‘Mini-budget’ Consistently inconsistent

The cat is finally out of the bag. The money bill (infamous mini-budget) and SBP (State Bank of Pakistan) amendment bill have been tabled in the parliament and both are expected to become law after debate in the parliament. The passage of bills in the National Assembly may take around 2-3 weeks. The case of Pakistan may not be presented in the 12thJan IMF’s (International Monetary Fund’s) board meeting, but likely later in January.

Money bill will become law after sailing through the National Assembly, after getting the non-binding recommendation from the senate standing committee. SBP’s amendment bill will go through National Assembly steering committee, before sailing through the lower house. However, the SBP bill would need to be passed by Senate (or a joint session of parliament). Thus, it would take more time to become law, and the IMF review will have to be completed without it.

A review of the proposed money bill shows that it is focused on eliminations of exemptions/concessions in the Sales Tax Act, specifically Schedules 5,6 and 8. There are some exceptions – such as Federal Excise Duty (FED) on cars, advanced income tax on cars and on telephone calls, where the tax rates have been enhanced; but these were not demanded by the IMF. In these two items, FBR’s (Federal Board of Revenue’s) consideration is to raise taxes, to lower import bill by increasing prices of cars, and to discourage new cars hoarding.

Many of the concessions and exemptions withdrawn are aimed to remove the distortions and the gross impact would be much higher than the net impact. Around 80 percent impact of removal of exemptions is adjustable and refundable -mainly in pharmaceutical and capital goods (machinery). Finance ministry claims that these would not be inflationary. However, tax experts fear that considering the shaky refund payment history, manufacturers may pass on the impact to the consumers.

The government functionaries say that in pharmaceutical sector the declared amount of sales is around one-fourth of actual. Since the raw material import will no longer be exempted, manufacturers would have to report correct sales to claim refunds. But no one is talking about hanky-panky at import stage where importers collude with customs officials to play with declaration and quantities of import. Steps taken are right (as advocated by the IMF) if the issues in other part of the chains are dealt with. But In Pakistan, the tax evader and avoider usually find ways to undo the intended impact.

One of the most controversial and critiqued items is imposition of 17 percent GST (from zero) on infant formula. The argument against it is that this would discourage use of formula milk and that could have adverse impact on infant development in a country where stunting and wasting ratios are already alarmingly high.

The government people may say that the price of infant milk is high, and it is being used by middle class. If that is the case, the tax should only be on imported milk. There are brands producing in Pakistan which are priced at almost half to imported ones. Some may argue that tax is to encourage mothers to breastfeed. That is true; but one should not forget that 40 percent of women in Pakistan are undernourished (having zinc and iron deficient), and breastfeeding cannot fully compensate for loss of vita nutrition. The government should consider tax revision on locally produced formula, and on import of its raw material.

Sales tax on mobile phones, laptops and solar panels has been increased. This will obviously increase prices of these goods. In case of phones, the tax is imposed on prices higher than $200 and lower middle class mostly use cheaper phones. However, tax on laptop could discourage its use. Here the government has shown lenience as the GST is increased from zero to 5 percent (not 17%). On the other hand, taxing solar panel is no good.

The usage of renewable cannot be overemphasized. It is not taxing environment and has no running fuel import bill. SBP is encouraging its use and offering concessionary finance. But FBR is taxing it. If FBR can bring the IMF on board to not increase tax on tractors and formal real estate structure (REITs), it should have considered solar panels too. Perhaps, its lobbying is too weak in Islamabad.

There are a number of other items as well, but many of those should be taxed. The government is removing the exemptions as per the IMF conditions. And what the IMF is saying is right as many of these are misused. Earlier (last year), the corporate income tax exemptions were removed. Now it’s sales tax.

The next in line is personal income tax where lawyers, doctors, architects, and consultants are having a ball. One area where the government has acted by itself is auto sector. Here the confused mindset of the government is evident. Finance ministry’s thinking is clearly divergent from the ministry of industries. Here the taxes are against the essence of the new auto policy. The government is sending all the wrong signals to investors.

In the budget, government reduced the sales tax on cars of up to 1000 cc to promote penetration of locally assembled smaller cars. Auto players have made investment plans keeping this in mind. Now, within six months the government is removing it. That is what can be described as an inconsistent policy.

Similarly, FED on cars was reduced to deepen local cars penetration to 500,000 a year from around 200,000. Now the FED has been raised again. The premise for imposing these taxes is to lower imports bill. If the import bill comes down, will the government reduce the FED again in the next budget?

This is the summary of the money bill. Considering already high inflation, any new increase has higher marginal pinch. Like every other economic pain, this will pass too. But will the incumbent regime outlast the pain of fiscal adjustment? That’s the big question in Islamabad.

Copyright Business Recorder, 2022