By

Viqar A. Khan FCA

The economic planning of the federal government has culminated in the budget for the financial year 2000-2001. It proposes an outlay of Rs. 306 billion [L/y Rs. 287 b] for debt servicing which is 229% [L/y 202%] more than the expenditure of Rs. 133 billion [L/y Rs. 142 b] envisaged for defense. The revenue receipts of Rs. 412 billion [L/y Rs. 423 b] cover only 71% [L/y 80%] of the revenue expenditure which stands at Rs. 578 billion [L/y Rs. 526 b]. Meaning thereby that 29% (Rs. 166 b) [L/y 20% - Rs. 105 b] of the revenue expenditure and 100% (Rs. 120 b) [L/y 100% - Rs. 116 b] of the development expenditure is being catered through other sources. Of these other sources, Rs. 178 billion [L/y Rs. 185 b] is through the ‘beggars bowl’.

Defense vs. debt servicing – All this means that the allocation for defense has been reduced thereby making it vulnerable. This appears to be on the dictates of the multilateral agencies to whom the quantum of debt servicing has been increased over last year. This shows the extent of the economic isolation of our country. Our economic and foreign policy planners have been unable to obtain a moratorium on debt servicing and repayments. They appear to be over anxious to please the donor agencies. They seem to have short memories when they tend to overlook that in the recent past, Brazil was able to wrest a significant breathing space from the creditors as a whole. They have been unable to convince the Paris Club of the dangers of nuclear proliferation if an unstable economic environment in Pakistan were to pass on the reigns of power of a nascent nuclear state to adventurist elements. These events reflect an inability of our policy maker to combine our foreign policy goals with our economic necessities. One fails to understand that the decrease in defense spending by Pakistan has been envisioned in the backdrop of an increased spending by India on defense.

The hue and cry raised by some of our skeptics on the size of our defense needs may be true with regard to the quantum of manpower. However, the spending on hardware and technology is measly to say the least, though it may be large (20%) compared to the total budget size of Rs. 698 billion. Our policy maker should understand that our defense needs cannot be compromised. He has to innovate aggressive measures to generate economic activity and the resultant increase in GDP which should hopefully result in greater taxation receipts.

CBR collections – The total collections to be made by CBR have been projected at Rs. 436 billion which is an optimistic 24% increase over last year’s revised figures of Rs. 352 billion. Direct taxes account for Rs. 138 billion (32%) [L/y Rs. 110 b – 31%] while the indirect taxes the balance Rs. 298 billion (68%) [L/y Rs. 242 b – 69%]. This quantum leap in the expectation of increased collection from direct taxes is not understandable since last year CBR revised its original budget estimates downwards by Rs. 17 billion (13.5%). The revenue receipts of Rs. 412 billion [L/y Rs. 423 b] at the disposal of the federal government cannot even finance the combined figures of expenditure on defense (Rs. 133 billion) and debt servicing (Rs. 306 billion). We have a current account deficit of Rs. 166 billion on hand which is a huge 24% [L/y 16%] of the budget. Our total budget deficit is 179 billion [L/y Rs. 185 b] which is huge 26% [L/y 29%] of the total budget outlay. This means the continued dependence of Pakistan on international financial institutions and donor agencies for survival.

Policy making – Every year, our policy maker advises the impoverished population to sacrifice for the country while failing to remove the irritants for gearing the economy. Inspite of the glaring and persistent gap between our resources and our needs, our policy making continues to be devised in the same bureaucratic style. The policy maker continues to advise the bridging of this gap through further indebtedness. This is not understandable since we already have a Rs. 3,200 billion debt of which 56% is foreign and the rest domestic. The policy maker is never taken to task for giving faulty and shallow economic policies.

There is no forum in the country, which has a bird’s eye view on all the facets of the economy from agriculture to industry, from manufacture to service, from technology to manpower, from finance to education, etc. etc. The urgency of having such a policy making forum with an apolitical makeup so as to give continuity of thought and leadership cannot be over emphasized. This forum should be given a sizable allocation. It should be manned by high intellect human resource and should be driven by market forces without any cradle to grave security for the functionaries. It should be severed from bureaucratic interference. Such a forum would churn out policies, which would have depth and take a long term view for the sustained development of the economy as a whole. Hopefully, it would take this country out from the current vicious circle of taking ‘dole’ and acquiring additional debt to finance the earlier ‘debts’. Unless this is done, the nation will continue to remain at the mercy of whimsical policies of the few functionaries at the helm of the affairs. Ironically the major portion of these functionaries is none other than the bureaucracy whose primary function is to execute. By letting the bureaucracy continue to plan for our country, fifty years hence, we shall be worse off than we are today.

Sum up of economy – Two third of the budget speech of the Finance Minister has been focused to sum up the economy. On this I may add, he and his team have done a commendable job. He has highlighted the soft under belly and has given the priorities as perceived by him to make the economy vibrant. He has accorded top priority to agriculture, followed by small and medium industry, information technology and software, exports, financial sector reforms, capital market regulation, oil and gas and poverty reduction. Diagnosing the ills is very important to suggesting a remedy. The one third of the budget speech of the Finance Minister deals with the methodology to be adopted by the government in the next fiscal year to bring the economy back on track. Now we have to see whether the remedies suggested match up to the weaknesses which have been highlighted.

