May Issue 2015

The new fiscal year begins on July 1, with budget proceedings starting around the first week of June. The initial figures suggest that some new taxes are in the offing as the revenue collection target is likely to be set at around Rs 2.9 trillion compared to the current financial year’s tax collection which was revised twice at Rs 2.6 trillion. That amounts to Rs 300 billion worth of new taxes for the next fiscal year.

The government has nothing new to offer, and it’s likely that the present structure will be revised with a few taxes going up and some being cut. Despite the 40 per cent drop in the global price of crude oil, the government never fully passed that benefit to the general consumer as it blamed the economy’s slow growth on the Pakistan Tehreek-i-Insaf’s dharna which lasted almost four months, and the many terrorist attacks and targeted killings in which scores of people across the country lost their lives.

Revenue collection in the first nine months of the current fiscal year stood at around Rs 1.7 trillion, with Rs 900 billion to be collected in the last three months — a target which is next to impossible — leading to a definite rise in the fiscal deficit.

The government raised taxes on furnace oil, petrol and high speed diesel. The sales tax on these products was 17 per cent, but when oil prices dropped it was raised to between 22 per cent to 32 per cent. This helped offset the larger shortfall between incomes and revenue, otherwise the picture would have been much worse.

For the next fiscal year, out of the likely Rs 2.9 trillion tax, around Rs 770 billion is earmarked for defence expenditure; Rs 1.2 trillion has been set aside for debt servicing and interest payments; Rs 330 billion will be spent on government expenditures such as officials’ salaries, pensions and expenses on different ministries, thus leaving the government with a measly Rs 600 billion to spend on the social and development sectors.

Finance minister Ishaq Dar will be presenting the federal budget to the house in June and he is reputed to be a past master in the art of rhetoric. Ambitious plans will be announced promising thousands of megawatts of electricity and a reduction in the lengthy hours of load-shedding. The new projects will claim to help in creating new jobs and boost foreign investment, and documentation of the economy will be the buzzword for the next fiscal year.

We’ve heard the same promises for seven years, but nothing has changed. The country has been in an economic mess. Every year, loadshedding lasts for 10 to 18 hours a day and the rate of unemployment remains the same.

But against all odds, one industry in Pakistan has developed by leaps and bounds — the ‘black economy.’

“Tax collection has been one of the foremost problems for Pakistan’s past governments and needs to be addressed through strict enforcement of current laws,” says Syed Fawad Basir, chief strategist at Alternate Research.

He says the FBR needs to incentivise tax-paying in order to bring more people into the tax net. For example, tax rebates on investment in mutual funds has contributed towards broadening the tax base. For years now, public sector enterprises (PSEs) have been a burden on the government’s kitty as inefficiency has haunted these entities. Pakistan International Airlines and Pakistan Steel Mills are prime examples of this.

“If the government is unable to make these efficient, then they should be privatised in order to raise revenue as well as ensure their efficient operation,” he says.

K-Electric (formerly KESC) is a prime example of a turnaround story, with the company posting profits on a consistent basis. The government needs to take a cue from its successes and apply it to other government institutions.

“I expect the upcoming budget to be the toughest one for this government because they are likely to miss the agreed fiscal deficit set with the IMF in the running fiscal year,” says Taha Khan Javed, head of research at Elixir Securities. “They will have to finally take some concrete steps to make up for the shortfall in deficit.”

This will pose a challenge, especially since oil-based revenues have been suppressed by the decline in international crude oil prices, while a similar decline in subsidies has not been observed. It remains to be seen what measures will be taken in the 2015-16 Budget to enhance tax-based revenues — whether the government targets tax revenue growth through broadening the tax base or by increasing taxes on existing tax payers.

Javed added that the government needs to tap other avenues apart from the manufacturing sector such as agriculture, and the wholesale, retail and transport sector, which continue to remain out of the tax net, though their current contribution to the economy has been around 50 per cent.

In addition, the FBR claims that in the last couple of years, with the help of NADRA it has identified between 500,000 to two million people who have lavish lifestyles but don’t pay any income tax. Yet no credible action seems to have been taken to bring these people into the tax net. Only by going after the tax evaders, and finding ways to increase direct tax revenue, will the government be able to focus on development. Otherwise, it will continue to remain occupied with keeping the fiscal deficit under control, while the rest of the budget is usurped by debt servicing, defense and government expenditures.

Bilal Asif, head of research at Habib Metropolitan Financial Services, says that the drop in international oil prices coupled with the shedding of valuable assets via the privatisation programme gave the government a lot of room to manoeuvre.

“But the performance of the tax authorities with a year-on-year growth of 13 per cent may not be considered as a commendable performance,” he says. “The long-standing problem of power crises has yet to be resolved, as we haven’t see any major power project become productive. With lower crude oil prices, the government should have been in a position to produce more electricity and boost productivity.”

And despite slowing inflation and low interest rates, the lives of ordinary citizens have not changed for the better. The global dynamics has presented a greater challenge where we haven’t seen growth in exports despite the improvement in external account dynamics.

The underlying issue is law and order, says Asif. Unless the law and order situation improves, investors will be wary of investing in Pakistan.

This article was originally published in Newsline’s May 2015 issue.