Supporters praise while the opposition criticizes on various grounds
By AMANULLAH BASHAR
Jun 21 - 27, 1999
As usual the federal budget 1999-2000, announced a week ago by the Finance Minister Ishaq Dar, is being supported by the members of the ruling party to prove their loyalty with the treasury while members of the opposition are opposing for the sake of opposition.
The supporters are praising the government for presenting a tax-free budget, the opposition has expressed its apprehensions that mini budgets are in the offing. Practically speaking it is, however, amazing that neither the supporters nor the members of the opposition are genuinely concerned with the increase or decrease in taxes or prices by virtue of their fatty purse. It is the common man who has to suffer the tortures of the increase in prices or has to go through the complex taxation system. It is the common man only who has to face the corrupt tax collectors, not the strong and wealthy politicians.
Not only the trade and industry but the poor farmers of the rural areas and the common man of the urban population took a sigh of relief when the Finance Minister announced the withdrawal of Octroi and Zila tax. The roughs and toughs operating on behalf of the Octroi contractors had made the life of the poor farmers miserable. They were unable to take their produce from farm to market without greasing the palms of Zila tax or Octroi officials besides paying the relevant taxes. In order to avoid this nuisance they used to sell out their standing crops to the middle man instead of taking full benefit of their hard earned yields.
The importers of the industrial raw material had to negotiate with the octroi people soon after coming out of the port. Octroi posts were located in front of the KPT and Port Qasim. These octroi collectors were sitting outside the railway stations to interrupt travellers. In some cases they used to allow the railway passengers without any interruption. However, the armed man used to chase the passengers in their vehicles to catch them somewhere in the midway. The passengers were charged that have evaded the octroi tax. The passengers were forced to pay four time more or face the dire consequences. Such was the modus operandi of the contractors men to trap the innocent citizens.
According to Shaikh Jawed, Chairman, Investors Council of Karachi Export Processing Zone, one of the major reasons for failure of Nooriabad Industrial Zone was the rampant corruption of the Octroi collectors. In certain cases the industrialists had to pay even more than Rs10,000 per truck loaded with the finished goods. Without pleasing the Octroi men the movement of the goods was not possible in Nooriabad Industrial Zone. By and large these octroi collectors were operating in the similar fashion all over the country.
Withdrawal of Octroi and Zila tax is of course a historic decision taken by the government as the people in general would be the direct beneficiary of the decision. It is, however, surprising that some political quarters are opposing the decision despite the factor that the local bodies whose responsibility was to collect the octroi have been assured that the Federal Government would compensate the revenue collection which is estimated at Rs.19.5 billion. The political quarters are of the view that the withdrawal be against the concept of de-centralization. On the other hand they always urge the federal government to levy tax on agricultural income. Since it is a provincial subject they go to such an extent that by amending the constitution it should be transferred from provincial governments to the jurisdiction of the Federal Government. Is it not a contradictory approach of our politicians?
Fazalur Rehman Dittu, President, Federation of Pakistan Chambers of Commerce and Industry(FPCCI) has appreciated Government's bold initiative of abolishing Zila tax and Octroi all over the country.
He said that the business community has welcomed the decision as it would save them from the harassment by contractors. The abolition of Zila tax and Octroi would have positive and far-reaching effect on national economy as the cost of production would go down hence increasing county's exports.
Dittu said that some unscrupulous elements in the society had started to give this initiative a political dimension and were pressurizing the government to withdraw its decision. He strongly urged the government not to succumb to such pressure tactics and assured full cooperation and support on behalf of the business community.
Faisal Yousuf Zia, Chairman standing committee on Octroi and local bodies affairs has congratulated the finance minister for abolishing octroi and Zila taxes.
He was of the view that the withdrawal had brought a deep sense of relief to the members of the business community who were the victims of extortion by the contractors and their hounds collecting Zila and octroi at their will. The bold step of withdrawal would certainly have a positive impact on the national economy. He endorsed the view of Finance Minister Ishaq Dar that these contractors were charging many times more tax than that prescribed under the rule. As a result of this extortion, the prices of goods, both locally produced and imported had increased, putting extra burden on the consumers.
He criticized the elements who were opposing the government decision in the name of provincial autonomy and said that they were trying to make it a political issue just to protect the interest of the contractors collecting octroi and Zila taxes. He expressed the hope that the government would not give in to their pressure.
