Federal budget 2013-14 was perceived as the one which was prepared by caretakers and technocrats with the consent of the PML-N, mainly to qualify for the IMF’s extended fund facility (EFF). The budget presented last week although is the second for this government, in real terms it is the first for the PML-N. For the last many years, budget speech and finance bill present two different worlds. The speech reflects political ambitions while finance bill is about number crunching, overestimating revenue, understating politically motivated expenses and attempting to reduce the fiscal deficit.
Let us analyse the speech first. The government is taking some bold steps towards documentation of economy. Non-tax compliant persons and non-NTN holders would have to pay the cost of non-compliance in the form of double advance tax on different items; including first and business class air tickets, purchase of immovable property and higher advance tax on interest income and dividends, cash withdrawal, and car registration etc.
Likewise, making NTN a compulsory condition for seeking commercial/industrial electricity and gas connections is a welcome move which (if implemented effectively) would help in documenting the economy. An awareness campaign that adjustable taxes may get adjusted towards final tax liability would also improve the number of tax returns filed.
The government seems to be serious in bringing retail sector in the tax net through dividing the retailers into two tiers. The high end retailers would have an electronic cash register of approved specifications and pay the sales tax in the normal range, whereas all remaining retailers will pay 5 to 7.5 per cent on their electricity bills. An increase in taxes on tobacco (although the government would have to curb the sale of smuggled cigarettes to make it effective) is also an appreciable step.
Almost 86 per cent of our tariff lines are subject to different Statutory Regulatory Orders (SROs), some issued (by the FBR officials) for a particular individual and were used for a single transaction only. Former Deputy Chairman Planning Commission Dr Nadeem-ul-Haque did try to eliminate SRO regime, however, he was not successful due to the resistance of interest groups. Another positive announcement (which may be very difficult to implement) is about abolishing such SROs (though) over next three years.
Increase in BISP allocation, decision to consolidate different security nets under single umbrella and reduction in sales taxes on tractors are also positive moves. Still other positive initiatives of the government include decisions to establish an EXIM bank and a National Food Security Council; launch of national insurance scheme, livestock insurance scheme, establishment of quality warehouses and airfreight subsidy for horticulture produce from Gilgit-Baltistan. For government servants, the budget was about increase in salary, pension and minimum wages whereas for corporate sector it was about getting 1 per cent reduction in their corporate tax.
So what is in the budget for common masses? The things which matter for ordinary persons i.e., fuel prices and electricity prices are no more in the realm of budget. They get revised every now and then, apparently by “autonomous” regulatory bodies OGRA and NEPRA. The reduction in WAPDA/PEPCO subsidy by 34 per cent would mean that electricity tariff would increase to the tune of 15-20 per cent in next fiscal year. Masses would also get affected by indirect taxes which still form 59 per cent of the FBR taxes. These indirect taxes; custom duties, sales tax, federal excise hit the lower middle and middle income class the worst. The maximum effect of petroleum levy, natural gas development surcharge and gas infrastructure development cess (38 billion in last budget and 145 billion in this budget) is again borne by the middle income group.
Now let us look at the number crunching. The budget exercise is done to match revenue with the politically motivated expenditures (not the other way around) with a view to meet a specific fiscal deficit target. According to SDPI’s analysis of tax payers directory for 2012-13, about 250 companies paid 1/3rd of total direct taxes, whereas 45 companies paid more than 25 per cent of the total direct taxes. Imagine the fact that 26,600 or 41 per cent of registered companies filed tax return with zero tax. These figures yet again necessitate a major overhaul and restructuring in the FBR as well as in tax collection mechanism.
Last year, the FBR’s tax collection target was reduced by Rs200 billion. It is in this context that 23 per cent increased target over last year’s revised target seems overambitious rather slightly unrealistic. There is excessive reliance on withholding taxes and withholding tax agents (WHTA). However, how much of these WHTA would pass on to the FBR is anybody’s guess. This approach will not result in tax-net broadening.
Under the fiscal prudence approach, the finance minister had done a block allocation of Rs200 billion in the outgoing budget. This allocation was to be released had the FBR achieved its target of collection Rs2475 billion. It is very logical to have such block allocations, curtail your expenditures if there is reduction in your income. However, guess who had to face the brunt of the FBR’s missed target? Correct, development expenditures. Before one wonders that why people whose development matters had to suffer on part of the FBR’s inefficiencies, it is pertinent to note that our current expenditures are so inflexible that there is hardly any cushion for budget cut. Thus, development expenditures always bear the brunt in case of any fiscal shortfall.
Let us assume (and hope) that the FBR achieves its revenue target for next year and the government collects the budgeted Rs3945.5 billion from tax and non-tax revenue. As per the 7th NFC Award, 57.5 per cent of the divisible pool or Rs1720 billion would go to provinces, leaving Rs2225 billion with the federal government as net revenue. The federal government would have to take care of current expenditures (Rs3130 billion), foreign loan repayments (Rs333 billion), and development & net lending (Rs806 billion). The huge deficit would get bridged by borrowing (external loans, domestic financing, public debt, and public accounts).
Markup payment makes 38.26 per cent of current expenditures, and if we include foreign loan repayment in these figures, it would turn to 48 per cent of current expenditures. Defence affairs and services make another 20.2 per cent, and adding military pensions to this figure means 25 per cent of current expenditures. Both of these expenses cannot be compromised and are already Rs300 billion more than the net federal revenue. Rest of the current expenditures (subsidies, civil pension, grants and transfers, and running of civil government) and all developmental expenditures are met through borrowing.
The Public Sector Development Program (PSDP) is the main instrument for providing budgetary resources for development projects and programmes. It is the lubricant for development engine, but for last many years it gets slashed to reduce the fiscal deficit. This year the GoP has approved an overall size of PSDP at Rs1175 billion (federal 525 billion, provinces 650 billoin). My major concern is not the allocation. I am more worried about the releases and subsequent spending. Even after downward revision, the PSDP funds for the current fiscal year could neither be released not spent completely. Rather the spending performance of provinces, who are responsible for social sector delivery, is dismal.
In the first 10 months, both Punjab and Sindh spent 31 per cent each of their PSDP funds while KPK and Balochistan spent 25 per cent each of their PSDP funds. The federal government ends up getting blamed for what is no more its mandate now, i.e., poor quality of social sector development in the province.
To sum it up, routine finance bills are based on too many “ifs” and “buts” and this is yet another routine finance bill. I have been analysing the budgets for over a decade now and cannot see any major departure from the previous budgets rather the budget would have been the same if it were to be presented by a government led by the PPP, the PTI, the MQM, the JI or any other political party.
However, the budget speech of finance minister did contain some out-of-the box initiatives. One hopes that some of the initiatives announced by him are implemented to bring informal economy in the tax net.