The Finance Bill 2016, presented on June 3, 2016 along with annual budget, by the Finance Minister, is the worst one can think of in terms of imposing oppressive taxes that are bound to retard growth in the frenzy of showing "extraordinary" revenue collection of over Rs 3500 billion in the coming fiscal year. The real tax potential of Pakistan is much higher, not less than Rs 8 trillion at federal level alone. The worthy Finance Minister, hoodwinked by crafty bureaucrats sitting in the Ministry of Finance (MoF) and Federal Board of Revenue (FBR), is pushing the country towards further debt enslavement by killing growth through innumerable withholding taxes that are anti-business in nature. What makes the situation more painful is the fact that he poses like a magician doing wonders, whereas the facts speak otherwise. Even the basic figures like growth rate and per capita income are clearly manipulated to paint a rosy picture.
The budget speech of Ishaq Dar was aptly summed up by Anjum Ibrahim in her op-ed, "What is the critical question this year?" [Business Recorder, June 4, 2016] as under:
"The budget speech was typical of Ishaq Dar: a litany of achievements backed by unrealistic data not supported by either the international donor agencies or independent economists (Dar's claim of a growth of 4.7 percent with IMF's estimate of 4.5 percent and independent economists 3.5 to 4 percent at best) as well as laying the blame for any poor performing macro economic indicator that cannot be manipulated for example declining exports and farm output on factors external to his policies. But some disturbing data is in order, data gleaned from the budget documents: public debt was 64.8 percent in the current year's revised estimates against the budgeted 62 percent; domestic permanent debt was 473 .8 billion rupees in the revised estimates for 2015-16 and is budgeted to rise to 1.476 trillion rupees in 2016-17; savings schemes estimated at 641 billion rupees in the revised estimates for the current year are projected to decline to 577 billion rupees in 2016-17, Punjab and Khyber Pakhtunkhwa are to receive no special grants or transfers in 2016-17, and a tariff differential subsidy for agriculture tube wells in Balochistan of 600 million rupees next year-a decision opposed by donor agencies as it targets the rich."
No independent study is available to show the role of unprecedented indirect taxes, amongst other factors, on the negative growth of agricultural sector as inputs were loaded with General Sales Tax (GST) ranging from 17% to 50%. Diesel used by farmers to operate tube-wells in the absence of electricity has a tax element on an average of over 25%. Fertilizers, pesticides, insecticides, tractors etc, and what not, everything loaded with exorbitant GST making farming non-profitable, and then no subsidies for farmers, similar to the ones enjoyed by Indian or Bangladeshi farmers.
Surrendering markets to foreigners All concessions on imported goods, be it for agriculture (the environment damaging pesticides now less costly), for vegetable ghee producers so that they could now earn more on unhealthy foods, less slabs and taxes on other imported goods so that foreigners could capture our market on the cost of domestic producers. Transfer of resources to foreign companies and producers, more inflation in domestic economy and more taxes on domestic traders and producers. Is any other interpretation possible? It is briefly the budget 2016-17 by Dar and his team.
Since agriculture is vital, over 50% of population lives in rural areas, the negative growth triggered angry reaction from all. The claim of growth rate of 4.7% after fiasco in agricultural sector irked many. Former Federal Minister Dr Hafeez Pasha contested that actual growth rate in 2015-16 could not be more than 3.1%. He claimed that that "this is the third year running that the Pakistan Bureau of Statistic (PBS) has exaggerated the GDP growth rate." The modus operandi, according to him, was that in June 2014, PBS brought down the relatively high growth rate achieved in 2011-12 from 4.4% to 3.8% to show that the GDP growth rate in 2013-14 was the highest in six years. According to Dr Pasha, the growth rate in 2015-16 "has been overstated in ten out of 18 sectors in the national economy. Almost 60% of the overstatement is in services." The estimated alternative growth rates for agriculture are negative 2%; for industry, 5.5% and for services, 4.1%, implying a GDP growth rate in 2015-16 of 3.1%. These are significantly lower than the GDP growth rate achieved last year. This is consistent with the finding over the last four decades that in a year when the agriculture sector declines, the GDP growth rate never exceeds 4%. Agriculture is important for Pakistan not only because it directly accounts for 21% of the GDP but also 60% of the manufacturing is agro-based and over 40% of trading and transport is of agricultural products. This exposes the claims of Ishaq Dar that wonders have been achieved in terms of fiscal stability and satisfactory growth rate as well as increase in per capita income. Without new census and having only an estimate of the number of people inhabiting the country, how did he correctly calculate per capita income and all other indices having per capita impact? Only the trouble-shooter of Nawaz Sharif for all times, Ishaq Dar and his favourites sitting in MoF can do it!
