NationalVOLUME 15 ISSUE # 21

Budget in the shadow of corona crisis

The government is confronted with multifaceted challenges in the next financial year 2020-2021. It would be a tough call indeed as every segment of the population — from government servants to the armed forces, from labourers to employers and from the poor to big businesses — wants a helping hand amid the economic contraction.

The biggest challenge for budget makers on the tax mobilisation front faced by the Federal Board of Revenue (FBR) is bridging the gap through automation and introduction of a tax intelligence system and levying taxes on the rich, rather than enhancing the rates of the existing ones, especially the indirect taxes which have already made us uncompetitive in the world. Though the government’s economic team has considered a number of ways for improving the tax structure of the country with the help of an effective data gathering and reconciliation mechanism, yet the challenges are huge.

While the Pakistan Tehreek-i-Insaf (PTI) has focused on a pro-people and business-friendly budget, the FBR is being tasked with collecting Rs5,100 billion in revenue, which will be around 30 percent higher than the estimated collection of Rs3,900 billion in the current fiscal year ending June 30. Prime Minister Imran Khan has said that it would be a coronavirus relief budget and Finance Adviser Dr Abdul Hafeez Shaikh stressed that the government was trying to announce a tax-free budget.

Ministry of Finance former adviser Dr Khaqan Hassan Najeeb said the government was in need of higher revenues in order to spend more on healthcare in the testing times. He suggested that the targeted revenue could be collected by plugging tax leakages, curtailing expenditure on sectors other than healthcare, such as no increase in government employees’ salary this year and shifting the focus to increasing the savings rate to finance the budget deficit rather than increasing borrowing.

The Covid-19 pandemic has made the situation uncertain and impacted tax collection. There are different scenarios, however, an optimistic view is that economic activities would normalise soon while the pessimistic view is that nothing would change.

The economy is facing one of the most challenging years in history. It braved many boom-and-bust cycles, but the national economic output, measured by gross domestic product (GDP), never turned negative since 1951-52. For a change, provincial cash surpluses may not be available to the Centre this year after almost a decade. The revenue shortfall of almost Rs1.6 trillion is too big and has already slashed the pie. The four provinces had promised together about one percent of GDP as surplus to the Centre this year out of their joint share of over Rs3.25t, which now appears compromised around Rs2.2t.

The next year will be no different given the continuation of the Covid-19 impact, at least in the first half. As the current fiscal year will be concluding at a record 9.5pc fiscal deficit, the outlook for 2020-21 can be anything but hunky-dory. The survival and stability will, therefore, be the key challenge in the next fiscal year. As we conclude the fiscal year on June 30, the economy is officially estimated to have contracted about 0.4 per cent against a growth target of 3.3pc. It is, however, far better performance in view of the doomsday scenarios projected by the lenders’ community until a couple of weeks ago.

All targets for the real economy were missed this year by a wide margin. In fact, most of the indicators have gone in the opposite direction. The slide is quite steep when seen against the backdrop of 5.8pc growth just two years ago. The GDP itself is now valued at around $265 billion compared to $280b last year and $313b at the end of 2017-18. The assessment of economic performance by the National Accounts Committee is based on the actual output data for the first three quarters along with the Covid-19 impact in the fourth quarter.

Various assumptions for subsidies, grants and support to the vulnerable are still changing and so are the savings on account of interest payments as monetary policy finally takes an accommodating stance — an over five percentage points’ cut is estimated to have a cumulative Rs265 billion cushion so far.

In his 2012 budget speech, Finance Adviser Dr Abdul Hafeez Shaikh had lamented that even after the injection of Rs1.25t in five years the power sector remained a source of concern. Since then, another trillion rupees have gone down the same drain and the circular debt has monstrously moved past Rs2t again. Its financing and limiting subsidies remain central to the survival of the IMF programme.

Simultaneously, revenues remain the central challenge. A depressed economy can hardly afford more tax burden. After quite some time, the Federal Board of Revenue (FBR) appears to be not in the driving seat — it is not as much the adjudicator of its own cause as it used to be. With support from some heavyweights in the prime minister’s think tank on the economy, economic ministries — finance, industries and commerce — keep on challenging the taxation proposals.

In the context, the minimum tax regime of the FBR is now in question. It promised guaranteed revenue flows, but is leading businesses to show losses through double book-keeping for tax evasion. Enforcement mechanisms, therefore, are also coming under scrutiny now.

The prime minister and his adviser on finance have shunned proposals even for a slight increase in tax rates because of the economic downturn and want to continue with the stimulus approach. Dr Shaikh, Dr Ishrat Husain, Shaukat Tareen and Razak Dawood have called into question the number of taxes, like customs duty, additional customs duty and regulatory duty. They are instead building pressure for the enforcement side to check smuggling and effectively recover collections from bottlers, cigarette suppliers and similar consumer goods whose contraband, duplicate and substandard products flood the markets.

It is in this background that at least 2,000 tariff lines are expected to see total abolition or a substantial cut in additional customs and regulatory duties on raw material and intermediary goods used by export sectors. It has been acknowledged that there is no need for a new tax – all taxes are already in place and will start accruing as soon as businesses resume operations.

Reportedly, the economic team is banking on bridging the 50pc tax gap — the difference between potential and actual collection — through the enforcement mechanism with expert advice from the private sector. A 15-20pc success could add Rs400-500b to additional revenue without new measures. For it, capacity-based taxation for traders and small businesses across the country is also under review.