Until yesterday afternoon, magic and shamanism had no role to play in public finances. After the announcement of Pakistan's federal budget FY20, however, it might seem that taxation textbooks will have to be revised to include the role of magic. How else can the government grow its tax collection at such high pace: FBR's taxes in FY20 are budgeted to grow 19 percent over and above the growth in nominal GDP. That appears simply unbelievable in light of recent trends.
In relation to growth in nominal GDP, sales tax has never been budgeted to grow at such higher pace as it has been for FY20 (27% - see table), whereas budgeted growth in income tax has also been rarely as high as it is for FY20 (@11% above nominal GDP). The latter was proposed to grow substantially high in FY15-16 for instance, but those were the years when advance tax regime was expanded including on cash withdrawal from banks; car registration by non-filers; higher advance taxes on electricity bills & interest income; rising differences in filer-non-filer; and so forth.
This year those filer-non-filer differences have been done away with; corporate taxes have not been increased (albeit they have stayed the gradual decline); sales tax rate at large has not been increased; nor there has been additional super tax over and above what already exists or any other one-time tax to deal with what clearly seems to be a fiscal emergency. Instead Shabbar Zaidi, the tax boss, seems to be relying on an invocation that he has long been arguing for: documentation. (Must read BR Research’s From Shabbar’s lens, May 8, 2019).
He has done away with zero-rating of top five sectors, a big gambit that may have to be rolled back given the reaction of business community. The budget also proposes to limit the government's powers to grant zero-rating. He is betting on asset declaration scheme and the benami account, which should work but it's a never-before in Pakistan's history. He is also betting on business license through Nadra; and tackle the concerns in transfer pricing while empowering the government to rope in small businesses, construction business, medical practitioners, hospitals, educational institutions.
The incremental revenue collection estimate of all these are unknown at the moment, but if the removal of zero-rating survives the onslaught of business community, it might yield substantial amount of money, possibly north of Rs100-150 billion. The removal of zero-rating of utilities for these sectors may also add a few billions.
But these wouldn’t move the needle given the nearly Rs1400 billion budgeted increase in FBR taxes. Changes in the tax slab for salaried and non-salaried might yield another Rs150 billion, whereas sales tax on petroleum may raise another Rs80-100 billion following further exchange rate weakness. Another Rs200-300 billion may be collected by shaving off those huge exemptions (See BR Research The trillion rupee concessions, June 11 2019).
How would Shabbar fill the rest of the yawning gap between hopes and reality? Perhaps better administration, documentation, prosecution. Maybe he can. But given the poor state of FBR, the political climate, the reaction of business community, Shabbar would really need to have some serious abracadabra up his sleeves.
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