PML-N’s economic manifesto, its Implementation

The PML-N economic manifesto is essentially right wing: allow the private sector to become the engine of growth by providing a level playing field and an environment conducive to its operation, allow the market to operate freely and it would naturally take corrective measures as and when required, and withdraw the state from operating state-owned entities (SoEs).

So what component of its manifesto has the PML-N government achieved in the three months of its five-year mandate? Federal Finance Minister Ishaq Dar decided to promote private sector activity in the budget 2013-14 through six fiscal measures: (i) reduction of maximum corporate tax rate from 35 to 30 percent in five years by reducing one percent per annum effective 2014-15. His rationale was no doubt to send a positive message to the corporate sector that a reduction would become effective from next year onwards. It is unlikely that the corporate sector would respond favourably to this incentive a year in advance; (ii) tax exemption period to special economic zones would be enhanced from 5 to ten years. Again it is unlikely that investment would rise as a consequence given the continuing energy shortfall coupled with rising energy rates as well as security concerns. However, this measure would reduce government revenue; (iii) reintroduction of the facility of exemption certificate on import of raw material subject to the payment of tax determined for any preceding two years whichever is higher. It is again unlikely that those who are not registered taxpayers would hurriedly register themselves to pay tax given their concern with future taxes; (iv) transporters would be allowed to adjust income tax with the provincial motor vehicle tax – a good decision but also likely to reduce the government’s revenue; (v) extension of facility of Unadjusted Maximum Tax to individuals and Association of Persons (AOPs). This too would reduce revenue; and (vi) extension of minimum tax previously restricted to distributors of cigarettes (a concession that no doubt compromises the warning on each cigarette pack) to small taxpayers as in AOPs and individuals. None of these is enough to encourage the private sector to enhance productivity if other mitigating factors are not dealt with, but would reduce government revenue.

Thus all the tax measures proposed to encourage the private sector playing its role as the engine of growth, envisage a reduction in revenue in the current fiscal year before the economy can actually pick up leading to a revenue rise. The question then becomes would revenue rise as a consequence of other tax measures, encourage or discourage productivity? The Chairman of the Federal Board of Revenue (FBR) recently stated that he opposed amnesty schemes, the usual approach used in the past to lure those who operate in the parallel black economy – schemes which failed to make any significant dent in reducing the black economy; and instead added that he would begin to exercise FBR’s power to access bank accounts of unregistered taxpayers operating in the black economy.

One would sincerely hope that the Chairman FBR succeeds in getting the black economy into the tax net, a target that appears more achievable than in the past given that National Database Registration Authority (Nadra) has not only identified 2.6 million people with no national tax number but has also indicated a readiness to fully support FBR efforts to enhance the tax base by bringing in tax evaders into the net. Reports indicate that 43,000 cases have already been shared by Nadra with FBR’s field formations, however, the field formations have indicated that the information is incomplete and complex (for example bank account information is not provided and a place of residence in a posh locality does not constitute ownership) and therefore the information does not provide an instant solution to the country’s poor tax revenue collections requiring further verification/processing by RTOs (Regional Taxpayer Offices). A major loophole that the government can simply not touch, given its massive contribution to supporting our balance of payment position, remains remittance income which is beyond the ambit of scrutiny of the tax officials.

In addition, two more elements with respect to raising revenue through broadening the tax base and its likely impact on output need to be highlighted. First and foremost the majority of those operating in the black economy do not have bank accounts in this country. We remain a largely cash economy. And unfortunately even those operating within the legal economy choose to bank abroad – a contention backed by recent reports that Pakistanis have more Swiss accounts than any other neighbouring country including India. Chairman FBR also noted that the largest expenditure was on real estate which again indicates that productive sectors are not the major recipient of investment.

Secondly, the black economy is fuelled for a number of reasons including (i) failure of the legal economy to provide jobs and an attempt to bring it into the tax net may actually increase joblessness; and (ii) concerns over corruption/misgovernance in government departments and its sustained failure to provide basic infrastructure facilities as well as security which explains why our tax to Gross Domestic Product ratio is very low yet contributions to charity are one of the highest in the world. Until and unless these factors are taken into account it is unlikely that FBR, however strengthened to begin intrusive inspections, would simply not succeed in generating revenue.

The solution to our economic woes is to create fiscal space and that must be done initially through reducing expenditure. It is unfortunate that the budget for the current year envisages a rise in both current and development expenditure thereby laying the onus of creating fiscal space on the FBR which has been charged with increasing collections by 535 billion rupees (or 28 percent from the previous year).

Given the statistic of 500 billion rupees lost through FBR annually by former Finance Minister Shaukat Tarin the target may seem attainable. Additionally the, new FBR Chairman has brought in some honest officials and stated that the Board would make all-out efforts to meet the targets set but realistically it is unlikely that FBR would achieve a percentage rise in collections of more than 10 percent at best in the current year – a rise that must be sustained in the year 2014-15 reflecting improved administration and tax policy dictated by the Ministry of Finance.