Mini budgets are never a good practice. Such fiscal measures promote uncertainty and discourage decisions regarding long term investments. This year, in fact, witnessed two mini budgets. The second supplementary finance bill was passed after much delay in the parliament.
The major changes proposed relate to income taxes, sales tax, customs and excise duties. A major thrust is to brand these changes as interventions which could promote investment. For example, for greenfield industrial investment, exemption from customs duty has been allowed. Similarly, the business income from such investments will be exempted from taxes for a period of 5 years. These entities will also not be subject to any minimum turnover tax during this duration.
To promote Pakistan Banao Certificates, the advance tax on their profits was waived. Similar exemption has been allowed to Duty Drawback Bonds and Sarmaya-e-Pakistan Ltd — a new entity aimed at addressing the woes of loss making public sector enterprises (PSEs). It was promised during the finance minister’s speech that refunds of exporters will be cleared through issuance of promissory notes by FBR. In line with this thinking the supplementary finance bill now provides for establishing a Refund Settlement Company Ltd — a subsidiary of FBR, with responsibility of issuing the promissory notes.
Select industries were also able to receive benefits. For example, auto sector and assemblers of motor vehicles were relieved to see that non-filers can now purchase the locally manufactured cars. Banks have been allowed incentives if loans are extended to housing sector. Some industries could see benefit in the form of reduced input costs as customs duty was exempted on select raw materials and health related imports.
Many would argue that such changes to tax policy are customary, and the country was waiting to hear regarding the three-year economic roadmap which had been promised as part of the first 100-day agenda. It was informed earlier that this roadmap will be presented as part of the supplementary finance bill — something which didn’t happen.
The timing of this bill was also a cause of confusion for the markets as the government is still in the process of negotiating a programme with the International Monetary Fund. The Fund programme will require changes to the tax policy given the expanding fiscal deficit. One wonders if the IMF would eventually demand the government to reverse all the tax exemptions which have been provided in the supplementary finance bill.
On the expenditure side, not much of a belt tightening is being observed. There is no clear direction yet regarding how circular debt will be curtailed, losses of PSEs will be trimmed and overall size of the federal government will be reduced. The promise of the PTI government to merge several ministries and reduce the size of the Cabinet also remains unfulfilled.
The full year federal budget will be due in June 2019. It would be best for the PTI government to first put in place a clear roadmap for economic growth and job creation and then frame tax and spending interventions to support sectors which can attract investment and also have job creation and export potential. Perhaps putting in place a vision for economic change will also require the prime minister’s undivided attention. His cabinet members are working on all sorts of diverse economic plans including 12th Five Year Plan, Strategic Trade Policy Framework, Industrial Policy and Five Year Tax Policy. One wonders if all these policy frameworks are dovetailed so that interventions by one ministry is not in contradiction to the other.
At a national level, this task is even more important as all provinces are embarking on formulating their own medium-term development plans. However, coordination across provincial growth policies is much needed. This can be achieved through a comprehensive discussion around the national economic vision in the Council of Common Interests.
We should also be mindful that economic strategies would not see light of the day unless these are understood and executed by good economists and sectoral experts in the public sector. It is surprising that even after almost six months, the economic team of the government remains incomplete. The positions of senior-level economists in Finance Division and Planning Commission are still vacant despite advertisements which went out several months back. We are informed that part-time consultants at Ministry of Finance, hired by donor organisations, are negotiating the IMF programme.
Not having the team in place also makes the task of economic troubleshooting more difficult. The recent example of inflated gas billing to consumers is a case in point. The government’s response to this awkward development was to create a committee for the third time to look into the gas sector challenges. The findings from the first two committees were never made public.
While all this is happening, it is important to note that Pakistan has been informing the global community that we are set to receive investment amounting to USD21 billion from Saudi Arabia. Also, it was hinted that similar investment deals will be structured with United Arab Emirates, Malaysia, Qatar and China.
Without doubting the intentions of friends of Pakistan, we should be clear that no country will ultimately invest unless the economy has stabilised and local businesspersons are upbeat about the future economic outlook. It is easier to attract long-term foreign direct investment from abroad if a country is able to demonstrate its seriousness towards undertaking structural reforms. Most notability, these reforms will include improvements in energy sector, tax regime, public sector enterprises, and a reduction in regulatory burden faced by businesses.
On the last point, it is important to note that small and medium enterprises (SMEs) still do not see much relief in the supplementary finance bill. Several business associations have highlighted that changes to tax policy are not effective unless complimented by reform of tax administration. It is a sad fact that even increased automation of our tax system has not led to improvement in trust between the tax payers and the state. The dismal performance of past amnesty schemes also points towards the need for a new social contract.
The PTI government can help the SMEs if it is able to reduce the compliance cost of taxation in Pakistan. Tax Reform Commission report provides several decent suggestions in this direction. Most importantly, the coordination across over a dozen tax authorities in Pakistan needs to be strengthened. The number of taxes needs to be rationalised. Tax rates across provinces also need to be harmonised. An effective one-window operation would imply that an individual tax payer or company will only file a single return and pay to a single window and that too through an automated platform. The grievance redressal mechanisms would need to be strengthened. The business community needs to feel that such mechanisms do work for their interest.
Finally, the predatory behaviour of tax authorities towards micro and small enterprises need to be strongly checked. If Pakistan is to promote entrepreneurship, the start-up culture must be respected.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.