Daily Times

Political parties that form governments around the world use their initial honeymoon periods to push through reforms that in the usual course of business are seen as politically difficult to enforce due to the power of vested interests that seek to block them. Undertaking such reforms at an early stage also sets the course and lays a solid foundation for the newly elected government to work and build upon during the rest of its term. To be honest, a lot was not expected when it came to reforms from the Pakistan Muslim-League (PML-N) due to the nature of its vote base that still relies on conservative and traditional structures. But to see it presenting its maiden budget that utterly failed to tackle any of the structural economic woes of Pakistan is indeed a depressing sight.

The tax revenue target has been set at an ambitious Rs 2.47 trillion by the new Finance Minister Ishaq Dar. Very ambitious indeed, given that we missed last year’s target of Rs 2.38 trillion by a whopping Rs 350 billion. But what is more worrying are the sources that Mr Dar plans to use in attempting to meet this target. We have a one percent raise in GST, coupled with a raise in turnover tax (raised to one percent from 0.5 percent) and withholding tax that the government plans to use to raise revenue. The raise in GST will, of course, have a direct inflationary impact and is a regressive form of taxation. It burdens the poor more than the rich. However, turnover and withholding taxes will also be figured into the costing sheets of firms and eventually be passed on to the consumer in the form of higher prices. Couple these measures with the proposed exorbitant increases in electricity and gas prices and our inflationary rocket will be ready to lift off.

Sadly, the million odd data of wealthy individuals that lie with the FBR that pay no taxes at all has not been mentioned in the finance minister’s speech. Similarly, agriculture that contributes more than 21 percent to our GDP and is now a provincial subject as far as tax collection is concerned received no attention. The significance of agricultural earnings can be gauged by the fact that Punjab’s tax-to-GDP ratio is half that of the national average because of the massive role of agriculture in this province and the almost negligible tax collection from this sector. Agriculturalists benefit from many exemptions and lacunae in the law that allows them to pay virtually no tax on their incomes. A complete legal overhaul is required on this count and the PML-N could have benefited from the support of the opposition parties that have formed governments in other provinces and are eager to bring this sector under the tax net. But this opportunity too was lost, perhaps due to a lack of political will.

It was pledged in both the PML-N and Pakistan Tehreek-e-Insaaf (PTI) manifestos that all forms of income, irrespective of their source, would be taxed. And this represented a major change in Pakistan’s political economy. But this pledge has not been converted into policy by the PML-N. Huge swathes of Pakistan’s economy are not taxed simply because income is not derived through one homogenous activity or sector. By tradition, the salaried middle classes or the registered commercial and corporate companies that are already in the tax net are burdened each year to meet the ever rising expenditures of government. Apart from agriculture, the stock markets, real estate and the Afghan transit trade yield massive incomes annually but the corresponding taxes collected from these sectors are close to nil. Pakistan’s tax-to-GDP ratio is now below nine percent precisely for the reason that we have failed to tax these forms of income. This ratio is lowest not only in the region but also one of the lowest in the world. And if Mr Dar contemplates raising the tax-to-GDP figure of Pakistan to 15 percent by using the same old traditional methods of fixed and indirect taxes, he will be unlikely to meet his ambitious revenue targets. This in turn will force a cut in the PSDP of which the energy sector is now the largest recipient.

As the PML-N shies away from taxing wealthy individuals, large agriculturalists and real estate tycoons, it has simultaneously added insult to injury for the common man by deciding to tax education (five percent above Rs 200,000 in annual fees). This is another fatal blow for the already squeezed middle class that is forced to look towards the private sector for their educational needs due to the failure of the state in ensuring adequate and quality provision of education for citizens. Pakistan’s education spending as a proportion of its GDP is one of the lowest in the world. Instead of rectifying this major lack of spending on education, our new government has decided to tax it.

The finance minister made a bold statement of eliminating the circular debt within two months. He did not elaborate on the mode and method of doing so. Given the limited resources available and the revenues that additional taxation can or will yield, it can be safely said that the money will either come from the IMF or will be borrowed domestically. However, what is more important is that the finance minister did not divulge the details of how he would prevent the circular debt from resurfacing again. Pakistan’s energy mix that is 40 percent dependent on expensive furnace oil is unsustainable. Furthermore, estimates are that if our IPPs are to run at their full capacity, we would require an additional $ three billion for furnace oil imports. Do we have that sum? If not then the circular debt will eventually resurface. Unless, of course, the finance minister plans to raise the per unit cost of electricity to such levels that it not only makes life even more miserable for the masses but also triggers a massive inflationary wave and makes our industry uncompetitive in international markets.

After burdening the common man with different forms of regressive taxation and failing to broaden the tax net, the PML-N could not resist its habit of cosmetic measures. Policies like the laptop scheme, youth internship, micro credit and the like were introduced to obscure the real philosophy and priorities of this budget. If one cuts through the economic jargon, numbers and percentages, it becomes all too apparent at once. The PMLN’s maiden budget is just more of the same: regressive and inflationary.

The writer is a Graduate in Development Economics from SOAS and a Barrister-at-law from Lincoln’s Inn. He is also the PTI candidate and runner-up from NA-121 Lahore and can be reached on twitter @Hammad_Azhar