The last fiscal year concluded with a mammoth fiscal deficit of 6.6 percent of GDP (Rs2.260 trillion) and a record $18 billion (5.7 percent of GDP) current account deficit. It was in this backdrop that the government came up with the ‘mini-budget’, highlights of which are as under:
- Excise duty on cars of 1800cc and above doubled.
- Ban on car, property purchases by non-filers withdrawn.
- Banking transactions of non-filers to be taxed at 0.6 percent.
- Regulatory duties on additional 312 items.
- China-Pakistan Economic Corridor (CPEC) spending protected.
With cut in development expenditures and reversal of tax exemptions, the government aims to raise Rs. 600-750 billion but in the process, an impact of Rs. 350 billion will be passed on to common man. This will be painful in the short to medium term as inflation has gone up to 8 percent and rates of gas and electricity have been increased simultaneously. Perhaps, the amendments to Finance Bill could best be described as ‘pro non-filers’, although, the government has hinted at withdrawing exemptions granted to them amid opposition. The main reason cited by the government for withdrawing ban on non-filers was to kick start activity in the real estate and auto sector through overseas investment which registered a decline of almost 50 percent after imposition of ban in the last budget.
The government has also introduced new tax slabs for salaried class under administrative tax reforms thus increasing tax for those who have the capacity to absorb. However, there is a desperate need to broaden the tax base and provision of incentives for filers. The ‘mini-budget’ is unclear as to how it will expand the capacity of the national tax infrastructure. The main focus of the government was to introduce import cut measures through imposition of regulatory duties on more than 150 luxury products. The major customs duty proposal is to increase the additional customs duty by 1 percent on 5,200 imported product lines. Besides generating about Rs40 billion in taxes, the measure could cut the import bill by around $1 billion. In this connection, major tax changes have been introduced for imported vehicles, tobacco and smartphones industry. The duty for imported car engines over 1800cc has been increased to 20 percent, up from 10 percent. The regulatory duty structure on imports of mobile phones is also being revised upwards up to 5 to 10 percent. Likewise, the tax on cigarettes has increased from Rs. 1 to Rs. 10 per pack.
In spite of the above, a critical analysis of the ‘mini-budget’ reveals that the document has been prepared in haste and its intent seems to incorporate suggestions from IMF before table talks in October. The mini-budget is also silent on the topic of circular debt. There are some grey areas which will not help Pakistan’s exit from the ‘grey’ list of Financial Action Task Force (FATF). For example, tax on banking transactions for non-filers have been increased from 0.4 percent to 0.6 percent which will instigate them to use informal channels. Similarly, relaxing investment in property purchases may contribute to speculative hike in land prices that ultimately may prohibit market access to many genuine property buyers, especially those from the low-to-middle income households, worsening yet the mounting housing shortage in the country. This is also in direct conflict with the government’s agenda of providing 5 million houses it has committed to the poor people. The move sends a wrong message to the tax compliant businesses and investors as it will favor political elites and big stake investors who operate informally with complete impunity and enjoy quick and easy returns.