Besides contempt proceedings against the Prime Minister (PM), 2012 may prove an historic year in yet another context: the government may announce the Federal Budget 2012-13 on May 25. Inklings of the distortions the budget may contain are being provided by the PM, the Finance Minister, and Federal Board of Revenue (FBR).
On February 25, the PM informed the media that his government will not levy new taxes in the coming budget, and will provide relief to the masses via the Benazir Income Support Programme (BISP), which left one guessing about the sources to fund an enlarged BISP: The Public Sector Development Plan (PSDP), as before?
An explanation came via the National Assembly's Standing Committee on Information and Broadcasting that wants levy of 2% broadcast cess on cellphone users, and one-time Rs 4,000 fee on new car purchases. These two, perhaps, aren't taxes. But indications are that the PSDP may still be slashed, as discussed here later on.
A day earlier, Dr Hafeez Shaikh, who became 'Advisor' to the PM (pending the passage of 20th Constitutional Amendment) emphasised the need for an accelerated drive for collecting 'direct taxes' and providing relief to the existing taxpayers. Both objectives are unusually realistic and commendable but the strategy therefore is as odd.
This policy announcement came after a two-day meeting of the FBR that finalised its lengthy report on the World Bank (WB) sponsored Tax Administration Reform Project. But with its promises to devise and implement highly sophisticated systems, the document sounds like a thesis for a PhD degree.
The report includes references to: Customs and Tax Fraud Division (CTFD), Project Management Unit (PMU), National Intelligence Division (NID), Risk Management System (RMS), Risk Management Unit (RMU), Pakistan Revenue Automation Ltd (PRAL), Customs Automated Clearance System, Web-Based One Customs (WeBOC) and Micro-Clear, Post Clearance Audit (PCA), Customs Administrative Reform Program (CARP), and Single Administration Document (SAD).
Mind you, these systems (mind-boggling in the sophistication they imply) are to be implemented with active participation of the taxpayers in a country that has a global reputation for illiteracy, and petty as well as gigantic modes of corruption being rampant in its economy.
A workable option that doesn't attract the Finance Minister, the FBR, the WB and the IMF, is the introduction of the annually renewable trade-licenses, which could ensure maximizing tax contribution by the retail sector of which just about 12,000 of an estimated 2.5 million pay any taxes.
What the FRB needs to do is to divide all retail outlets in the big, medium, and small categories, and require them to obtain annually renewable trading licenses on payment of fees ranging from Rs 3,000 to 9,000. The mega-retail outlets should be taxed on the basis of the formal tax returns they file.
Meantime, with the help of tax consultants, the FBR must quickly develop the basic books of accounts (in all the four provincial languages besides Urdu and English) to be maintained by retailers, and give them three years' time to get ready for eventually filing tax returns.
That's how the FBR can achieve the aim of inculcating the culture of paying taxes and increase the current miserable tax-to-GDP ratio of a nation that continues to remain illiterate, more so when it comes to keeping logical and reliable books of account.
Besides, a trade licensing could help develop a data-base to serve a variety of purposes in economic planning, and taxation on a more equitable and less non-controversial basis. Instead, the FBR is again bracing for a failed experiment: impose "Reformed General Sales Tax (RGST)" that won't deliver anything.
In the absence of the above-described basic framework, can the FBR credibly succeed in collecting RGST based even on the retailers' annual turnover? One thing is certain though; the move will justify retailers' charging RGST to the people, and higher inflation.
To succeed in this adventure, the FBR will need a huge workforce and train it quickly to routinely check (God alone knows how) what is the fair amount of RGST collected by a retailer, and whether it has been deposited with the FBR? But this inspection "business" will certainly open fresh venues for corruption.
About the Public Sector Development Plan (PSDP), according to the latest Planning Commission (PC) report, its size in 2010-11 was 7% below that budgeted for 2007-08, 27% less than the budgetary allocation in 2008-09, and 17% less than the allocation in 2009-10, and 2010-11, closed with the largest cutback of almost 32%.
This, according to the PC, was despite the fact that the cost of the projects escalated from 14% to 15% during their completion period courtesy unrealistic cost estimates (especially the displacement cost), hike in global prices of inputs, depreciation of the Rupee, and resource waste and corruption.
Yet, the PC claims that the projects are now approved quickly. For instance, 216 proposals for Rs 1.085 trillion were assessed between mid-October 2010 and mid-April 2011 (just 6 months), and 192 projects for Rs 985 billion (PSDP was just Rs 233 billion) were approved, ie the approval rate was 91% (of the amount, not number of projects).
An official of the Finance Ministry told the media that the government would protect at all costs the Rs 300 billion allocation for the PSDP (higher by 40%, compared to Rs 233bn, in FY10-11). But not much of the credit for this 'rise' in the allocation goes to the government.
Pakistan received Rs 60 billion in project aid during July-December 2011 against its estimate of Rs 36.5 billion for FY11-12. The government is again expecting foreign aid inflows to cross Rs 70bn by end of FY11-12. Impliedly, the government's own allocation will still be around Rs 230bn ie zero growth therein.
The other dangerous implication is that, should the expected aid (Rs 70 billion) not arrive, the PSDP may be slashed by this amount to divert resources to other pressing requirements; for instance, higher allocation for the BISP. Doesn't that amount to compromising the future for living today ie on handouts?
Do BISP handouts help people engage in sustainable economic activities, become self-reliant over time, in short, learn to stand on their own feet rather than rely on alms? What existential culture are we promoting? Shouldn't this culture be promoted through supportive social and physical infrastructure improvement?
The other likelihood is that the funds diverted from the PSDP could be used for higher subsidies or discretionary funds for the PM under the People Works Programme (PWP-II). Although, that too amounts to compromising the future, it is a marginally better option compared to handouts under the BISP.
The only positive indicator is that during the above-referred meeting in the FBR, some members of the TRCG opposed the amnesty schemes (which too were discussed in the meeting) because such schemes discourage the compliant taxpayers who regularly pay taxes.