As regards inflation, again there is a problem with data collection. A study titled, "Inflation in Pakistan: Understated Especially for the Poor", launched by free market think tank PRIME Institute, says that "while no major evidence of figure fudging was uncovered, it was discovered that the price level of Consumer Price Index for all urban households in February 2016 does appear to be understated by 9 percent." This study, coming just a day before the launching of the Economic Survey of Pakistan, undertakes a critical analysis of the government's measurements of inflation. It identifies discrepancies between reported inflation rates and adjusted inflation rates, especially for low income households. According to the authors, who include former Federal Minister Hafeez Pasha, "the price levels for the lowest income group households are a shocking 13 percent higher than the overall CPI in February 2016." The study further claims:
Poor households have faced an annual inflation rate since 2007-08 which is almost two percentage points higher than the overall CPI reported by Pakistan Bureau of Statistics. The study found that other household categories are exposed to 1.5 percentage points more inflation on average annually than what was reported by the government. There appears to be a serious problem of understating of inflation in housing rents.
The above also explodes the myth that the poor of Pakistan are not hit by increase in items they consume to survive as inflation is the lowest during the last three "golden" (sic) years of economic wonders of Dar Sahib under the extraordinary leadership and able guidance of Mian Nawaz Sharif, the icon of development in Pakistan.
Now coming to taxes collected, the same story of figure manipulations. By blocking refunds of nearly Rs 250 billion, our worthy Finance Minister is confident about achieving this year's tax target of Rs 3104 billion by FBR, no matter if exports have gone down substantially and economy as a whole is retarded due to nearly 58 types of withholding/advance taxes. The Finance Bill 2016 added new ones and if the trend continues, FBR will one day make a century of WHT (Withholding Taxes). Exporters have been continuously advertising in newspapers and virtually begging for what is due to them.
On November 26, 2015, it was confessed by Chairman FBR that they had blocked refunds of nearly Rs 200 billion to show higher collection aimed at hoodwinking the people and IMF. This confession was made before the National Assembly's Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatisation.
In 2014-15, as in the past, FBR failed to meet the third revised target. The original target of Rs 2810 billion was first reduced to Rs 2691 billion and then to Rs 2605 billion. On a shortfall of over Rs 220 billion vis-à-vis original target, FBR stalwarts received kudos from Ishaq Dar, besides getting hefty bonuses! FBR in its Year Book 2014-15 claimed provisional collection at Rs 2589.9 billion. Till to date it is "provisional" (sic) as no reconciliation was made with the State Bank of Pakistan. This collection was made possible after imposing additional taxes of Rs 360 billion, blocking refunds of Rs 200 billion and taking advances yet not due, of many billions.
More regressive taxes but no will to tax the rich New taxes of billions imposed to meet the target of Rs 3621 billion (indirect taxes Rs 2063 billion and direct taxes Rs 1558 billion) fixed for financial year 2016-17. Some of these tax measures are:
10 percent Capital Gain Tax (CGT) on disposal of immovable properties sold within five years of acquisition, and doubling of withholding tax on purchase/sale of properties for filers/non-filers-this will increase cost of lands/buildings.
One year extension in Super Tax and Alternate Corporate Tax (ACT) is to become basis for payment of advance tax-this is highly lamentable step detrimental for already overburdened corporate sector.
Increase in sales tax on import of mobile phones-this will increase the cost and hurt the low-income groups.
Fixed excise duty of Rs 1 per kg on cement, increase in 10 to 11 percent customs duty on import of 900 items, 15 to 16 percent duty raise on 508 items-all regressive taxes to increase cost of goods effecting the businesses.
Final tax on builders/land developers on the basis of per unit area-thus they will not pay any income tax and pass on it to the buyers!
Increase in FED on beverages from 10.5 to 11.5 percent, replacement of 5 percent FED on cement to fixed rate basis of Re 1 per kg, increase in fixed sales tax on steel sector, sales tax on marble industry @ Rs 1.25 per KWH of electricity consumed-all these to increase the burden of customers and make industries less compatible.
Enhancement of sales tax from 5 to 10 percent on certain ingredients of poultry feed-this will raise the prices of poultry items. Withholding tax on the value of minerals, imposing 17 percent GST on input of milk and fat filled milk-regressive and oppressive tax measures.
No desire to force the rich to declare actual incomes and only incidence of withholding tax has been increased on them as non-filers. The rate of tax on dividend in the case of non-filers increased from 17.5% to 20%. Increase of withholding tax rate for non-filers from 15% to 20% on winning of prize bonds. Higher tax rates of 15% for non-filers receiving dividend from Mutual Funds.
Interestingly, the Finance Minister told the House Committee on November 26, 2015 that "an out-of-the-box solution is under consideration to clear all the pending refund of Rs 200 billion." Even after a lapse of nearly seven months, not only payment of earlier refunds is pending but new ones have also been added. Chairman of the Finance Committee and Minister of Commerce ensured the exporters that refunds would be soon issued, but nothing happened thereafter. Due to pending refunds a serious liquidity crunch was faced by the exporters. Exports have shown 15% decline during the current fiscal year.
