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What is in the budget for masses?
By: Dr Abid Qaiyum Suleri

Though the government is taking some bold steps towards documentation of
economy, political ambitions and number crunching leave little for
ordinary people

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

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

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

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

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



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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.