EDITORIAL: Finally, the IMF (International Monetary Fund) executive board with Pakistan’s programme on its agenda is happening. It’s indeed good news that is unfortunately clubbed with a further burdening of taxes because of FBR’s (Federal Board of Revenue’s) inability to collect the projected tax revenue.
The FBR tax revenues targets are going to be short by around Rs200 billion in the first quarter. The numbers for the first two months of this fiscal year are pointing in that direction, and the contingencies (stipulated in the yet to be released MEFP) will come into play.
This implies that a mini-budget is very much in the offing and perhaps it would be enacted/tabled or agreed with the IMF before Pakistan’s case is presented in the IMF board, which is expected in the last week of September.
The FY25 budget has placed a heavy burden on almost all the economic actors due to harsh taxation measures introduced through it. The rate of tax on the salaried class has been substantially increased.
The corporate super tax continues. Exporters have been brought into the normal tax regime. And numerous sales tax exemptions, including those on sensitive items like baby milk and food, and kids’ stationery items, have been removed. And on top of it all, within three months, there is a likelihood of imposition of some more taxes. That will further antagonize the businesses and consumers alike.
However, the good news is that the government has got some breathing space due to decline in inflation and falling international commodity prices – especially oil’s. SBP (State Bank of Pakistan) has decreased the policy rate by another 2 percent to 17.5 percent, which is to curtail the debt services expense. These factors are giving the government some cushion to limit the fiscal deficit slippages due to the revenue shortfall.
One possible option is to increase the petroleum levy to match the decline in the international oil prices without letting the consumer prices go up. The government ought to have already done it but the fluid political situation obtaining in the country is a hindrance. As time passes, however, options with the government to remedy the situation will certainly reduce.
The issue, however, is that this step alone won’t be enough. The government needs to ‘do more’. Here the contingencies are to come into play. One of them is to enhance the withholding tax (WHT) rates across the sectors. The WHT regime is indirect in nature and at times the collection is higher than the actual tax incidence; and in such cases, refunds are hard to come and contribute to raising the effective tax rate.
The WHT is inflationary in nature and in most cases it is being passed on to consumers. It is regressive in nature and adds to the cost of doing business. That happens in sales tax as well where the service (or goods) recipient has to deduct 20 percent of the sales tax charged by the supplier to ensure that the supplier is not pocketing the sales tax charged and is depositing it in the treasury. This layering is adding to the cost of doing business and it is due to inability of FBR to collect taxes directly.
The sales tax exemptions or reduced rate on certain items -– such as tractors — are to be removed. The farmer is already not happy due to the absence of support prices, and this step would further enhance the cost for him where the growth is likely to remain muted in this fiscal year.
There no doubt that FBR failed to collect the due taxes, particularly on incomes, and has increasingly resorted to taxing transactions by way of the withholding tax mechanism. This has effectively transformed the nature of tax on income, which is a direct tax, into sales tax that is an indirect tax and in the process skewed the entire tax structure.
It has not only substantially increased the cost of doing business but also contributed to price hike and created distortions within the economy, causing gaping holes for tax leakages.
The unfortunate element is that all the efforts are on increasing the tax burden, which is highly skewed towards the sectors that are already in the tax net and that too in an indirect form which hits the poor the most. However, there is nothing on cutting down the expenditures where there is much room to do so.
The will of the government or state is simply missing to reduce its fat. And without doing so, the fiscal consolidation and expectations of enhancing the tax net will remain a pipedream. Meanwhile, new taxes will keep on popping up with limited efficacy to generate revenues with a view to achieving the monthly, quarterly and annual collection targets.
Copyright Business Recorder, 2024