Overall, the monetary measures unveiled by the mini budget suggest that the government did not do its homework and, by and large, it intends to continue the policies of the previous government. Instead of bringing any new sector or class of people in the tax net, the has government increased the burden on the existing taxpayers. It did not scale back non-development expenditure’s but has cut the development budget, which will pull down the economic growth rate to a level that will not be sufficient to absorb new entrants in the job market. The Asia Development Bank has estimated 4.8 percent growth for the current fiscal against last governments’ projection of 6.2. Despite the trumped-up austerity erne, the cost of running the civilian government has been reduced by only Rs.3 billion.
Nonetheless, the government’s measures of financial discipline stand unfolded. Some real, some symbolic; put together they indicate a tough spell for a common man. The finance minister said these are only emergency measures and the economic reforms will be introduced in coming weeks. He described “increasing employment, enhancing economic stability and supporting exports” as top priorities of his government. These ’emergency’ measures lack the conceptual shift that is needed to document the growing informal economy and increase economic growth to create more jobs.
The proposed Rs.1.9 trillion (5.1 percent of Gross Domestic Product (GDP) budget deficit tar get is Rs.89 billion higher than the original budget deficit target. The finance minister said the country is facing a severe economic crisis. If no measures were taken the budget deficit could shoot up to Rs.2.9 trillion (7.2 percent of GDP). That is, the budget volume could have gone up to Rs.6.1 trillion by end of fiscal year as against Rs.5.246 trillion projected in the main budget.
However, despite Rs.814 billion fiscal adjustment, the revised size of the budget will be Rs.5.3 trillion; Rs.63 billion or 1.2 percent higher than the original budget for this fiscal year. This is because the government has increased the current expenditures budget to Rs.4.4 trillion (an increase of Rs.234 billion or 5.6 percent of the original budget of this fiscal).
The Government has lowered the annual tax collection target to Rs.4.4 trillion, deviating from its pre-election promise of increasing revenue collection and reducing reliance on indirect taxes. The Rs.4.398-trillion target is only 14.4 percent higher than the collection of Rs.3.841 trillion in the previous fiscal year. The New PTI government had promised to increase revenue collection to Rs8 trillion but to achieve this, first year tar get should have been at least 20 percent higher.
Any effects which have begun showing up are not due to trickle down of reforms, but due resource squeeze. Worst hit is Public Sector Development Programme. Nearly 450 schemes costing 1.6 trillion rupees which were in the pre-approval stage, have been dropped. The Government has decided to release Rs.4.5 billion for construction of 8,276 housing units for laborer’s. Employees Old Age Benefit Institute (EOBI) pensions have been upped by 10 percent and 52 item categories of medical instruments and equipment from sales tax. Earlier decision to increase petroleum levy by three-fold to Rs.30 per litre has also been withdrawn. This will result into Rs.110 billion cut in non tax revenue estimates. Government has lowered the cost of doing business by providing Rs44 billion relief to the five export-oriented sectors.
Pakistan’s current account deficit (CAD), caused by higher expenditures in foreign currencies than the earnings, has begun to decline. It narrowed down by $600 million in August 2018 compared to the previous month because of a notable drop in imports. It stood at $2.12 billion in the previous month of July. Imports slowed down 19 percent to $4.47 billion compared to $5.49 billion in July.
Two main pillars of economy, agriculture and textile industry have been given added incentives. Textile that accounts for 60 percent of net exports is thrilled on a massive cut in input costs. The cut in duty on 82 items would give a benefit of Rs.5 billion to the textile industry in remaining months of the current fiscal year 2018-19. Moreover, this sector would get gas supply on subsidised rates. This is in addition to the Rs.44-billion benefits the industry is being provided through gas subsidy to make the utility price uniform across the country. Textile sector is hopeful of doubling exports within five years. Government has also promised to reduce electricity tariff for the industry to the regional competitive level. Agriculture got support prices upped alongside multi-billion subsidy in fertilizer and gas.
