For the past three years, Pakistan has been pursuing macroeconomic stability under the patronage of the International Monetary Fund (IMF). It appears that the government has been successful to some extent in this endeavour, with the economy growing at a rate of 5.28%, the highest growth rate in almost a decade. The size of the economy also surpassed $300 billion for the first time, prompting declarations that Pakistan may be among the world’s top economies by 2030.
However, the Economic Survey 2016-2017 reveals that the government failed to achieve multiple economic targets, such as manufacturing, electricity generation, and agriculture. Even the high economic growth rate fell short of its target of 5.7%. Circular debt also remains an issue, crossing the Rs400 billion mark once again.
The government has presented what appears to be an effective election year federal budget for 2017-2018, with a new ambitious GDP growth target of 6% coupled with an allocation to the Public Sector Development Programme (PSDP) almost 40% higher than last year’s estimates. The total size of this federal budget, the fifth budget revealed during the current PML-N government, has been estimated at Rs4.753 trillion, about 8% higher than the previous budget of about Rs4.4 trillion. The government is hopeful that FBR revenues will aid in meeting the expenditures set by the budget. The ambitious targets set by the budget are unsurprising, given that the next General Election is expected to take place within this fiscal year.
It would have been more effective to introduce exemptions on raw materials to build energy-saving devices. The local manufacturing industry in this sector would benefit from cheaper materials
Exemptions and concessions offered in customs duties were mostly for industry raw materials and items for poultry and other bird farming, including hatching eggs and ostriches. Some regulatory duties were also imposed, presumably to boost local industry, prevent dumping, and protect consumers from injurious substances. Such duties have been levied on synthetic filament yarn, aluminum beverage cans, animal protein meals, betel nuts, and betel leaves, among other items.
Though regulatory duties are presumed by the government to have a pro-growth effect on local industry, they may only result in increased prices for raw materials as well as raised costs being passed onto consumers. Instead of increased regulations, better tax incentives may do a better job of improving the business environment and boosting local manufacturing.
Sales tax and Federal Excise Duty concessions, on the other hand, were largely to the benefit of the agriculture and energy sectors. The sales tax and FED exemptions offered on machinery and seeds bode well for the agriculture sector – though this does raise the question of why farmer protests on the eve of the budget announcement were met with such resistance.
Some energy-friendly concessions have also been introduced, including sales tax exemptions on energy-saving items and parts for LED lights. This is likely to encourage the adoption of such technology to ease the burdens of the energy crisis. One does wonder, however, whether it would have been more effective to introduce exemptions on raw materials to build energy-saving devices. The local manufacturing industry in this sector would benefit from cheaper materials, which would in turn serve to eventually drive down the prices of such technology and make it more accessible for the average citizen.
The continuation of zero-rating for export-oriented sectors is also a positive step, as it is likely to help revive the country’s dwindling exports. There is a need, however, to improve the tax refund system. Pending refunds have led to a liquidity crisis in the export sector, which results in falling exports and thus a failure of zero-rating to achieve the intended effect. There needs to be an overall reduction in red tape to facilitate ease of doing business.
This year’s budget also continued with the trend of providing incentives for investments under the China-Pakistan Economic Corridor. In addition to multiple existing concessions and exemptions, vehicles to be used in the development of Gwadar port will now also be exempt from sales tax. It would have perhaps been better, however, had more measures been introduced to boost local manufacturing, as very few items have received exemptions. Nonetheless, we may hold out hope that investments in Gwadar will allow local businesses and industries to flourish as well. Including local parties in the incentives offered to foreign investors will definitely be a step in the right direction.
A number of tax revenue measures, on the other hand, were not met with much enthusiasm. The ending of the Rs300 slab on mobile phones, for instance, is a measure that is sure to affect low-income people, as mobile phones have become a necessary purchase. The super tax was also not viewed favourably in the last budget, but it is being continued. This brings into question the efficacy of reducing corporate taxes. There also appear to be multiple tax hikes for businesses and retailers, and it appears that most taxes are introduced to the detriment of smaller businesses such as retailers of batteries and electronics.
The government has also continued its policy of intimidating non-filers through higher tax rates, for example through stock market taxation. Such measures prevent businesses from entering the formal sector and listing themselves on the stock exchange. Interestingly, a tax credit for manufacturers selling to registered taxpayers was withdrawn as an effect was not seen in tax documentation. Perhaps it would be useful if the government made public the effect of increased taxes on non-filers, as such measures are consistently imposed in every budget.
Instead of introducing regressive taxes, there is a need to bring about structural reform in the taxation system. Flat taxation may be too much to ask for at present, but steps can certainly be taken to make taxation simpler and more predictable to facilitate businesses in long term planning.
As always, the federal budget introduced no out-of-the-box measures. An election year budget, in particular, could only be expected to maintain the status quo. One way to make sure that budget reforms work for, and not against, citizens is to take civil society and the business community on board prior to formulating the budget. This will prevent the usual discontent that follows every budget, and allow all stakeholders to weigh in on the effects of past measures as well. Only by making the budget more inclusive and the process more transparent can it be ensured that it achieves what it sets out to do.
The writer is a researcher and programme officer at Policy Research Institute of Market Economy (PRIME)