The Budget 2005-06 framed against the back-drop of a very impressive growth rate of 8.4 per cent, emanating mainly from agricultural, industrial and service sectors, does not envisage adequate measures to ensure speedy trickle-down effect for employment-generation and poverty alleviation.
Although the budget primarily aims at sustaining growth, its reduced targeted rate from 8.4 to 7 per cent for the next fiscal year, indicates that the budget makers do not expect the growth-generating sectors to repeat their performance. This is, indeed, surprising in the context of a series of fiscal incentives—both in indirect and direct taxes, particularly in the agricultural and textile sectors, which must provide impetus for a better performance.
The growing trade deficit of more than about $5 billion and inflation of over nine per cent and the crippling effect of persistent upward rise in the prices of petrol did not receive adequate treatment in the budget.
Meanwhile, the tax-revenue target has been fixed at Rs690 billion for the next fiscal year, as compared to revised target of Rs590 billion in the preceding year, thus indicating a net increase of Rs100 billion taxes. The tax collection during the year 2003-04 was Rs510 billion.
Although the custom tariff has been revised down-ward on a multitude of items, the estimate for the next year from this source depicts an increase of 4.6 per cent. The custom duty for the year 2005-06 has been estimated at Rs121.2 billion for 2005-06, against the revised target of Rs113.9 billion for the year 2004-05.
Likewise, there is an up-surge in the collection of sales-tax, which has jumped from Rs239 billion to Rs294 billion in the next fiscal year, thus registering a net increase of Rs55 billion. The additional taxes to the tune of Rs100 billion have rendered the budget tax-laden.
The tax/GDP ratio continues to remain within the vicinity of 10 per cent. The number of income tax assessees is not more than 1.1 million, in a country, having population of more than 150 million.
A zero-rated scheme pertaining to both custom duty and sales tax will apply to the export-oriented industries, i.e. textile, carpets, leather, surgical and sports goods. This will remove many irritants and help enhance their production as well as competitiveness abroad in the post-WTO era. It is, however, noteworthy that the duty and sales tax levied on import of raw-material and input used in an export-oriented industry were already liable to be refunded.
However, over a long time, exporters have not been getting the refund on time and speedily. Some-time back, the government introduced `duty and tax remission for exports’ (DTRE) scheme which, due to its more regulatory dimension, could not get the support of industrialists. Similarly, the application of zero-rated regime of sales-tax in respect of export, textile, carpet, leather and sports goods would save these industries from the hassle of refund.
The zero-rated mechanism does not fall within the meaning of tax-relief. It is based on the principles of ‘no tax, no refund’. It will accrue many-sided benefits because it will eliminate the in-built system of malpractices. There were reports of wide imbalances between the tax collection and its refund to exporters.
Since these items are also consumed locally, there would be a loss of revenue. In order to offset such losses, the retail sales of clothes, garments, carpet, sports goods, valuing more than Rs5 million annually, will be subjected to three per cent tax, inclusive of one per cent income tax, which will be considered as final tax liability.
Another disquieting development which has not been taken cognizance in the budget, relates to the growing trade deficit. During the ten months of the current fiscal year, the imports have already touched the mark of $16 billion and exports are about $12 billion. By the end of the year, chances are that the imports would move to around $19 billion, while exports would meet the target of $14 billion showing a deficit of around $5 billion. This may impact on the foreign exchange reserves adversely.
The federal finance minister, in his budget speeches has time and again stressed that the country would adhere to only three taxes, namely, sales tax, income tax and custom duty. The excise duty was one of the taxes along with the wealth tax and others, which were supposed to be ultimately abolished. However, with the introduction of new Federal Excise Act, replacing the existing Central Excise Act of 1944, it appears that the government intends to retain this tax while enlarging its scope.
The persistent rise in the prices of oil has been a major source of disequilibrium in the economy, besides adding to cost-push inflation. The economy has to bear an additional cost of $652.3 million during the nine months of July-March. It would, therefore, have been in the fitness of things, if `petrol development levy’, should have been withdrawn. Meanwhile, revenue for the exploration and development of petrol and petroleum products would have been mobilized from other sources.
At the same time, the budget should have dealt with the indigenous production of oil and additional sources of energy. Meanwhile, the government is providing subsidy to the tune of Rs72 billion to the public-sector corporations, specially to Wapda and KESC. The consumers are doubly affected, because, subsidiary is paid from their taxes and they have to pay high price for electricity.
The SMEs have been termed as driver of economic growth, without framing an effective policy framework. It was expected that the new budget would envisage a package for the development and growth of SMEs either in terms of exports or employment generation.
The budget provides for SMEs support funds backed by incentive for converting the SMEs enterprises into a company. Historically, the government has made no distinction between large and small enterprises and their policies have been uniform for all kinds of enterprises.
The investment made during the last few years was directed mainly either to the high-tech industries or for BMR purposes. The high-tech industries which are generally capital-intensive do not have much scope for employment-generation. Similarly, in case of BMR which is only a replacement of modern machinery, instead of creating new employment opportunities render the already employed workers unemployed. It is SMEs which can create employment and help reduce poverty.
The development projects such as building dams, roads and other necessary infrastructure, have a long gestation-period and although circulation of money is increased in-between, goods and services are not produced. It appears that the present budget has focused more on the supply side, but demand side is also equally important for a balanced economic growth.
The policy of consumerism, initiated
by the SBP for providing funds to the people for the purchase of vehicles and building houses, did generate economic activities, but at the same time, fuelled inflation.
A balance between creation of money and supply of goods and services must be maintained.
It may be emphasized that the budget has mainly focused on achieving the sustainable growth and in the process, such burning issues like inflation, job creation, poverty alleviation have been relegated to the back-ground. The additional tax burden with a major component of indirect taxes would add and not diminish the problems of the common-man.