PORTALS IN BUDGET 2013
By Brig Samson S Sharaf
Considering Pakistan’s pressing economic issues, it was felt that the government would announce affirmative measures towards revival of the economy through tax reforms, ability to investigate and discipline the energy sector and propel growth that appreciates the rupee. Budget 2013 lacks all three.
At a glance the Budget gives relief to the corporate sector with the idea of attracting investments and agitating growth by promising successive cuts in taxes. The ability of the corporate sector to deliver will depend largely on its ability to ensure export led growth, cheaper domestic consumption as import substitution and employment. The budget is business friendly with a calculated risk covered by widening of the tax base (challenging) and the easy to enforce levies in consumptive taxes. Energy deficits and high costs stare down the throat of this sector.
The Finance Bill 2013 has been introduced to widen the tax base. This aims to bring 500,000 tax evaders into the net and authorising FBR to tap into the online banking system, credit cards and suspicious transactions. To hedge its bets, the government has decided to raise additional taxes by increasing the GST from 16 to 17% and levies resulting in an expected yield of 209 Billion that translates exactly to a budgetary deficit of 6.3 %, a decrease of 2.5% from the 8.8 % in the past.
This reflects eagerness to appease IMF and qualify for assistance. As old habits die hard, the finance minister is once again indulging in jugglery. The budget preparation is an exercise at calculating backwards after factorising the fiscal deficit. The Finance Minister now feels confident to declare that the government will go to IMF at its own terms; the people should swallow the bitter pill; and the salaried class should wait another year before relief comes.
If the corporate sector performs in the next 12 months, the government shall have the initiative of announcing midway reliefs. If not, its tax machinery will ensure that the last drops of blood are sucked out of stones. As events will prove, there is a rolling budget at hand subject to modifications in the course of 12 months. Lolly pops are far and few.
It is this aspect that reflects poorly on the lessons learnt from Pakistan’s fiscal history of two decades. Had the hindsight been there, the budgetary outline would have been different.
Increase in indirect consumptive taxes led by the GST regime does not auger well for the documentation of economy and sustainable growth. If the majority consumes, the supply chain automatically delivers more revenue. A bulwark approach targeting the ultimate consumers in recession is a recipe for hyperinflation, poverty and crime.
Sales Tax is the oldest sledge hammer. Its basic premise remains to collect a levy at every stage of transaction. Ultimately the entire burden passes on to the last buyer. Private cash holdings and undocumented economy are forced into circulation, triggering reflation, raising Consumer Price Index (CPI) and expanding the Gross Domestic Product (GDP). It also allows the effective tax rates to be much higher than the declared ones; an aspect why FBR shies away from the onerous task of direct taxation in preference to this indirect method.
The method holds substance in economies like USA that are productive, consumptive and export competitive. If both domestic economy and exports do not propel consumption, the revenue shrinks as component of GDP. This is what has happened in the past decade.
Since the 80s, Sales Tax has failed to set off these precursors. The solution therefore lies in gradual edging out of GST with a more robust, scientific and documentable Value Addition Tax that taxes each level of profit with a small levy ultimately assisting in determining tax brackets of individuals and businesses. The government has shied away from VAT.
It seems the government has neither the incisive dissection of Pakistan’s energy crises building since 1994 nor the memory of having antagonised the IPPs in the late 90s. The biggest suspicion is that the new un-spelled methodology of handling the crises may land the IPPS and the World Bank at loggerheads with the government again. The circular debt will be reborn due to the price mechanisms, hidden subsidies and fuel cartels.
Under the pricing mechanism of 1994, IPPs with tax exemptions had recovered investments and begun remitting profits and outsourcing costs abroad. They became the new energy manipulators. In 2004, realising the cost of fuel inputs in the energy sector, the government set off to create a state run monopoly in the name of PSO. This monopoly along with distribution companies in the past decade is reported to have embezzled over 37 trillion rupees aggravating cost for local consumers and industry.
Apart for corruption and high cost of fuel, a cascading effect has been the high cost of electricity being paid in US dollars. Repeated devaluations, an archaic WAPDA, distribution companies and the PSO cartels have combined to create a circular debt that can run Pakistan blue in months.
The budget has shown no inclination towards revamping the existing system and investigating PSO. Though the volumes of this corruption are confirmed, rumours suggest that the ineffectiveness of the previous National Accountability Chief had links to his intentions of investigating the biggest scandal of Pakistan’s history in exposing PSO and Ministry of Petroleum.
Appreciation of Rupee
After 9/11, despite $13 billion in the system and an appreciating rupee, the Central Bank ignored the lesson to devalue the rupee. Devaluation means more debt, rising costs and inflation. Unless the tax base is overtly broadened, fuel cartels controlled and domestic production given incentives, the economy cannot grow. The seizure of FCAs in 1997 proved that a weak rupee was not a pre-requisite to boost exports. The present budget in the absence of any growth led initiatives gives no indication that the government has learnt its lessons.