Dar's claims

Federal Finance Minister Ishaq Dar's blatantly incorrect claims as well as lack of consultation with his cabinet colleagues (leave alone parliament) prior to approving the 40 billion rupee mini-budget announced this week past may have disabused his few remaining supporters of his capacity to be credible or take his colleagues on board on decisions that would have a far reaching impact on the quality of life of the general public.
Dar repeatedly claims that there has been no dictation from the International Monetary Fund (IMF) under the 6.64 billion dollar Extended Fund Facility with respect to his mini-budget and that the revenue from the package would be targeted towards the operation Zarb-e-Azb and the internally displaced persons (IDPs). This is a blatant misrepresentation of three known facts: (i) Dar himself admitted during the joint press conference held on 5 November 2015 with the International Monetary Fund (IMF) Mission Chief subsequent to the completion of the ninth mandated review that there has been a revenue shortfall of 40 billion rupees which would have to be made up with additional taxes and/or lower expenditure; (ii) the next day on 6 November the Mission Chief in his interaction with the media stated that the shortfall has to be bridged with the unambiguous indication that this is a pre-tenth tranche release condition; and (iii) budget 2015-16 has already earmarked 200 billion rupees for the army's operational expenses and 100 billion rupees for the IDPs. Any additionality in this context is highly unlikely at this stage.
The process of approval of the mini-budget smacked of abuse of his personal relationship with the Prime Minister as Dar first put together the package, then got the Prime Minister's approval and subsequently approved it in his capacity as the head of the Economic Co-ordination Committee (ECC) of the cabinet.
Dar also claims incorrectly that the tax measures proposed in the package would only hit the rich as they are limited to luxury items. It is relevant to note that all the taxes envisaged in the mini-budget are indirect taxes whose incidence on the poor is greater than on the rich. Dar's inability to raise direct income taxes is by now patently evident. The naming and shaming of parliamentarians did not lead to higher tax collections though the taxpayers did bear the cost of that publication and he has exhibited a singular lack of attention to try to form a consensus to amend the constitution and bring rich farmers into the income tax net (at the same rate as the salaried class). The relevant information on the 1.7 million identified by Nadra as frequent travellers and not paying direct taxes was not passed onto the Federal Board of Revenue (FBR) even after the former FBR Chairman Tariq Bajwa (since then given the considerably lower prestige position of Secretary Economic Affairs Division) wrote a letter to Nadra. The reason: Nadra and FBR were not co-operating reminiscent of lack of legislation that would have ensured the release of the information.
If one sprinkles poor governance that pervades the Finance Ministry and attached departments, particularly the Federal Board of Revenue (FBR), one understands why genuine income tax reforms are not being implemented. There is a visible rise in reliance on withholding taxes collected by withholding agents and not FBR officials (currently these taxes account for 65 to 70 percent of all direct taxes collected). In addition, withholding taxes are not strictly direct taxes as they are passed on in their entirety to consumers who maybe filers and paying income tax but who bear this additional burden because the time and money that is required to claim a refund in this country is more than the refund itself; but they almost certainly are paying customs or excise duty or indeed sales tax. In other words, Dar's claim that he is enhancing documentation by making non-filers pay more withholding taxes relative to filers is considerably undermined by their payment of these other taxes.
The biggest revenue earner to meet the shortfall of 40 billion rupees is the one percent further rise in customs across the board projected to generate 21 billion rupees. Customs duty was imposed at the rate of one percent in 2014-15 budget, which was raised to 2 percent in the current year's budget and with the mini-budget total duty is now 3 percent. To reiterate this indicates that those importers/traders who maybe non-filers are still paying the 3 percent customs duty on all imports on top of sales tax and excise duty, if applicable. Dar's budgeted 0.6 percent tax on all banking transactions for non-filers (negotiations ongoing between the traders and the authorities) does not imply that traders are not paying other heavy taxes.
Dar is also on record as claiming that the customs duty would be on luxury items. He needs to revisit his definition of luxury items as imported pulses, vegetables, onions, would be included in the higher tax. Edible oil, an essential product, as well as all public utility items and computer items would also from henceforth pay an additional one percent customs duty which implies lower middle to middle-middle income earners would be badly impacted. This levy would also be applicable on all petroleum products imported on or after 1 December and unless sales tax is adjusted for January prices would rise. Any rise in duty on petroleum and products would have an across the board negative impact on domestic prices as well as transport costs thereby fuelling inflation and eroding the income of the poor sections of society more than the rich. Fuel as a major component of manufacturing input costs would have a further negative impact on the capacity of our exporters to compete internationally.
The projected revenue from the levy of regulatory duty on new items is projected to generate 4.5 billion rupees and enhancement of duty to also generate 4.5 billion rupees. There is general skepticism on two counts with respect to the imposition of regulatory duty on 350 items. Firstly, there is general bafflement again as to how some of these can possibly be defined as luxury items with examples including live poultry, citrus fruit, pears, plums, yogurt, handkerchiefs, garments' made up of fabrics, footwear, glass beads. Perhaps the vulnerable would not be purchasing these items but the lower middle to middle classes certainly do. And secondly, given our long and porous borders with Afghanistan, Iran and India any tax that is imposed on these so-called luxury items would fuel smuggling activity which, in turn, would imply that actual revenue collections may be a lot less than what Dar envisages.
So what revenue measures would have been supported by the public? Dar has been in the forefront on behalf of his party to ensure good relations with other political parties. He is credited with staying the government's hand in proactively pursuing cases of corruption against the PPP leadership including the two former prime ministers, the former president and other cases including the Ayyan Ali money laundering case. The amounts involved in these corruption cases are in billions of dollars. In this context it is relevant to note that former Chief Justice Iftikhar Chaudhry ensured the return of billions of rupees of money under the controversial rental power projects. This approach should be favoured over and above higher indirect taxes as well as privatisation for which a favourable domestic and international environment simply does not exist at present. Pakistan's rating on ease of doing business has declined and there is unlikely to be great interest in the sale of state-owned entities outside the country. Sale to Pakistani nationals may well raise concerns about favouring one buyer over another. However recent statements/claims indicate that this hand-off approach is changing.
What is extremely significant is that the 40 billion rupees envisaged in the mini-budget would be realised by the end of June 2016 therefore the obvious concern is that in the event of a shortfall in the next quarter a new mini-budget would be required to appease IMF concerns. So more taxes are probably on the way which would have negative political implications on the PML-N.