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General impact
By: Abid Qaiyum Suleri

Historically, budgets in Pakistan have been interpreted differently by different stakeholders. All governments claim the budgets presented by them are pro-people and pro-growth. The opposition parties always find these budgets to be “anti-poor.” The masses complain that the expenses that pinch them the most (i.e., electricity tariffs, petroleum prices, cost of living, cost of transportation etc) are never dealt with transparently. The story of the budget 2021-22 reads familiar.

One of the salient features of public policy measures is that there are always some beneficiaries. Conversely, the best possible public policy will cause some stakeholders to do less well. The objective of the public policymakers should be to ensure that the beneficiaries of their policies outnumber those losing out. Let us look at the federal budget’s good and bad sides.

Good news first: the government has abolished a dozen withholding taxes. It has reduced the general sale tax (GSTs), regulatory duty, import duty, additional import duty, federal excise duty (FED), and value-added tax for many industries and sectors. Some of the beneficiaries (subject to conditions) of the above-mentioned measures include manufacturers/importers of cars up to 850cc and those of electric vehicles, manufacturers of medical and surgical apparatus, local fruit juice manufacturers, paper industry, wood industry, yarn industry, shoe industry, machine-made carpet industry, ready to use supplementary foods (RUSF) and ready-to-use therapeutic food (RUTF) producers/importers. The list goes on to include telecommunication services, warehouse services, travel and tour services (domestic air travel), and oilfield services etc. Duty and tax benefits for these industries will reduce the prices of some of the goods and services of these industries.

Another good news is that through this budget, the government has tried to enhance the purchasing power of the citizens (based on their eligibility for different initiatives). To this end, it has increased the salaries and pensions of government officials by ten percent. After three years, it has raised the minimum wage. There is a large allocation also for the government’s flagship social protection programme, Ehsaas (through which cash is disbursed to targetted beneficiaries). There are plans to provide loans to the agricultural sector, urban households and small and medium entrepreneurs.

The third good news is that the health sector is on the policymakers’ radar. Provision of funds for procurement of Covid-19 vaccines, and allocations for measures to contain Covid-19 are steps in the right direction.

The fourth good news is the allocation of a substantial amount for subsidies. However, a large chunk of this amount will be spent on payment to independent power producers.

The fifth good news is a promise by finance minister to end FBR’s discretionary powers, the introduction of third-party audit and confidence-building measures to reduce the trust deficit between tax collectors and citizens. The corporate sector will benefit from reduced taxes. However, these will not directly benefit the masses.

Now let us turn to some of the potentially bad news. The proposal to give FBR officials the power to make arrests for tax evasion is not consistent with the stated objective of building trust between the taxpayers and the FBR. The government will do well to be more consistent in its messaging to the people.

The government plans to fetch an additional Rs 85 billion (12 percent higher) through custom duties, an additional Rs 579 billion (30 percent increase) through sales tax, and an additional Rs 81 billion (29 percent increase) through FED. It also plans to fetch an additional Rs 392 billion (22 percent more than last year) through taxes on income. One may argue that tax on income will pinch those who have income above a certain threshold and will not affect the masses. However, Rs 745 billion is to be collected through indirect taxes. The indirect taxes are regressive and hurt the low-income earners more.

These taxes will raise the price of sugar (Rs 7 per kg GST added in the retail prices), processed and packed dairy products (subject to GST now), online shopping, LNG, silver, gold jewelry, tyres, and many other items.

The elephant in the room is energy prices which are linked to the crude oil prices in the international market. These are nominally determined by the Oil and Gas Regulatory Authority (in case of oil and gas) and the National Electric Power Regulatory Authority (for electricity) and not discussed in the federal budget. The sale price of petrol to the consumer includes refineries’ costs, oil marketing company’s and dealer’s margin, inland freight equalization cost, general sales tax (which is shared with the provinces), and petroleum levy (which is the federal government’s revenue). The upper cap for petroleum levy is Rs 30 per litre in the case of petrol. Government compromises on income to be collected through petroleum levy to safeguard the domestic consumers from an abrupt increase in petroleum prices globally.

The prices of crude oil are increasing. Currently they are hovering around $74 per barrel (almost double the low a few months ago). The OGRA has been recommending an increase in domestic prices of petroleum products. The prime minister rejected the OGRA recommendations for several weeks until the prices were raised earlier this week.

For the next year, the government has budgeted a Rs 600 billion collection through the petroleum levy. Currently, the levy charged is Rs 4-6 per litre. To meet the ambitious target of Rs 600 billion, it will have to be increased significantly. Meanwhile, crude oil prices are expected to touch $90 per barrel by the end of 2021. Fuel inflation will, in turn, trigger cost-push inflation.

Likewise, the electricity tariffs will likely be revised upwards to contain the so-called energy circular debt. The tariff revision will include a ‘rationalisation’ of subsides.

The subsidies will likely be diverted mostly to lifeline consumers.

The budget has many pro-growth measures. The down side is that while these may increase purchasing power, inflation will be hard to contain. The lower-middle-income and middle-income groups will bear the brunt of inflation as well as the impact of diversion of subsidies. The poor apparently have nothing left to lose; the rich are largely immune to the price-hike shock.

The writer heads the Sustainable Development Policy Institute. He tweets at @abidsuleri

This article was originally published at:

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.