a change of mind about some of the budgetary proposals he had introduced in parliament earlier. For example, the final amendment passed by parliament removed altogether the restriction on the sale and purchase of vehicles by non-filers perhaps to facilitate local assemblers and manufacturers. A few of them are yet to actually start production and need buyers. Others continue to charge premiums and have long delivery times.

Why does the tax machinery not go after the buyers of new vehicles and force them to become return-filing taxpayers?

The PML-N government in its last budget in May 2018 put the non-filer restriction, which was withdrawn by the PTI in its first supplementary finance bill of September 2018. The move drew criticism and compelled the new government to surrender. But it came back with a revised scheme in January, allowing non-filers to purchase cars of up to 1,300cc. The joint opposition in the Senate opposed the move and proposed that the relaxation should be for cars of up to 800cc.

But the government reverted to its original stance: no restriction at all on the purchase or registration of cars by non-filers regardless of the capacity provided the vehicle is produced locally. No surprise that share prices of local automobile manufacturers have been hitting their daily upper limits on the stock exchange since then.

With a nominal effort, the tax machinery can always go after the buyers of new vehicles and force them to become return-filing taxpayers. Separately, a 10pc federal excise duty was imposed on locally manufactured vehicles with the engine capacity of 1,700cc and above.

Three more changes pertained to exemptions from advance tax on income and profit from Sarmaya-e-Pakistan Ltd (a state-run entity created to revamp loss-making public-sector entities up to privatisation), Duty Drawback Bonds and Pakistan Banao Certificates (the so-called diaspora bond).

The government will establish Refund Settlement Company Ltd, an entity fully owned by the Federal Board of Revenue (FBR), to issue proposed bonds to exporters and other businesses as an instrument to liquidate outstanding tax refunds estimated to be over Rs200 billion.

Another change related to the tax exemption of business income from greenfield industrial undertakings for a period of five years with conditions to prevent its misuse. The facility was also extended to all Special Economic Zones (SEZs).

The import of plant and machinery for greenfield industrial projects was also exempted from customs duty as an additional incentive. That was on top of the withdrawal of customs duty and advance income tax on the import of fire-fighting equipment for the industrial units in SEZs.

Most other schemes announced for industrialisation and investment in January remained unchanged.

A lot depends on how the government is able to roll out an implementation strategy and streamline systems to drive home success. The implementation strategy will determine if the government’s support for the industry, low-cost housing, agriculture and small and medium enterprises coupled with investment and export promotion measures actually leads to the industrial revival.

Alarming, however, is the fact that the second supplementary amendment bill has not impressed the International Monetary Fund (IMF) as the document lacked tax expansion measures. The eight-month revenue shortfall amounted to Rs235bn, or more than 0.6pc of GDP, official data shows.

That will mean an increase in the fiscal deficit at a time when the defence expenditure is set to go further up in the wake of renewed regional hostilities. That rise in the defence expenditure is on top of the over 22pc increase in the first half of 2018-19. The fiscal deficit in July-December was 2.7pc, which is the highest since 2010-11 when the full-year deficit touched 6.6pc of GDP.

Strangely, the government expects recoveries from held-up Gas Infrastructure Development Cess (GIDC) to partially make up for the revenue shortfall so far along with the loss of revenue due to these facilitations. Industry sources, however, suggest the government has not yet been able to take on board all the GIDC defaulters to streamline the revenue flow.

This comes on the heels of the government’s short-term borrowing from friendly countries for budgetary support, repayable in one time, coupled with more than a record Rs3 trillion domestic borrowing as inflation, particularly core inflation, is heading north. Despite pronouncements to the contrary, the IMF-oriented stabilisation measures, including the second round of hikes in energy prices, are set to follow later this year.

Published in Dawn, The Business and Finance Weekly, March 11th, 2019