No proper sin taxes on tobacco WHO recommends over 70% tax on tobacco products but in Pakistan there is only 61% even after enhancement through Finance Bill 2016. The National Health Services (NHS) Ministry made frantic efforts for increase taxation of cigarettes, but the tobacco lobby succeeded in ensuring only nominal increase. The increase is just an eye wash. An official of the NHS ministry revealed that the ministry wrote to the Finance Minister in March, recommending that prices of tobacco products should be increased substantially in order to discourage smoking, and this would be in the interest of both the exchequer and the country's youth but Dar chose to protect the interests of powerful tobacco lobby.
Even the Chairman and members of Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization ignored the false statements made before them. It proves that FBR is their handmaid though on paper is an autonomous body formed and constituted under the law, Federal Board of Revenue Act, 2007. Members of Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatisation even never bothered to study this law and ask FBR where the Policy Board was, envisaged under section 6 of Federal Board of Revenue Act, 2007.
In the past, FBR has been lying before the Standing Committees of Senate and National Assembly about the quantum of refunds due. On May 13, 2014, the then Chairman FBR claimed that "only Rs 97 billion were payable as refunds." On November 26, 2015, the Finance Minster and new Chairman admitted that the figure was Rs 200 billion. As expected, no action was taken by the Finance Minister against the ex-Chairman as allegedly "everything was in the knowledge of his boss" and overstatement of collection was allegedly done with his "tacit approval". Till today, FBR has not made public the details of outstanding refunds. For good governance and transparency, fiscal data of this nature should be available on the websites of Ministry of Finance and FBR. It should be updated every month so that the public knows how much tax is collected under various heads and what is payable to the taxpayers.
More regressive taxes In case of immovable properties, increase of rate in case of sale of property from 0.5% and 1% to 1% and 2% for filers and non-filers respectively and in case of purchase of property, from 1% and 2% to 2% and 4% for filers and non-filers respectively.
Withholding tax rate of 0.01% on commission of members of Stock Exchange is enhanced to 0.02%. Adjustable withholding tax at the rate of 3% of the value of vehicle be collected by every bank/leasing company etc from non-filers at the time of lease. Like banking companies, income of insurance companies from all sources will be subjected to composite corporate tax rate.
Any person making payment for a foreign produced advertisement shall collect withholding tax at the rate of 20% of the payment. The mineral water is to be charged to sales tax at 17% of value of supply. Our self-assumed, so-called tax experts-cum-economists, sponsored and funded by foreign donors, keep on accusing Pakistanis of not paying taxes, whereas as many as 60 million mobile users are paying 14% advance income tax whether they have taxable income (more than Rs 400,000 annually) or not, in addition to 19.5% sales tax. Their oft-repeated jargon is that only "1% of the population pays income tax." This is total fabrication. Pakistanis are subjected to 58 kinds of withholding taxes under the Income Tax Ordinance, 2001 (both adjustable and non-adjustable) and they contributed 89.4% of direct tax collection [Rs 980 billion] in fiscal year 2014-15 voluntarily. Pakistanis are one of the most heavily-taxed nations, yet in foreign-funded initiatives like 'raftaar', they are dubbed as poor tax payers or even tax cheats. This is height of intellectual dishonestly.
Do these foreign-sponsored experts (sic) and policymakers have any concrete study about real tax potential of Pakistan? It is not less than Rs 8 trillion. Pakistan has about three million individuals having taxable income of Rs 1.5 million-total income tax collection from them, according to tax rates for tax year 2016, should have been Rs 300 billion. If super-rich about 0.2 percent of population are taxed properly, tax collection from them would be around Rs 500 billion. If we add income tax from corporate bodies, non-individual taxpayers (AOPs) and individuals having taxable income up to Rs 1,500,000, the gross figure would be nearly Rs 4500 billion.
FBR collected around Rs 1033.7 billion as income tax in fiscal year 2014-15. Due to weak enforcement and rampant corruption, the collection of sales tax in 2014-15 was Rs 1088 billion, customs duties Rs 306 billion and federal excise was Rs 162 billion. This was around 50% of actual potential as per own admission of tax gap by FBR. It should have been at least Rs 3500 billion under the existing system. This shows that FBR is highly underperforming. Even if FBR collects Rs 3000 billion in 2015-16, after blocking refunds and creating arbitrary demands, it will be only 37.5% of real tax potential of Pakistan. The Finance Bill 2016 after imposing all kinds of oppressive taxes stipulates collection of only Rs 3650 billion that comes to 45.6% of real tax potential of the country. (To be continued on Sunday) (The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)