EDITORIAL: Federal Finance Minister Shaukat Tarin held meetings with provincial finance ministers, a key requirement for budget-making, and requested them to rationalise expenditure and harmonise taxation policies for a growth-oriented budget. Meaningful consultation with the provinces is critical for the formulation of a realistic and achievable federal budget as subsequent to the passage of the National Finance Commission award and the 18th Constitutional Amendment - both passed in 2010 - provincial surplus began to be used to plug in the federal budget deficit. In 2012-13, the total provincial surplus was budgeted at 80 billion rupees, 23 billion rupees the next year, rising dramatically in 2014-15 to 297 billion rupees to reach 423 billion rupees in 2019-20. In the current year Dr Hafeez Sheikh budgeted 242 billion rupees under this head, unlikely to be achieved given the raging pandemic. However, these projections are rarely achieved and history shows that those provinces governed by a different political party from that in the Centre are resistant to presenting a surplus as budgeted by the Centre while those governed by the same party struggle to reach the surplus target given their lower than budgeted share under the divisible pool due to low growth rates.
Thus one can infer that during a low growth year the budgeted provincial surplus by the Centre is higher, albeit unrealistic, while in high growth years tax collections are higher and therefore the need to rely on provincial surplus not as acute. And when Pakistan is on an International Monetary Fund (IMF) programme and has pledged to adhere to specific conditions particularly those relating to containing the unsustainable budget deficit two years running the pressure to overstate the provincial surplus is all the more. In this context, it is relevant to note the IMF statement in its second to fifth review report dated April 2021: “The provinces formally agreed again to contribute to the federal government’s fiscal strategy via Memoranda of Understanding targeting a surplus of around 0.5 percent of GDP in FY21, conditional on FBR tax collection. To achieve this they will increase their tax revenues by at least 0.1 percent of their respective provincial GDPs relative to their FY2020 performance and constrain the expenditure side while protecting health and education spending.” The Pakistan authorities added that the MoUs include implications in case of missed targets.
However, the Fund report goes on to state that the revenue will rise due to (i) hike in petroleum levy on gas and diesel toward 30 rupees per litre which is budgeted to generate 450 billion rupees this year – a target that will be achieved as per FBR officials. This tax is not only regressive but by raising transport costs contributes significantly to a rise in inflation as well as raises input costs for exporters. In the Memorandum on Economic and Financial Policies the government to achieve the primary deficit pledged to rely on one-off non-Federal Board of Revenue (FBR) measurers and non-tax revenue which includes the levy as well as “additional transfers of SBP dividends”; and (ii) automatic stabilizers which of course are linked to the growth rate.
The Fund also noted that the government has committed to parliamentary adoption of a corporate income tax reform in March 2021 that would simplify the system by streamlining numerous tax exemptions and bringing provisions in line with best international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates and tax liability reductions). In this context, it is relevant to note that at present high rates of minimum taxes apply to all businesses. In the absence of presumptive taxation, i.e., final discharge of tax liability, such abnormally high rates of minimum taxes militate against trade and industry in the documented sector and this anomaly needs to be rectified in the coming budget.
Copyright Business Recorder, 2021
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