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Taxing the poor

August 12, 2002

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Is poverty a curse from God? Pakistan federal budget replies, yes, the poor should be punished more. A conscious effort has been made to decrease the burden of taxes on the rich and shift it toward the poor.

Total taxes have been increased but, to favour the rich, the budget has put a cap on the increase in direct taxes. Rather it has moved to slightly reduce the burden on the rich. It has reduced the direct taxes in gross revenue from 23.1 per cent in FY 2001-2002 to 21.9 per cent in FY 2002-2003.

The overall burden of all increase in the tax revenues has been skillfully transferred to the poor. Compared to this fall in direct taxes, the increase in indirect taxes and surcharges is quite substantial. Indirect tax revenue is expected to grow by over 16 per cent and surcharges by 12 per cent. The burden of indirect taxes and surcharges falls directly on the weak shoulders of the mass consumers, who are the poorest in our society.

The revenue target of the last year fixed at Rs457.7 billion was not met and shortfall remained at 12.5 per cent than estimated. So the target of Rs460 billion for year 2002-03 is an ambitious one. These ambitions of higher revenues will be fulfilled by the planned increase of indirect taxes on the poor masses.

The extension of limit of taxable income from Rs60,000 to Rs80,000 is to be appreciated, but the increase in petroleum prices and the levy of sales tax on ghee, cooking oil and other daily use items would adversely affect the common man and would accelerate the erosion of real income of the common people. Besides, the lowering of exemption limit of investment in national saving schemes from Rs300,000 to Rs150,000 is regrettable, as the pensioners and widows were the main investors in these schemes. Moreover, the government failed to honour its commitment made last year to increase salaries of the low paid government employees. All these measures show as to how much friendly the budget is for the poor and the low-income groups!

The government has brought down the maximum tax level to 35 per cent during the last three years. The rich are demanding to bring it further down to 20 per cent. Bringing down overall taxes will be welcomed by all countrymen but it should not be at the expense of the poor, to whom all the required increase in revenues is being transferred. The finance minister, in his budget speech boasted that as a fall-out of September 11 events, most of the Pakistanis’ external liabilities have been postponed. According to a report in the Economist, Pakistan’s total external debts amount to about $37 billion. The finance minister was silent about their disposal in his speech. He simply announced that the entire stock of debt of about $12.5 billion has been rescheduled for a period of 38 years with a grace period of 15 years. But ‘this entire stock of debt’ belongs to the Paris Club alone. The finance minister is silent about the remaining $24.5 billion from other sources. According to the same report, “Until recently, the Paris Club of official creditors had discussed only a modest rescheduling. Now, big write-offs of debt are on the cards. Egypt’s official foreign debt was cut in half in 1991, partly as a reward for its help in the Gulf war.” Even the Economist was expecting some similar tangible reward for Pakistan for its support in Afghan war. But all such hopes have dashed to the ground. The finance minister did not announce any such write-offs of debts in his speech.

Despite assuming the role of a staunch American ally against the national interests and against the sentiments of the countrymen by providing her airspace and ground bases to attack our Muslim brothers in Afghanistan, unlike Egypt, not even 1 per cent of our foreign debts have been waived off, nor have we received any substantial grants to relieve our economy. The postponement of about one-third of our external debts is all that we have got. Had it been something substantial, it would have reflected either in the form of a fall in taxes and in consumer prices or in the shape of an increase in the development expenses of the country.

Despite our increasing pro-American policies, the share of external total resources has fallen dramatically from 39 per cent in FY 2002 to 26 per cent in FY 2003. Pakistan has saved a paltry sum of Rs29 billion only (about $480 million) in its debt servicing payments obligations for FY2003. External assistance in FY 2003 is expected to decline by 35 per cent and project aid is worth a trivial $728 million, insufficient for financing a single major project in Pakistan. The fall-out of September 11 has worked in reverse and has transformed into a wrath of God for us economically, as the above budget figures indicate.

