Thursday, 20 June 2013

BUDGET: Scrambling for Revenues

The Article was published in the Money Matters on June 17, 2013 
 Scrambling for revenues 
 By M Ali Kemal 
The budget is an important event. Based on the budget presented, each year investors take decisions regarding investment and divestment, entrepreneurs take decisions for changes in wages and in the prices of their products, and households make their decisions for consumption and savings. In this way the total economy works in an efficient way.

People always have high expectations from the budget every year. However, irrespective of whether it is an investor, the head of a household or an entrepreneur, everyone wants a favourable budget. Here comes the importance of manifestos and ideology of the political parties, which people forget when voting for the candidates belonging to different parties. The PML-N discussed a pro-economic revival increase, tax revenues and mitigation of the energy shortage in its manifesto.

The presence and increasing importance of social media makes it easy to get frequent responses on the things happening around us. The expectations of people on the social media were evident on both Facebook and Twitter. Fortunately or unfortunately, the PML-N has either fan following or people are against them as far as the current situation is concerned. It is just because they are in power.

Pro-PML-N people were really expecting a better budget but they were continually saying that since it is a very difficult time for the country, it is not easy for the party to make a budget in favour of everyone. Thus, their arguments are justifications for the PML-N budget is not in accordance with everyone’s expectations. On the other hand, anti-PML-N people were cautiously stating their positions and tweeting proposals on what should be done in the budget. Nevertheless, they have already loaded their guns and ready to open fire as soon as the budget is presented.

Considering the history of the PML-N government, people were not expecting a pro-poor budget. Nor were they were expecting an increase in salaries since they always called for austerity measures. It was expected to be pro-economic revival and mitigate the energy shortage. Additionally, many were bullish regarding the tax measures the government would take. Whereas no significant policy has been announced to cope with the energy crisis, apart from allocating an insufficient amount for circular debt, hopefully, the government has a concrete policy up its sleeve.

Given that there are various expenditures which cannot be avoided, such as interest payments on the piling public debt which has one-third share in the total expenditures, the huge fiscal deficit is inviting a big problem of continuous piling up of the public debt. Thus, increases in tax revenues are mandatory for the government. There are several ways of increasing tax revenues. Since we have a very narrow base for all the taxes, just an increase in the base would result in more revenues.

This budget is a budget of economic revival and revenue collection. It is definitely not a pro-poor budget. Different taxes have been introduced, such as a tax on wedding halls, an increase in the sales tax to 17 percent, and more commodities are brought in under the sales tax. Bukhari and Haq pointed out in their article published in The News that if we tax everyone, the real revenue potential of the country is not less than Rs8,000 billion, while our expenditures are Rs3,190 billion. Thus, the government does not need higher taxes if they are able to get Rs8 trillion in tax revenues and certainly they will have more fiscal space to play with. 

Increase in revenues needs certain reforms such as exemptions should be withdrawn. Income tax should be applied on all the income, irrespective of its source. SROs should be abolished, reliance of too much centralisation should be avoided, an e-governance system should replace the old system, a punishment and fines system can be introduced for those who do not pay taxes, educate FBR people who collect and audit tax returns, monetise of employees’ perks. Most of the things are said by Shahid Kardar in his several articles on tax reforms. The PML-N government is expected to implement all the reforms he has suggested because all his suggestions are for revenue enhancement. However, exemptions given on sales tax to Khyber Pakhtunkhwa are withdrawn but agriculture income is still not taxed, and we can just hope that after local bodies elections provincial governments were asked to collect certain taxes, so that we move away from centralised tax system.

Contrary to what Shahid Kardar suggested, the reforms are not done in a clean way. The budget is prepared after every sector was taken into consideration. It is more likely that it is done by taking lobbyists (financers) into consideration since they are going to invest in the country. Some measures which are taken by the government, such as an increase in the tax base by asking industrial and commercial units to have NTN number otherwise they will be charged 5 percent more electricity bill may not have a significant result. Instead, it will create problems for smaller industrial and commercial units. But if the administration and governance structure will improve, then we may see an improvement in the tax base as well as collection. The FBR, having access to all the bank accounts, would be a good strategy if it is used in a proper way otherwise misused of the policy may worsen the law order situation for common person since we do not have a good governance structure in police. Moreover, the increase in sales tax was necessary according to Dr Waqar Masood since the government had a shortfall of revenues by Rs300 to Rs400 billion. The strategy is not convincing, although the government must have calculated the numbers, but this type of taxes raises the inflation rate. Since the government is not providing relief to a common person apart from the BISP Rs75 billion and increase in pension rates by ten percent, the misery of a common person is going to increase.

Items proposed in the budget can be revised before the final approval. An item-wise debate is necessary in the coming days so that a revised and better version of the budget is approved for the prosperous of the country. Moreover, certain allocations, such as Rs3 billion for the distributing laptops, should be stopped since these policies do not contribute much to society.

The budget should be more focused since we do not have much fiscal space to spend on everything. This year, if the major focus is revenue-generation, all reforms are taken which helps in increasing revenues. Itís about time to change our mindset from taking populist measures to doing something to deal with the real problems people are facing.

The writer is a research economist at PIDE. Twitter @malikemal

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