At the outset, the Finance Minister has stated that the document being presented is not a routine budget but is a part of a three year macroeconomic framework. I have gone through the entire Finance Ordinance and no where have I found a three year staggered approach for achieving a particular end. Hence, there is a clear dichotomy between the words and the actions of the worthy Finance Minister. I shall try to focus on the concrete fiscal steps taken to alleviate the situation and at the same time, I shall try to draw parallel to the thought process as envisioned by the Finance Minister and the actual steps taken

Tax amnesty scheme – In the third week of December 1999, multiple money laundering scheme that had been on the ground for almost decade and a half were wiped out without any forewarning. There is no doubting the fact that cheap money laundering schemes and expensive normal tax regime cannot go hand in hand for an indefinite period. If this was the high moral ground to do away with the multiple money laundering schemes, then the action of December 1999 was worthy of respect. Apparently, this was not the case.

When the government failed to recover windfall taxation receipts on the cessation of money laundering schemes, the policy maker took a hundred and eighty degree turn and announced a 10% amnesty scheme on the 1^st of March 2000 which was to be availed upto 30^th of April 2000. This scheme got an extremely poor response. As a consequence, in the last week of April, it was extended to 15^th of June 2000. A diabolical lifetime exemption from wealth tax was thrown in as a bait and simultaneously a national survey of assets and income was launched. This was again extended to 30^th of June 2000 with an additional benefit of payment by installments. All these efforts were able to give a collection of more than Rs. 10 billion, which is the highest collection to date from an amnesty scheme.

As we see from the current budget, the offer of a lifetime exemption from wealth tax was a ploy to entrap an unsuspecting person. There was no element of dignity and uprightness in this offer since the government had already decided to do away with wealth tax.

An amnesty scheme is an admission on part of the policy maker that he has failed to devise workable policies to convince people to pay tax willingly. Hence, he had to go out of his way to give abnormal concessions to a perpetual and a habitual tax evader. Successive governments, considering them an easy source of collection, have given innumerable amnesty schemes. The policy maker has never really made an honest and concerted effort to iron out the irritants, which force an ordinary person to become a tax evader. Since the last fifty years of Pakistan’s existence, not a single scheme has been given to honour and recognize an honest and regular taxpayer. Such trumpeted schemes discourage honest taxpayers for they imagine, and rightly so, that another scheme would be around the corner. It is being speculated that a new amnesty scheme would be given some time in August 2000. These schemes though they become a source of revenue for the government are extremely discouraging to an honest taxpayer and should be given sparingly

Survey and registration scheme – For documentation of assets, it would have been much more wise to begin by setting one’s own house right. If the government can somehow computerize the entire land registration records while simultaneously passing a law against holding benami property and reducing the registration charges to 1% of the value of property, we would have the entire fixed assets documented.

Self assessment scheme – It is proposed to give a self assessment scheme for the corporate and the non-corporate assessees as per last year. It has been stated that the tax survey forms, wherever distributed would form the basis for the self assessment. In other cases, if tax paid is more than 5% of the last assessed tax, such a person would qualify under the self assessment scheme. It has been proposed that 15%-20% of the cases would be selected for detailed scrutiny.

It has been stated by the Finance Minister that there are 1.8 million assessees of which 36,000 are companies or registered firms. Please bear in mind that the government has been giving self assessment and immunity schemes on a perennial basis to the non-corporate sector. This normally left around 20,000 corporate assessees to be catered by a 35,000 strong CBR force. The suggestion is that around 350,000 of the balance 1,764,000 assessees would be subjected to a detailed scrutiny by the same 35,000 thousand staff. These figures show that the policies lack adequate homework

Additional taxation measures – Withholding tax on imports has been increased by 1% (5%-6%) while that on exports has been increased by 0.25%. A surcharge of 5% has been levied on companies other than banking companies. These additional taxation measures have been necessitated to compensate the government for the loss of revenue it would incur by abolishing wealth tax.

Wealth tax – A primary irritant for the declaration of correct wealth, the wealth tax, has been abolished from 1^st of July 2000. It certainly is a welcome step. The logic behind it being abolished is that wealth is saving which has been created from taxed income. To tax it further would be penalizing savings which does not appear to be very prudent. Moreover, wealth tax was levied in 1963 and had not made a significant headway in the last around four decades

If abolishing of wealth tax is accompanied by reduction in registration charges to around 1% of the value of property, it would encourage most people to declare correct value and to register their properties. This would increase the circulation of money and hopefully compensate the revenue due to decrease in the registration charges

Central excise duty – The government still seems to be in two minds with regard to which of the taxes it should do away with it. It has made certain adjustments in central excise duty but there appears to be no concerted effort to do away with this levy

Customs duty – Goods consigned for educational institutions and for scientific research have been brought down from 25% to 0%. In my opinion, this relief will be much abused. Imports in the name of scientific research and educational would flood the market leading to the closure of the related industry. Tariff should always be adjusted with the consent of the local entrepreneur. Anomalies in the tariff structure would give rise to misuse and abuse of the facility

Electro-medical equipment and ambulances are also allowed to be imported free of custom duty. Our electronic industry is not so well developed, therefore, this measure might not harm it significantly. In any case, reduction or elimination of duty without discussing the matter with the people involved within the country in the manufacture of similar items, is a very autocratic tendency, which has hurt our industry ever so often

Sales tax – Additional tax leviable on a non-registered person @ 3% has been reduced to 1.5%. Penalties for omissions and wrong statements have been reduced

Agricultural income tax – The Finance Minister has stated that the provincial government will announce measures for the imposition of an agricultural income tax on farmers with high incomes. This area can only be commented upon, once the policy comes to the fore

Conclusion – The taxation measures and the changes in the fiscal laws do not measure up to the incisive surgery of the economy done by the Finance Minister in the two thirds of the budget speech. It is a cautious budget. Considering that the Finance Minister is new to the local environment and has been on the job for only eight months, he has preferred to be safe than to be sorry. Since his taking the assignment, he has not been quoted as having made too many mistakes. This in itself is an achievement. In my opinion, if he still around for the next budget, we will see a more aggressive posture than what is exhibited in the current budget.