Pre-budget exercise

WEB DESK: A usual the pre-budget exercise currently under way is to increase tax revenue to enable the government to not only meet its growing expenditure liabilities comprising mainly of rising costs associated with debt servicing, defence and general public current expenditure as well as development outlay.

It is unfortunate though that the focus of the incumbent government, like its predecessors, remains on raising existing taxes which implies that a select group would be further burdened. Those who may argue that the government will not take such inappropriate fiscal measures must not be aware that the government has taken three measures in just three years that have acted as a stopper to domestic economic activity.

First and foremost, the Finance Ministry has allowed the sales tax refunds to accumulate with the objective of showing revenue that is higher than is in fact the case thereby generating a severe liquidity crisis within several companies that, in turn, accounts for declining exports. Second, the heavy reliance on withholding taxes, projected to rise to 75 percent of total direct taxes in 2016-17, is being levied not on sources of income that should include rent or dividend income, but on consumer items as well as services that are passed onto the consumers/clients fuelling inflation as well as eroding the value of each rupee earned.

And finally, multiple taxes on several commodities may well reduce the overall revenue collected as the general public begins to adjust to the erosion of income earned. There appear to be no reforms under way focused on ending these blatant tax anomalies and the Ministry of Finance remains concentrated on raising revenue. It is relevant to note that Ishaq Dar has frequently boasted that tax revenue has increased by 20 percent in the current fiscal year which given the rate of growth of the economy of less than 5 percent reflects at best an anti-business fiscal policy and at worst an unrealistic growth claim.

In this context, it is extremely unfortunate that the International Monetary Fund (IMF) with considerable leverage as long as Pakistan is on its programme is also focused on total revenue as opposed to the source of revenue. There are also examples of mismanagement attributable to flawed expenditure-related decision-making. The circular debt in the second quarter of the current year was 326 billion rupees, 39 billion rupees higher than the target agreed with the IMF, and the 11th IMF review report would indicate whether the third quarter target of 341 billion rupees has been met – a target inexplicably higher (instead of lower) than that set for the second quarter. And in the final quarter under the ongoing programme, the Fund has agreed to an even higher stock of circular debt at 364 billion rupees.

It is unclear whether the decrease in the flow of arrears (as opposed to stock) where actual arrears were estimated at 13 billion rupees as opposed to the target of 24 billion rupees, a difference of 11 billion rupees, was adjusted as a rise in stocks of arrears. If so, this is unscrupulous data manipulation that prompted the Fund to state that the government over-performed in the power sector. In addition, the Pakistan State Oil has once again requested the government to release a whopping 190 billion rupees to enable it to import fuel to meet domestic demand of the power and other user sectors on time.

The Finance Ministry should bear the full responsibility for failure to make the payment in the event of a fuel crisis of the magnitude that faced the country a couple of years ago, a responsibility that Ishaq Dar had wrongly refused to bear at the time. Second, the Finance Minister in the post-11th IMF review press conference maintained that development expenditure has doubled; however, according to the releases to-date on the Ministry of Planning, Development and Reforms website 429 billion rupees were released by April (last month) against the budgeted 700 billion rupees – a slash that would not only negatively impact on the growth rate but may also have some negative repercussions on the pace of implementation of the China Pakistan Economic Corridor. It is hoped that the Minister of Finance makes some appropriate revisions in his economic policies to-date to forestall a further decline in economic activity and rising reliance on domestic borrowing to meet ever-rising releases under non-development expenditure.-Business Recorder