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Scrambling for money

Updated June 03, 2019

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With over Rs1,450 billion of additional revenue targeted for next year — the highest ever in the country’s history — Prime Minister Imran Khan’s new economic team is apparently setting the stage for creative destruction. The International Monetary Fund (IMF) also seems to be on board — at least at the staff level.

Adviser on finance and revenue Dr Abdul Hafeez Shaikh has announced next year’s revenue target at Rs5.55 trillion for the Federal Board of Revenue (FBR) that is struggling with a Rs447bn shortfall and may hardly touch Rs4.2tr this year.

Practically, this means that revenue has to increase by 3.1pc of the GDP in a single year — a record.

The revenue plan shared with the IMF aims at almost Rs750bn in additional revenue next year. About Rs700bn increase is anticipated from two areas — sales tax and income tax.

About Rs350bn has to be generated through sales tax with a combination of increase in tax rate and withdrawal of exemptions, minor tweaking before budget notwithstanding.

In view of the large revenue target agreed to with the Fund, the Dr Shaikh led technocratic dispensation is on the path to drastic economic surgery. The industry is up in arms against an end to zero-rating and claims it would be a disaster for industries, causing mass unemployment and huge foreign exchange losses.

It fears the new scheme could result in more than Rs700bn in refundable revenue generation to the FBR but cause a liquidity problem to the industry and lead to corruption in the form of flying invoices, over-invoicing, frauds in refunds etc.

Overall, additional tax measures are estimated to generate about Rs550bn while Rs100bn or so would flow from widening of the tax base including the impact of amnesty scheme.

The FBR believes it could pull together about Rs220bn through better monitoring and enforcement. About Rs520bn are expected to automatically come in from 8.5pc inflation and 4pc economic growth rate. Around Rs200bn will be generated through withdrawal of tax exemptions.

The economic team has set its eyes on areas nobody dared touch over the past few decades. Previously pampered babies — the zero-rated export sectors, particularly the textile industry along with leather, sports, carpets and surgical — are now the focus of policy change to ‘revolutionise the economic structure from within’.

Other than the end to zero-rating for five export sectors, the government has indicated it will withdraw electricity and gas subsidies, which are $6.5 per million British thermal units (mmBtu) of gas and 7.5cents per unit of electricity. These were given to them by the PTI’s then economic team led by Asad Umar in line with the pre-election promises of Imran Khan.

Another initiative of extending Rs26bn subsidy on fertiliser is also set to be reversed even though government talks about embarking upon an agriculture emergency.

Last week, Dr Shaikh, Shabbar Zaidi and Hammad Azhar confronted the textile industry with the evidence that against its due tax share of Rs27bn they paid Rs10bn taxes, which meant the industry was misusing the zero rating facility ‘despite domestic textile sales of over Rs2trillion’.

The government has decided to withdraw zero-rating and that has been committed with the IMF, told FBR chief Mr Zaidi to the stunned textile sector representatives.

The textile industry puts the total value-added production at $18bn and claims exports of $13bn or 70pc, leaving $5bn or Rs750bn for domestic sales. The industry is reported to have offered to bridge the gap of Rs17bn tax.

Shabbar Zaidi, supported by Dr Shaikh, is not ready to buy these estimates, believing the value of clothing sold locally was multiple times the recorded domestic sales and industry’s claims about Chinese imports etc were not depicting reality.

Interestingly, the prime minister’s adviser on commerce and textiles has gone public against the withdrawal of zero rating facility saying this would go against industrialisation and export enhancement.

He has proposed that “the government should make a statement in the upcoming budget that the relevant statutory regulatory order (SRO) would be modified to ensure that there is no tax evasion but not state that zero-rating would be withdrawn”.

There have always been calls for provision of subsidies to zero-rated export sectors based on solid and professional studies, justified only on the basis of the cost benefit ratio. There have been reports that such subsidies are being shifted to generally non-productive areas of economy like real estate, currency and gold.

On the other hand, Dr Hafeez Shaikh promised last week that civilian, armed forces and private sector would participate in the government’s austerity oriented budget 2019-20 to stabilise the economy over the next 12 months. Then move on to the recovery phase and put the country on a sustainable growth trajectory.

Subsequent presentation to the federal cabinet on budget strategy paper, however, showed a different direction. The cabinet was told that civilian budget for next year would be scaled down by 5pc while the defence expenditure, which was higher by 15-20pc than the budget allocation this year, would further go up by 10-15pc next year.

Also, the GDP growth rate target for next year was set at 4pc in view of the stabilisation programme with the hope that growth rate would increase to 4.5pc by 2020-21.

If government policies take root, growth rate could be expected to range between 5-6pc in 2021-22. The planning commission on the other hand projects GDP growth rate at 6.5pc by fiscal year 2023-24 — the terminal year of the 12th 5-year plan.

As if that was not enough, the SBP envisaged inflation at 8.5-9pc for next year (2019-20) and would be even higher in double digits (10pc) in 2020-21 before scaling down the year later i.e. 2021-22.

The cabinet was also candidly told that interest rates were increasing and were already 3pc higher in current year because of a staff level agreement reached with the IMF to jack up policy rate of the central bank.

Published in Dawn, The Business and Finance Weekly, June 3rd, 2019