EDITORIAL: Informed sources have revealed exclusively to Business Recorder that the Ministry of Finance has requested additional tax proposals to raise total revenue from around 225 billion rupees (already with the ministry) to 300 billion rupees that would be levied through the Tax Laws Amendment Ordinance 2023.
Any further delay in the implementation of revenue generating measures to contain the budget deficit would simply require more draconian measures.**
The question today is would this amount be sufficient to conclude the ninth review with the International Monetary Fund (IMF) and, if so, then are these measures over and above the contingency plan that the government pledged in the Memorandum of Economic and Financial Policies in the seventh/eighth review documents signed off late August 2022 or whether additional taxation measures are required?
The contingency plan agreed with the Fund stipulated that in the event of monthly revenue data underperformed against the first quarter targets (which it did not) and subsequent targets (which it did in December — both in terms of a reduction in the target tax revenue as well as non-tax revenue) three measures would be taken: (i) setting GST on fuel products to a rate sufficient to raise the necessary revenue up to the standard 17 percent.
This measure will remain pending as the government has yet to max the legally allowed petroleum levy of 50 rupees per litre on High Speed Diesel, Kerosene and LDO which, as per the Federal Board of Revenue (FBR), could generate an additional 76 billion rupees for the remaining five months of the fiscal year.
The shortfall in petroleum levy is estimated at approximately 250 billion rupees, against the budgeted 750 billion rupees, due to a decline in consumption; (ii) withdrawal of exemptions in the manufacture of export goods under export facilitation scheme with a revenue impact of 20 to 25 billion rupees and other unwarranted exemptions such as those benefitting exporters. This measure may be opposed by the Ministry of Finance that has already violated the agreement with the Fund by extending an unfunded 110 billion rupee electricity subsidy to exporters. Additionally, it was agreed to further streamline GST exemptions, including on sugary drinks.
The mini-budget already proposes raising the federal excise duty on sugary drinks to generate 60 billion rupees; and (iii) increasing federal duty on Tier-I and Tier-II cigarettes by at least 2 rupees per stick projected to raise 120 billion rupees. FBR has already proposed raising the excise duty to generate 25 to 30 billion rupees or, in other words, there is further room for revenue under this head.
However, the mini-budget envisages the levy of withholding tax on bank transactions of non-filers projected to generate 45 billion rupees — a tax previously imposed but lifted because it increased the large parallel non-formal economy further contracting the formal economy.
A three percent flood levy is projected to generate 60 billion rupees, capital value tax 10 billion rupees and a tax on banks’ foreign exchange income to generate 20 billion rupees. And lastly, 20 to 30 billion rupees advance tax on the sale/purchase of immoveable property.
One would have hoped that reliance on indirect taxes was reduced in the mini-budget, regressive as their incidence on the poor is higher than on the wealthy, and direct taxes, levied on the ability to pay principle, increased. One would also have hoped that the flawed previous policy of legitimizing the non-filers by levying a withholding tax on their banking transactions had been replaced by widening the tax net instead of succumbing yet again to political instead of economic considerations. The proposals under consideration do not reflect any out of the box thinking and envisage either upping existing taxes, as on cigarettes, or widening the ambit of existing taxes.
The burgeoning budget deficit has already reached unsustainable levels and with another five months remaining in the current fiscal year the situation is likely to worsen.
However, this state of affairs requires not only a raise in revenue but equally, if not more importantly, there is a need to reduce expenditure, especially current expenditure.
And while it is relevant to note that the Prime Minister established an austerity committee on 13 January 2023 yet its reported proposal, to reduce salaries, is likely to lead to strikes given the Consumer Price Index of 24.5 percent in December and is therefore not implementable. Freezing salaries for the next couple of years, ushering in pension reforms where contributions by employees is a requirement and reducing untargeted subsidies is now a necessity.
Copyright Business Recorder, 2023
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