Former Senior Member, Federal Board of Revenue (FBR), Shahid Hussain Asad, stated in an interview with Aaj News that there is a 40 billion rupee shortfall in the first quarter of the current year. This shortfall, he said, would be met through increasing taxes on luxury goods, and claimed that it would not be a mini-budget as a presidential ordinance would not be required. In this context, it is relevant to note that all those taxes that can be imposed through issuance of a statutory regulatory order notably regulatory duty do not require the promulgation of an ordinance. All other taxes, including withholding taxes, enhancement or widening of sales tax, excise and customs duty would require an amendment in the law requiring the promulgation of a presidential ordinance.
The why of the shortfall is fairly easy to explain: the constant pressure on the FBR by the government, especially when the country is on an International Monetary Fund (IMF) programme with agreed quarterly quantitative targets, to generate as much revenue as possible if there is a high probability of a higher than agreed budgeted deficit. The usual practice is for the FBR to collect advance tax by the end of the fiscal year (before June 30) advising those who pay the tax to adjust it in the first quarter of next fiscal year which implies a shortfall in the first quarter (July-September).
Asad was summarily transferred out of FBR last week which many may take as a reflection of the unlikelihood of his proposals being considered. However, taken in conjunction with the transfer of Chairman FBR last week as well, analysts maintain that these administrative decisions may have been taken to attribute blame for the shortfall on senior FBR management. This perhaps was considered necessary to address concerns raised by Harold Finger, IMF mission chief for the 6.64 billion dollar Extended Fund Facility, during the recently completed quarterly mandated review. However, FBR is an implementer and not a decision-maker with respect to tax measures.
It is therefore unfortunate that the Minister of Finance did not take ownership for the shortfall as it is he who approves tax measures proposed by the FBR, then seeks approval from the cabinet headed by the Prime Minister and subsequently gets parliamentary approval for the budget that includes revenue and expenditure measures. The fact that the passage of the Finance Bill requires a simple majority, which the PML-N has, explains why the bill passed so easily in June this year even though the tax measures proposed created distortions which, one would have hoped, had been picked up and at least debated in the National Assembly by the opposition. An example of tax measures creating distortions is the government's claim that it imposed the withholding tax on all banking transactions of non-filers of tax returns to enhance documentation. But, if this was the sole motive then the tax rate should have been lower than 0.6 percent announced in the budget, which the government was compelled to reduce to 0.3 percent after countrywide protests subsequent to the issuance of a presidential ordinance. Furthermore, there would be no reason to subject cash withdrawals to a withholding tax at 0.3 percent by people who are filers of tax return and therefore in the tax. A low rate is used to ensure compliance and detect non-filers while the higher rate is justifiably being seen by economists as a revenue generating measure.
Asad also referred to Federal Finance Minister Ishaq Dar's claim during his joint press conference with Harold Finger that an expenditure of 23 billion rupees has already been slashed. Asked by the media as to what items were slashed, he did not respond. However, the Institute of Policy Research, headed by former Finance Minister Dr Hafeez Pasha, contends that the government has already agreed to reduce development expenditure by 20 percent for the current year which would negatively impact on Pakistan's funding of the China-Pakistan Economic Corridor. And therein lies the difference between an accountant and an economist. The former is focused on balancing the books whereas an economist is more concerned with the tax measures and their impact on all sectors of the economy as well as on expenditure focused on growth.