The 20-25 per cent increases in the basic pay of the government employees and the retired personnel was another important decision announced in the budget. According to an estimate, the total number of government employees, both federal and the provincial, was registered at 2.37 million while the number of public sector employees was 2.794 million. If the retired people were also taken into account the total number of beneficiaries of this scheme would be around 3.5 million.
Affordable housing has always been a serious problem of majority of this country. Construction of 500,000 low cost housing units is a step which would only be welcomed when the scheme is implemented in letter and spirit and the benefit is passed on to the really deserving masses. An allocation of Rs 5 billion has been assured in this scheme which would be disbursed through the House Building Finance Corporation. The process of construction of as much as 500,000 housing units may also help promoting small industries affiliated to construction industry.
The business community in particular has hailed the Universal Self-Assessment scheme which is an optional scheme and would be applicable to the individual, registered firms and private limited companies. The universal self-assessment scheme offers that no case will be subject to total audit and tax payers, except companies will not be required to submit any document. Assessees will be free to adjust agreed refund of the previous year and will be eligible to show an ad hoc addition in their income without any tax increase. The one page return form has been further simplified and would be treated as an assessment order. In the case of indidviduals, three new income tax brackets have been added with rate slabs of 25, 30 and 35 per cent for income higher than Rs.500,000. The scheme was generally welcomed except those drawing higher salaries whose perks have been included in the taxable income.
BUDGET AT A GLANCE
Analyzing different aspects of the budget, experts of a leading brokerage house observed that a two-pronged strategy has been opted by the budget makers for the current financial year. That includes higher revenue collections and to inject a fiscal stimulus in the economy. Higher revenues will consolidate the fiscal position and thereby increase the availability of resources to the private sector while increased public spending will raise confidence and attract private sector investment.
The revenue target in this budget has been set at Rs356 billion, up by estimated 15.6 per cent from Rs308 billion estimated last year. When compared with the original target it is only 5 per cent higher. While this may suggest that the government is not going aggressive on revenue collection. Differing from this assumption, the analysts feel that the post sanctions scenario has brought new realities to light. Such as the poor response of the industry to supply side incentives. In such a situation, setting unrealistic targets could not only interfere with macro-economic management but also create a credibility issue with the multilaterals.
Already the IMF has asked the government to avoid downward revision of yearly targets. Explaining its position for downward revision of revenue collection during previous year, the CBR has informed the IMF that heavy refunds, decline in imports and reduction in customs duty led to a big shortfall in the revenue receipts in 1998-99.
This was discussed in a CBR-IMF meeting recently in which structural reforms, adjustment and revenue collection during the current and the upcoming financial year were discussed. The meeting was disclosed that CBR refunded Rs34 billion in 11 months while imports and exports also declined by $819 million or 8.9 per cent of $866 million or 11 per cent respectively in 11 months of the outgoing year.
The other point to note is that even through the tax revenue number does not look very high, it will be quite a task to achieve. Customs duties will not be contributing significantly to revenue because imports have yet to pick up measurably and as of March 1999 , maximum tariffs have been dropped by another 10 per cent to 35 per cent. This means that the government will have to rely much more on sales tax, customs duty and direct taxes. And this will only be possible through a revamped tax collection machinery. In this regard, measures such as the introduction of a common taxpayer identifier and Universal Self-Assessment scheme, as well as reducing the involvement of the tax collector are all steps in the right direction. What needs to be tested is implementation, the analysts feel.
Lack of funds in the past, resulting from a planned strategy to control spending prevented the government from inducing a strong fiscal stimulus in order to reinvigorate private sector investment. That will probably change this year. The huge fiscal space of over Rs60 billion crated by deferral of foreign debt payments has given the government to the opportunity to attract significant private sector investment. This will happen, both directly and indirectly. Directly, the government will be initiating a Rs116 billion development expenditure programme, which will be 18 per cent higher than the amount budgeted last year. Indirectly, the government will encourage banks as well as semi-government organizations to take part in social development programmes. As an example, banks and private sector industries will be encouraged and incentivized to take part in Prime Minister's Housing Programme which envisages setting up 500,000 houses during the next 2-3 years. Government estimates suggest that this scheme would generate private sector activity to the tune of Rs400 billion annually and will revive 40 housing related industries.
The analysts, however while sounding a note of warning, said that every effort must be made to ensure that funds allocated under development expenditure are not slashed and any scheme that involves bank credit must be thoroughly screened and financially viable to prevent a sharp rise in non-performing loans.