The FY 2003 budget is growth strangulating. The developmental expenditures, the government failed to fully utilize the allocation of Rs130 billion for the last year and actually spent only Rs124.7 billion. The allocation for the year 2002-2003 is Rs134 billion which is only 3 percent more than the last year. It is much less and would not be able to generate any positive development in growth of economy. Every year non-developmental expenditure exceeds the allocated targets by squeezing the developmental expenditures. Common man is asked to sacrifice and therefore the percentage of population below poverty line is increasing. It is alarming to note from the State Bank of Pakistan (SBP) report that 32 per cent of population numbering 45 million is having monthly income of less than Rs650 per month.

President Sindh Abadgar Board, Abdul Majeed Nizamani has termed the national budget as enemy of agriculture and said that no relief had been given to farmers although Sindh province has remained the main sufferer due to acute shortage of water, absence of rain, natural calamities and rampant lawlessness. He issued a statement saying that the finance minister had himself admitted that the GDP had suffered due to the set back in agriculture sector. Nizamani claimed that during the last three years, the agricultural economy of Sindh had sustained a total loss of Rs75 billion. He demanded that a judicial committee should be appointed to determine the extent of loss to Sindh province. The end result is that the poor farmers all over Pakistan and especially in Sindh are affected most.

The All-Pakistan Trade Union Federation (APTUF) has expressed displeasure over taxation measures announced in the budget for the year 2002-03. The federation described it as anti-labour budget. It decided to arrange protest meetings in all the industrial zones against anti- labour policies of present regime.

With a custom duty of 20 per cent on spices, having a total tax impact of around 58 per cent, the contribution of smuggling to meet the demand of spices in the market has jumped to around 90 per cent. Similarly, tea continues to be liable to import duty at the maximum rate, whose total incidence along with other taxes comes to around 70 percent. The growing smuggling of spices and tea has been causing substantial loss of revenue to the government and colossal loss to the genuine importers/traders of tea and spices, who are struggling for their survival. There is a pressing need for reduction of import tariff on smuggling-prone items to snatch away the existing incentive to the smugglers.

The managing committee of the North Karachi Association of Trade and Industry (NKATI) concluded after a meeting that neither any foreign investor will enter in Pakistan nor it charms the local investors particularly due to high utility tariff, oil, gas prices and continued downslide of law and other conditions in the country. The committee noted that the President has already stressed through the media to bring down the tariff of utilities. The budget has come out against the wishes of the President of Pakistan.

If the budget is against the interests of the poor and against the best wishes of the President, whose pleasure was the target of the budget? We find replies from two sources in Pakistan press. One of them is Mian Sajid Pervez, president, Pakistan Tehrik-e-Insaf (PTI ). He took exception to remarks of Minister for Finance that IMF and World Bank had no role in preparation of the budget. The other one is Dr Jawed Akbar Ansari, an economist, who spoke at a post-Budget seminar organized by the Institute of Cost and Management Accountants of Pakistan (ICMAP) and Pakistan Institute of Public Finance Accountants (PIPFA).

Dr, Ansari observed that the outline of Budget 2002-03 was approved by the IMF in November 2001 and the present budget is a scaled down version of the IMF budget. This was prerequisite for $ 1.3 billion Poverty Reduction and Growth Facility loan awarded to Pakistan in that month. The budget for 2003-04 had also been approved by IMF last year. The PGRF is to be released in 12 trenches after approval by a visiting IMF mission to Pakistan.

The fiscal deficit of the budget is almost exactly similar to that approved by the IMF for 2002-03. The budget deficit for FY 2001 had been as high as 7 per cent of GDP. This quantum jump in the fiscal deficit had been approved by the IMF and the donor countries. It included a Rs 30 billion debt equity swap for preparing the KESC for privatization, issuance of Rs22 billion to commercial banks in lieu of their tax refunds again in order to privatize them and Rs 17 billion defence expenditure increase to facilitate the slaughtering of Muslims in Afghanistan. Dr. Ansari remarked that the IMF and America will undoubtedly be equally tolerant of an increase in the budget deficit for FY 2003 if the justification of this increase is to prepare the ground for selling precious national assets at throwaway prices or to facilitate imperialists slaughter, in Afghanistan and Kashmir. But except for these “special case” issues “imperialism is not willing to give us much more money” for the development of our country.