A cursory glance on the positive macroeconomic indicators may reinforce the optimism displayed by the young minister of state in his budget speech. Real GDP grew by 8.4 per cent during the fiscal year 2004-05, large-scale manufacturing by 15.4 per cent, agriculture by 7.5% and the service sector by 7.9 per cent.
The CBR is poised to achieve an all time high target of revenue collection of Rs590 billion. But have the benefits of these positive indicators mitigated the misery of the masses of this country? The vital question is whether the proposals in the budget for the FY 2005-06 would help alleviate poverty in any meaningful way.
The fiscal measures announced with the budget aim to stimulate production, both in manufacturing and agricultural sectors, boost exports and generally bolster the present business friendly environment. A reduction in custom duty rates is proposed on 416 items used by chemical and allied industries. Duties on import of tractors, cotton ginning, wheat processing and feed production machineries have been reduced. In the domain of income tax, withholding tax management has been rationalized. In many cases, the rates have been reduced, most significantly in case of ship-breaking industry. Reduction of one per cent in tax has been proposed for new enlistments in stock exchange. They are only a few fiscal measures which would further enhance the profitability of ventures in manufacturing and agricultural sectors.
Our economic history is replete with the implementation of such measures, based on the presumption that increased profitability would augment savings, capital formation and investment, resulting in their benefits trickling down to the poor masses.
The hope of our economic managers was that the growth-led economy would create large number of jobs, poverty would be reduced and even the poor would achieve a reasonable standard of living.
This has not happened. According to Pakistan Economic Survey, the percentage of population below poverty line in our country has gone up from 17.32 per cent in 1980s to 32.6 per cent in the year 2001-02. The reason is simple. Half the benefits of economic growth in Pakistan have gone to the top 20 percent of the population. The bottom 20 per cent of population are getting only eight per cent of the benefits.
The minuscule benefit to the under-privileged has been eaten up by the great demon of inflation. According to the Economic Survey 2004-05, inflation averaged at 9.3 per cent during the first ten months of the fiscal year, compared to 3.9 per cent of the corresponding period last year. What is more disturbing is that the food price inflation was recorded at 12.8 per cent, compared to 4.9 per cent of last year. Prices of the most basic necessity, food, have nearly tripled in just one year. Is rejoicing over the stability of our macro-economic indicators justified?
It is most worrisome that the budget proposals for the next financial year do not contain any substantial measures for curbing inflation. Providing Atta at subsidized rates at the Utility Stores (notorious for their maladministration and shortages), duty-free import of some food items would hardly make a difference. Measures for curbing monetary expansion will bear fruit only in the long term basis.
On the contrary, the taxation proposals, relying heavily on indirect taxation, would further goad the inflationary trend. The taxation proposals are enumerated in the following schedule:-
Once again, sales tax contributes the largest chunk (42.6 per cent) in the federal taxes. It also shows by far, the highest growth (23 per cent). When the tax is imposed on almost all items of consumption, including electricity, gas and telephone, it is no wonder that the tax is the largest contributor to our exchequer. But the major burden of this taxation falls on
the poor; (1) by adding to the cost of production, it is stoking the flames of cost-pushed inflation; (ii) like all indirect taxes, it hits the poor harder; (iii) more significantly, it is a difficult tax to administer in a poorly documented economy like ours as it is levied on the value addition at different stages of manufacture and sale. The result is that evasion of sales tax is rampant.
One has seen innumerable cases of what are called “fake and flying vouchers” in the parlance of Sales Tax Department. On the basis of the fake vouchers, refund of imput tax is claimed where no tax was paid in the first instance. The evasion in indirect taxes is far more harmful to the nation that the one in direct taxes, for two reasons. One, obviously the public exchequer is denied what was its rightful due. Two, it is more menacing. The tax is not paid to the government but is nonetheless passed on to the consumer. So both the government and the consumer are poorer by this act of evasion. Only the tax evader is richer, and by a hefty margin, given the high rates of taxation. A large number of fortunes have been built on evasion of central excise duty on cigarettes, cosmetics and beverages. Now, fortunes based on evasion of sales tax are vying to replace them. As the industry-wise collection figures of the tax are not available, guesstimate is that a very large chunk of its total collection comes from the utility companies run by the government. Elsewhere it is largely evaded.
The element of indirect taxation in the total revenue, collected by CBR and other government departments, represents a highly disturbing percentage of 69.22 per cent. As we have already seen, it will push up the cost of production, resulting in higher inflation and thus making the poor poorer. By not taxing the incomes of the rich and failing to control the evasion in indirect taxes, the government is leaving large number of money in the hands of the rich, letting them indulge in conspicuous consumption and contributing their share in demand-pulled inflation.
Declining reliance on direct taxation and soft-pedalling, the requirement of income tax laws points towards the oligarchy of permanent interests. Up till now, persons who were not otherwise required to file a return of income but owned a motor vehicle were obligated to file one. Under a proposed amendment in Section 114 of the Income Tax Ordinance, 2001, they are no longer required to do so. Why? Now that the vehicles are becoming more and more expensive and expensive cars like BMW and Mercedes are being imported. Owner of a car, and an expensive one at that, is surely rich enough to pay Income Tax. If he does not, there is only one tag for him – tax evader. By deleting this condition, the CBR is actively encouraging tax evasion.
Our economic managers should realize that the trickle down theory has not worked any time during our economic history. Inflation cannot be controlled by the methods proposed in the budget. It can be controlled only by reducing the burden of indirect taxation on the poor and taxing the rich.