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Mini budget – a boon for the non-filers

There is a general consensus among the business community that the PTI government should have taken Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and other stakeholders on board before announcing the Supplementary Finance Bill. They, very rightly argue that industrialization requires long term financing usually from the private sector and as such there is a need to consult the business community in the decision making process of economic or fiscal policies. In this connection addition of some members from the business community in Prime Minister’s Economic Advisory Council (EAC) will definitely be good step and help the government in making realistic policy decisions.

According to a report the newly formed PTI government faces some daunting challenges on the economic front. The biggest of all is the balance of payment situation where the government has fewer dollars to pay for essential imports, such as oil, which keep the economy going and repay foreign loans that, too, in dollars. The current dollar reserves stand at $10.2 billion, which barely provide two month’s cover for imports. To shore up its dollar reserves, Islamabad is considering multiple options, including another bailout package from the International Monetary Fund. Under such circumstance the involvement of the private sector in policy making is essential to find ways and means to meet the economic challenges.

Being the main stakeholders of the government’s fiscal policies the apex body of the country’s business community called an emergent meeting to consider the fiscal measures of the finance supplementary (amendments) Bill 2018 as announced by Mr. Asad Umar, Finance Minister on 17th September 2018 for rest of the three quarters of ongoing fiscal year 2018-19. The meeting unanimously rejected the decision to allow non-filers to buy property and vehicles as it would defeat the prime objective of broadening the tax base and on the contrary incentivize the filers to become non-filers so that they may not be required to go through the hassle of audit and cumbersome process of filling of income tax returns.

The decision to bring the non-filers at par with the filers is undoubtedly a very negative step and may adversely affect the government plan to broaden the tax base. In fact when Miftah Ismail introduced this ban on non-filers, there was a lot of lobbying from the auto sector and property developers for reversing it, but he refused to succumb to their pressure. It seems the PTI very easily surrendered to the undue demand of the auto industry and real estate developers. According to reports to further constrain the space for non-filers Miftah Ismail was planning to make things difficult for the for non-filers as he was preparing restrict them from opening bank accounts or buy tickets to travel on foreign airlines. In short the PTI government is encouraging even the filers to stop filling tax returns – undoubtedly a preposterous move.

 

It may be mentioned here that the according to a published report total income tax return filers in Pakistan stood at 1.238 million as of February 15, 2018 of the current tax year 2017 compared to 1.391 million in 2016. This shows that about 152,789 people have slipped from the FBR’s already narrow tax base. These numbers are inclusive of the salaried class-from tax year 2013-17: Except for salaried class, number of tax return filers shrinks. With the decision to provide similar facilities to the non-filers in the mini budget presented by Asad Umar, the tax base may reduce to a danger level besides creating unrest among the genuine filers of the tax return. It may also be added here that Pakistan’s tax revenue remains very low compared to other developing countries.

Pakistan’s corporate income tax rate – tax on profits – is the third highest in the world, according to a December-2015 World Bank report titled ‘Toward a More Business Friendly Tax Regime: Key Challenges in South Asia’. “Corporate tax rates in South Asia are higher than those in other developing regions,” the report says citing ‘narrow tax base’ as one of the main reasons for the region’s ‘relatively higher tax rate’ — main hurdle in bringing Foreign Direct Investment (FDI) in the country as the rate of capital gains tax in Pakistan ‘too high’. Unfortunately despite a small tax base, the government continues to give tax incentives to privileged firms. While a select few may benefit from these concessions, they worsen the overall investment climate and put a disproportionate pressure on a narrow range of taxpayers, the report finds.

On the other hand it is unfair to increase tax rate of the salaried person. This should be withdrawn and be kept at previous rate as given in the finance act 2018 as the increase in the tax rate of the salaried class is not justified as this was the only segment of the society which had no choice but to pay the tax as it was deducted from the source.

An IMF Report says that this reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations, and structural features of the economy — Unlocking Pakistan’s revenue potential.

In short the mini budget presented by Asad Umar needs revision to avoid problems expected to emerge with a budget with so many confusions.

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