The International Monetary Fund (IMF) "First Post-Program, Monitoring Discussions" report was a source of serious concern for the Abbasi administration prompting the Advisor to the Prime Minister on Finance, Revenue and Economic Affairs with the status of a federal minister, Miftah Ismail, to publicly disagree with its prognosis.
Ismail stated that the 6 percent projected growth rate for the current year would be achieved, against IMF's projection of 5.6 percent, as proof that the economic wheels are well oiled. No doubt a rate of between 5 to 7 percent is regarded as good while above that is considered exceptional. However, in Pakistan's case, the growth rate is typically overestimated, a concern repeatedly voiced by independent economists based on the failure of the Pakistan Bureau of Statistics (PBS) to rationalize data with other government sources as well as credible industry sources. In addition, Pakistan has lagged behind other regional countries with respect to the growth rate for the past several years; in 2017 our rate was lower than Bangladesh's at 7.2 percent, India's at 7 percent, Bhutan's at 6.9 percent and Nepal's at 6.9 percent. Additionally, China's growth has declined to 6.7 percent and that unfortunately should be a red flag for Pakistan as inflows under the umbrella of the 56 billion dollar China Pakistan Economic Corridor (CPEC), spearheading the growth rate in Pakistan, are projected to decline as China's growth rate stalls.
Ismail also stated that "the increase in revenue indicates that business turnover is growing". Revenue has indeed increased by 75 percent during the past five years of the tenure of the PML-N - from 2 trillion rupees as per revised estimates for 2011-12 to 3.5 trillion rupees according to the revised estimates for 2016-17, a major feat by any standards. The year 2012-13 estimates are not cited given that the PPP government's tenure ended in March 2013 followed by the caretakers; and while Nawaz Sharif took oath in the first week of June yet Ishaq Dar as the Finance Minister took decisions that raised revenue effective from the day the budget was announced, 12 June, rather than from 1 July 2013, the start of the new fiscal year. The current year has not been cited because the budgeted revenue is an estimate and the past five years reveal that these have been unrealistically optimistic.
The biggest percentage jump in revenue collections between 2011-12 and 2016-17, was under the head of income tax collections - from 730 billion rupees to 1363.8 billion rupees, a rise of 87 percent. Income tax is a direct tax or premised on the ability to pay principal and unlike indirect taxes that include sales tax its incidence on the rich is much greater than on the poor.
Three major components of income tax collections reveal that a higher revenue was realized through: (i) Imposition of a withholding tax that accounts for around 70 to 75 percent of all revenue generated from this source. While withholding taxes on income for example rent income can unambiguously be defined as a direct tax yet, unfortunately, the bulk of the withholding taxes are levied in the sales tax mode, which is an indirect tax. In addition, the filers pay less than the non-filers - a factor designed to encourage the non-filers to begin filing their returns. This has effectively implied that filers who had already paid income tax were taxed again as and when they purchased say an airline ticket or bought a car while non-filers, paying almost double the tax on the purchase of a ticket or purchase of a car, were not even remotely tempted to file their returns as that would have meant paying the going income tax rate which is considerably higher; (ii) the rate of sales tax was raised by one percent in 2013-14 to 17 percent across the board which raised revenue considerably; and during the past five years the PML-N government has manipulated the tax rate of petroleum and products (sometimes charging the prohibitively high 43 percent on high speed diesel) to ensure that its revenue collections were not compromised due to a decline in their international price; the reason: ease of collection with little or no focus on its impact on the cost of production which, in turn, began to negatively impact on the ability of our exporters to compete internationally; and finally (iii) the Finance Act 2017 stipulates that "minimum tax under section 113 of the Ordinance is applicable in the case of a resident company, or an individual or an association of persons having a turnover of 10 million rupees or above in the tax year 2017 or in any subsequent tax year if no tax is payable for a tax year or the tax payable is less than 1 percent of the turnover from all sources. At present, the standard rate for minimum tax is 1 percent of turnover. The rate of minimum tax has now been increased from 1 percent to 1.25 percent." Thus turnover tax rate was increased which is a more realistic explanation than Ismail's. Media approached the Federal Board of Revenue (FBR) seeking the exact amount of revenue generated from the 0.25 percent rise in turnover tax however FBR officials stated that the information was not available.
The IMF report notes a 7.2 percent growth rate of large scale manufacturing (LSM) sector (July-November), while the State Bank of Pakistan (SBP) website notes a growth rate of 6.3 percent for July-January. In other words, the LSM growth rate declined in December and January - a persistent since July 2017.
It is relevant to note that SBP website indicates weight given to each item (thereby determining its contribution to the growth of large scale manufacturing sector) and added a column of adjusted weights - the oldest trick in the book to manipulate data. Thus food, beverages and tobacco weight was adjusted from 12.37 to 17.59 and one of its component's (sugar) weightage was increased from 3.54 to 5.04 percent - a commodity produced and owned by this country's political who's who at a cost higher than the international price in recent years which, given the surplus, has implied an export subsidy paid for by the taxpayers'. And land continues to be diverted from cotton to sugarcane production - a situation that all are agreed needs a policy revision.
Textiles consisting of our major export items increased in percentage terms to 0.48 during the first seven months of the current year as opposed to 0.36 percent last year. Automobiles' weightage was adjusted from 4.61 to 6.56 with a rise in the current year (July-January) estimated at a whopping 21 percent compared to 7.12 percent in the comparable period of the year before - a commodity that is almost limited to domestic demand with serious issues acknowledged by administration after administration that include the prevalence of on-money, vehicles do not meet international standards, etc. Iron and steel products weightage was raised from 5.39 to 7.67 and their rate of growth in the current year was 33.9 percent in contrast to last year's 17.46 percent - and this rate in spite of Pakistan Steel Mills being non-operational for these two years.
To conclude, Ismail needs to desist from making claims that are not backed by data and insist on realistic data - a basic precondition for formulating a technocrat budget that he has publicly committed to.