Changes in budget proposals

Federal Finance Minister while winding up the debate on the budget 2013-14, took the opportunity to reiterate that 'financial indiscipline' of the past five years was responsible for the current state of the economy and added that the current government is "determined to fix this." The 'fix' unfortunately includes a range of federal taxes and expenditure that would compromise his government's complementary policies. Notable amongst the 'fix' is his announcement during the budget speech that a levy on "net moveable assets on a given date at the rate of 0.5 percent (would be applied) on those of us who may have earned our assets while working abroad...(and) who had negligible tax liabilities under existing laws and double taxation. The receipts under this head will be credited to income support programme of the government."
Three major areas of concerns arise from this particular 'fix'. First, the Finance Bill stipulates that the levy would be applied to resident Pakistanis as well, the idea that non-resident Pakistanis would pay this levy on their earnings, would have been dependent on their voluntary declaration of their assets abroad, which is not a requirement under the double taxation laws and therefore highly unlikely. The levy would therefore be applicable on local investors who did not fracture their wealth and instead consolidated and/or corporatized their moveable assets. The 'given date' for the levy is 30th June, 2013 leaving little or no opportunity to those this tax will be levied on to 'fracture' their wealth. While at first glance the timing of its application maybe construed as a good decision but it brings to mind the freezing of the foreign currency accounts by the Nawaz Sharif government in 1997 which generated some money for the short-term but in the long run led to massive capital flight and perhaps is one explanation why Pakistani assets held in Swiss banks far outpace the Indian accounts.
Second, with 0.5 percent levy on moveable assets the government would seriously compromise its plan to attract local investors to bid for loss-making state-owned entities. Is there any justification for discriminating and burdening the local investors vis-a-vis the foreign investors? Attracting foreign investors who, given the ongoing global recession, as well as our own specific problems including law and order, is going to be a challenge for a number of years in any event. And finally Dar's insistence that the amount collected, which he anticipates at billions of rupees, would be dedicated for the Income Support Programmes and would therefore preclude it from being added to the federal divisible pool to be shared with the provinces. In effect this could imply that the 75 billion rupees earmarked for the BISP and youth training and internship programmes would mainly be met through this levy, an objective that the provinces may take exception to. It is recommended that in order to meet its objective of generating local investor's interest in the process of privatising loss-making SOEs capital assets be exempt from this levy for this year.
The tax on 'Not for Profit' institutions proposed to be withdrawn would now be restored upon a one-time certification of their non-profit character by the commissioner of income tax and thereafter they will continue to enjoy their tax-free status. However, the teachers and researchers continue to be subjected to a raw deal by reduction in their rebate from 75 percent to 40 percent that had earlier been withdrawn altogether in the proposals. The PTI chairman, Imran Khan in his speech on the budget proposals had noted that those oncologists who had taken a massive pay cut to work in his cancer hospital may find this particular budget proposal as the proverbial last straw on the camel's back and it needs to be taken notice of on an emergent basis. It is hoped that Dar withdraws this particular tax on a country where the brain drain is continuing at a fast clip especially given the fact that the amount to be saved from this would be very small.
Dar refused to lower the sales tax from 17 percent by first insisting that it was applicable in the past and would have a negligible impact on inflation but later conceding that sometimes the increase in GST is exploited which causes price hike. Two points need to be made in this context: (i) sales tax is raised during periods of growth, which was the case when the rate was 17 percent and not during a time period when as noted in his own budget speech poverty levels and prices rose, while output declined during the past five years; and (ii) exploitation by manufacturers/wholesalers/retailers is well documented and it would be appropriate for the government to first deal with it through strengthening the Competition Commission of Pakistan as well as the monitoring entities.
The PML-N promised lower corruption through improved governance and a commitment to reform that was unfortunately not evident in the budget. True that advertisements for heads of state-owned entities have appeared, however, there is a need to reform the Federal Board of Revenue to plug its massive corruption as well as improve governance through major policy decisions that have not yet been made public. The government should be aware of the fact that while tax evasion is a serious problem yet Pakistanis give the most in charities, which reflects one fact: no trust in government while having faith in the non-government entities. Unless this changes Dar's attempts at raising revenue would continue to be compromised.