Finance Supplementary (Amendment) Bill 2018 has continued the tax measures of previous regime. However, some of the efforts to document the informal economy stand reversed, at least for the time being. Most of the proposed tax measures are direct in nature except for the increase in income tax rates for individuals and salaried persons. The government has imposed regulatory duty on 312 tariff lines and increased duty rates on another 295 lines. It also increased sales tax on the supply of liquefied natural gas (LNG) and mobile phones . Similarly, the government increased the federal excise duty on imported cars, SUVs, vans of 1,800cc and more from 10 to 20 percent. It allowed non-filers of income tax returns to purchase cars and immovable property. It also introduced a tax amnesty scheme for more than 800,000 people who in the past had been picked for audit due to their failure to file income tax returns.
The Government has increased withholding tax on banking transactions being carried out by non-filers of tax returns. This would encourage the growth of informal economy. Cash will be withdrawn from the formal banking sector due to increase in the withholding tax on banking transactions. Non-tax return filers have been permitted to purchase cars and properties; in case of cars this is a welcome step and an upcoming mafia of middlemen for initial registration of cars by tax payers and then subsequent retransfer of cars to non-taxpayers after receipt of hefty under the table money has been eliminated. However, allowing non-filers of tax returns to buy plots and cars, the undocumented economy will flourish. More innovative measures need to be thought about rather than axing its own feet. This is all the more important as the country is struggling to get out of the Financial Action Task Force (FATF) grey listing.
Cosmetic changes include withdrawal of tax-free perks of provincial governors and federal ministers. The perquisites including rent-free accommodation provided by the government to the provincial governors, free conveyance and entertainment allowance granted to provincial governors and rent-free accommodation, house rent allowance exceeding Rs550,000 per month and free conveyance and sumptuary allowance granted to the federal ministers have been withdrawn.
Government has announced gross revenue measures of Rs183 billion. Moreover, Rs92 billion will be collected from tax evaders through administrative measures. The International Monetary Fund (IMF), however does not recognise administrative measures and the government may face difficulty in defending it during upcoming talks.
In the last budget, the outgoing government had increased the minimum threshold of taxable income for individuals from Rs.400,000 to Rs.1.2 million and reduced the maximum tax to 30 percent for salaried persons and 35 percent for non-salaried individuals. It had also reduced tax slabs for salaried as well as non-salaried individuals to three to make the tax system simple. The mini budget has now increased the tax slabs for salaried individuals to seven. Four new tax slabs ranging from 5 to 25 percent have been introduced for salaried individuals, increasing the tax burden on the highest paid per sons by 66.6 percent. It has maintained the tax rates introduced by the previous government for people earning up to Rs2.4 million annually. This tampering was uncalled for.
The government also increased the sales tax on RLNG supply to all the sectors to the standard 17 percent. The reduced 12 percent tax will now be avail able only on supplies of RLNG/LNG to gas transmission and distribution companies. This will increase the cost of cement, fertiliser and CNG production. Gas tariff has been upped up to 143 percent in one go, one hopes that its comprehensive impact has been calculated. The regulatory duties have also been increased or levied on 612 tariff lines. While tax revenues target is down by Rs.169 billion to Rs.4.72 trillion non-tax revenue estimate has increased by Rs.121 billion to Rs.893 billion. The government ‘s net revenue receipts have been projected at almost original budget target level of Rs3.04 trillion after transfer of Rs.2.6 trillion to provinces as their shares in federal taxes. This has left the government with an overall budget deficit of Rs1.9 trillion or 5.1 percent of the GDP against IMF guideline of 4 percent.
This mini budget indicates that the government is in a “go, no go” state with regard to availing IMF bailout package, however, it has a responsibility towards protecting general public against undue economic hardship. Hopefully, good sense would prevail, and financial matter would be handled in a professional manner.
