Passing the budget in second attempt

For a government consisting of partners in double-digit and forced to deal with a no nonsense IMF, the passing of the budget in second attempt is commendable. There are some improvements. Thanks to the IMF, the poor and the not-so-poor have been targeted for subsides in these days of hardship. Again, thanks to the IMF, the regressive attempt to provide relief to every individual paying income tax has been reversed and a progressively rising burden introduced. In addition, high earners will pay a super tax of 1-4%. There is an anomaly here of a person earning 50,000 rupees a month paying income tax and another making a little below eligible for targeted subsidy on petrol. Obviously, fixing thresholds is never easy. On the corporates, a super tax of 10% has been imposed on raising the effective rate to around 40%.

It seems like a beginning to address the low and falling share of direct taxes. However, with the super tax declared as a temporary measure and insubstantial progress on shifting the withholding income taxes to normal income tax regime, fingers will remain crossed. It may be convenient for a government in a crisis mode to tax the already taxed more, but fiscal sustainability requires reform to expand the base. The biggest hole in the base is agricultural income. Not only that it is exempt from income tax, it is also an easy route to tax avoidance by showing non-agricultural income as agricultural income. But the government wants to protect some GDP growth by subsiding agricultural inputs. Traders are another large set of delinquents. A start is being promised by reaching them through electricity bills. Last, but not least, is the real estate business that has extended itself to the smallest of towns. The budget signals a transition from amnesty to taxation. One hopes these are not temporary measures like the super tax. Regardless, indirect taxes that distribute burdens unfairly are likely to continue to dominate the tax structure. In addition to excises, import bans and duties levied in the budget speech, import duty on mobile phones and export duty on software exports have been imposed. Petroleum Levy of 50 rupees per liter has been authorised for phased implementation. GST has also been levied on petroleum, traders through electricity bills, software and IT houses and fixed tax on gold shops covering a defined area.

As in the past, the adjustment focuses on the revenue side and the wild goose chase of a tax-GDP ratio rising to the level of sacrosanct expenditure continues. Even in the prevailing grave economic and financial situation, current expenditure is budgeted to increase by 15.5%. The increase is higher than the projected inflation. Debt servicing, a charged expenditure, has risen by 29%. It appears that all expenditure has been treated as charged. Durability of structural reforms is related to an expenditure structure. The tax measures announced are ad hoc, not a coherent set of reform, in the hope that the gap between spending and revenues reduces somewhat. The unfilled gap will add to debt and its servicing. An effective debt reduction strategy is not in place. Before releasing the next tranche, the lender of the last resort has demanded the setting up of an anti-corruption taskforce at a time when a FATF review team is expected to be in the country to inspect on the ground the actions taken to move out of the gray list. Those surprised should read previous IMF reviews to see that the progress on the AML/CFT framework always formed part of the structural policy discussions.

Published in The Express Tribune, July 1st2022.

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