Flawed budgetary measures

Pakistan’s prevailing outlook paints a grim picture of a state in deep trouble. In view of perpetual political instability coupled with the economic meltdown, the country has been grappling with daunting challenges on all fronts, internal and external.

The main root cause of the present day’s mess is the non-observance of the principle of trichotomy of powers enshrined in the supreme law of the land—the 1973 Constitution of the Islamic Republic of Pakistan. The blame for this has earlier been mainly attributed to extra-constitutional measures and continuous institutional interferences in executive matters. However, of late, the state’s judicial branch has played a part as well in hampering the governance system, leading to political instability and economic chaos.

A country that was once hailed as an investment alternative to India is now facing the formidable problem of averting a default on its foreign payments. The inflation rate has soared to nearly 38 percent, while the policy rate to 22 percent after a recent 100 basis points increase. Sadly, financial decisions made by the leaders for political gains cannot be overlooked when attributing responsibility for the current worsening economic situation. Despite the country’s precarious economic condition, our rulers are still reluctant to acknowledge the need for introspection. A palpable division within institutions and power struggles among them are posing serious threats to our sovereignty. The mindset exhibited by those who matter in the land has not only undermined democratic principles but has also severely eroded institutional credibility.

The pursuit of endless power games has resulted in ignoring crucial matters, exemplified by nearly 55,000 pending cases in the Supreme Court of Pakistan alone. Additionally, the state of law and order is highly worrisome. Violent protests in the wake of Imran Khan’s arrest on May 9, 2023, have sparked a fresh national discourse. Despite decades of implementation of the Army Act of 1952 and the sentencing of many civilians under its jurisdiction, it is now being contested. Sympathizers of the May 9 incident, including some others, have contested its non-application and the matter is sub judice before the apex court.

Amidst these testing circumstances, ordinary citizens are bearing the economic brunt. The coalition government of Pakistan Democratic Alliance (PDM), much like its predecessor, has failed to provide any respite to distressed families. The reform agenda for addressing fiscal deficit is still awaiting implementation. Presentation of a budget of Rs 14.46 trillion on June 9, 2023, touted as a tax-free budget, underwent significant alterations [now revised to Rs 14.46 trillion] before receiving approval from the National Assembly on June 25, 2023, to meet the conditions (dictates) of the International Monetary Fund (IMF).

The tax revenue target initially set by the government for the Federal Board of Revenue (FBR) was Rs 9,200 billion [now revised to Rs. 9415 billion]. Although it seems pragmatic, but keeping in view the economic conditions of the country when major establishments are struggling to carry on their operations due to high cost of doing business and numerous small and medium enterprises (SMEs) have already gone out of business, it may not be achieved.

In this situation, rather than reforming the capacity of revenue generation and improving enforcement capability, the government has preferred to burden the already struggling middle-income families and push many below the poverty line. Finance Act, 2023 making amendments in the Petroleum Products (Petroleum Levy) Ordinance, 1961 has raised the levy up to Rs 60 per liter. An additional levy of Rs 10 would be inflationary nullifying the increase in salary of government employees, besides creating a burden on the middle class. It is also unconstitutional as the petroleum levy being a non-tax item could not be made part of the Money Bill.

Though the government claimed cutting expenditures up to Rs. 85 billion, yet amendments in the Members of Parliament (Salaries and Allowances) Act, 1974 (XXVII of 1974) present a different picture. The law is amended to secure use of vehicles of 1600cc by chairpersons of standing committees of the National Assembly and the Senate, though for camouflaging the words between 1200cc to 1600cc mentioned. “They are already using 1300cc cars”. Again, it is violative of the Constitution as such items could not be made part of the Money Bill. Further amendment extends the facility of staff-driven cars to the heads of standing committees for their journey outside of Islamabad dispensing with the condition to hire private drivers for such yatras (visits). The treasury will be burdened for the remuneration of drivers. The same section earlier required that chairpersons would be responsible for restitution of any damage caused to the official vehicle in the event of any accident during a journey outside Islamabad now it is from taxpayers’ pocket.

While amending the Customs Act 1969, the government offered 0% duty on imports or exports made by, or for, the qualified investment in respect of a project as specified at Serial No.1 of the First Schedule to the Foreign Investment (Promotion and Protection) Act, 2022. Subsequently, relief has been given in customs duty on household goods of employees of Reko Diq Mining Company (Private) Limited. However, this benefit will be claimed by only those who are either citizens of a country other than Pakistan or who for the tax year immediately prior to the import of goods, were non-resident in Pakistan for the purpose of Income Tax Ordinance, 2001.

However, the most regressive revenue measure is in the case of middle-income salaried persons. The Finance Act 2023 has increased the tax burden on the salaried class, with monthly incomes between Rs 200,000 to Rs 300,000. The highest slab for the salaried person (having salary income more than 75% of total taxable income) is 35% which is higher than 29% of the normal corporate tax rate. A salaried individual will now pay a higher rate of tax than companies and large corporations.

According to new tax rates with effect from July 1, 2023, for salaried individuals, earning over Rs 2,400,000 but not exceeding Rs 3,600,000, tax will be Rs 165,000 plus 22.5% of the amount exceeding Rs 2,400,000. Where taxable salary exceeds Rs 3,600,000 but does not surpass Rs 6,000,000, the tax will be Rs 435,000 plus 27.5% of the amount exceeding Rs 3,600,000. For a salary of more than Rs 6,000,000, the tax will be Rs 1,095,000 plus 35% on the amount exceeding Rs 6,000,000. However, no change is made in the taxation of income of salaried individuals falling in the lower slabs which is between Rs 600,001 to Rs 2,400,000.

While imposing heavy taxation on employees, the government did not bother to withdraw exemptions available to the rich and mighty salaried persons in higher judiciary and higher echelons of the civil-military bureaucracy. Additionally, the informal economy is the biggest challenge in revenue collection where salaried persons avoid any taxation.

Various credible reports indicate that the size of Pakistan’s informal economy is close to 37% of GDP. The informal sector also offers significant employment opportunities to the workforce in both rural and urban areas, especially in markets, restaurants, etc. The government has failed to introduce a comprehensive plan for documenting the economy and financial inclusion to bring all into the tax net, even those non-filers who pay exorbitant withholding taxes. FBR lacks the will to bring non-filers into the tax ambit. Introducing a higher rate for withholding tax is not a solution as most of them conduct cash-only businesses that hardly involve banking transactions. The government seems oblivious to the fact that due to its passive approach in hunting down these non-filers and traders, the dream of financial freedom from global lenders will never be realized.

Additionally, the government should revisit its approach of running loss-bearing commercially operated state-owned enterprises (SOEs) on subsidies. A good portion of revenue is being wasted in terms of subsidies which, in the current budget, is around Rs 1054 billion, including for these SOEs.

Budget for the fiscal year 2023-24 dedicates lion’s share of funds [Rs 7303 billion against net income of Rs 6879 billion] toward servicing debts, resulting in constrained resources for other essential expenses and operational costs. For tackling this challenge, the optimal strategy involves streamlining administrative processes, right-sizing the gigantic government machinery, cutting administrative expenses by 50%, formalizing the economy, and implementing a robust framework that guarantees accurate payment of both direct and indirect taxes by all stakeholders. Additionally, Pakistan should enhance its monitoring capabilities to combat trade-based money laundering and ensure precise collection and reporting of taxes. Neglecting these measures would hinder the realization of improved social indicators and development goals.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023