Prior to the tensions along the line of control, the market had reached a 12-month high of 1417 in what many termed as a pre-budget rally. Consensus forecasts for the KSE-100 before the budget stood around 1500 level. Then came the sell off followed by eruption of border conflict. The KSE came under a deluge of selling as nervous sellers began squaring positions. The selling was so sudden and so widespread that few investors were able to escape unhurt. Infact most investors, especially retail players, are still suffering from huge unrealized losses.
Against this backdrop, predicting investors' reaction to the budget is not yet clear, however, they are appreciating the government initiatives as well as the improving macro-economic outlook, but whether they will be able to take advantage of the opportunities that the budget offers is yet to be seen.
The analysts were of the view that "the market is still looking for a trigger that will result into a flood of buying." The budget may lay the foundation for another rally, but will not be the trigger.
The government has announced a 10 per cent reduction in excise duty on telephone charges. However, it remains to be seen whether the benefit will pass on to the consumer or the company. In case it is the consumer, the move may be a precursor to a tariff increase for the company. At any rate, PTCL will end up benefiting from either value or volume led revenue growth and all incremental revenues will flow to the bottom line.
It is clear that the government plans to fund its huge infrastructure programme via credit from the banking system. Construction will be given the status of an industry, thus it will become eligible for credit from the banking system. Although this will allow banks to fuel credit growth, which has been low in the past year.
The pros and cons of the Budget 1999-2000 were discussed by the professionals at a budget review seminar organized by Institute of Cost and Management Accountants of Pakistan.
The seminar was addressed among others by Prof. Dr. Khawaja Amjad Saeed, President ICMAP, Dr.Qazi Masood Ahmed, Research Economist/Asstt. Professor at Applied Economics Research Centre, Asad Ali Shah of Shah and Co, M.H.Asif, General Manager Sui Southern, Syed Shabbar Zaidi, FCA, Partner, A.F. Fergoson and Company and Badruddin Fakhri.
Commenting on the budgetary measures, Syed Shabbar Zaidi said that no major tax has been levied in the recent budget except that sectoral increase has been made in the tax for salaries and perquisites. However, that increase is also restricted to employees having salaries above Rs 500,000 per annum. Nevertheless the increase in tax rate for sub sector is very high and it is recommended that such increase should have been made gradually. It is considered that increase of tax rate from 22 per cent to 35 per cent is too high and the government should account for those increases which could not be corporatized such as self employed. He said that the action of freezing the tax rate for company has spoilt the image of the commitment made by the government. The government has backed out of its commitments twice in three year.
Speaking on the occasion, Dr. Qazi Masood said that the international comparison of performance shows that the performance of fiscal policy was very satisfactory. Over the last thirty years (1965-95) economic growth and inflation rates have failed in keeping the level of budget deficit. Due to pressure of international lending agencies the task of fiscal policy had changed during the last three to four years. In the last three years the direction to fiscal policy has reduced budget deficit but also reduced growth in GDP. This reduction in GDP has put an adverse impacts on revenue collection, employment and exports. The inflation has reduced to 6 per cent but beside government policies it was the result of world recession and real test of the government will be at the time when world recession will be over.
Regarding the decision of abolition of Octroi and Zila tax, Dr. Qazi was of the view that it might have serious political and social consequences. Like provinces, the local governments will have apprehension about the proper implementation of the proposal of transfer of resources from federal to local level. In this regard, he suggested that an "Extended National Finance Commission" which shall work out a formula for the permanent allocation of resources between Federal, Provincial and Local government be formed by the government.
The budget 1999-2000 announces withdrawal of exorbitant facilities available to the retired senior officials of the public sector corporations like PIA, WAPDA, Railways etc. For instance, they were allowed various facilities at the government's expanse such as free travelling facility after retirement from the airline or free power consumptions etc. The step is in the right direction to appease the poor. However, a number of areas still remain where immediate reforms are needed.
According to reports, the retired heads of the state are eligible to live in a rented accommodation for which the government is responsible to pay the price. The monthly rent of such accommodation is more than Rs100,000 which is paid by the poor who do not have even a small house of two rooms. Can we afford such a luxury to allow the retired heads to live in such an expensive accommodation, especially in the back drop of huge debt servicing, formidable size of the unemployed and other liabilities faced by the nation?