Finance Bill 2021

Oppressive taxes, anti-people & anti-growth

Huzaima Bukhari & Dr. Ikramul Haq

Finance Bill 2021, presented on June 11, 2021 along with budget, by the fourth Finance Minister, Shaukat Fayaz Ahmed Tarin, of the coalition government of Pakistan Tehreek-i-Insaf (PTI) with continuation of existing oppressive tax system can never achieve the desired higher and sustainable growth he claims. The International Monetary Fund (IMF) wants collection of nearly Rs. 6 trillion for the fiscal year (FY) 2021-22. Claim of Shaukat Tarin that we are “close” to IMF’s demand is correct. The real challenge is not on revenue side, it is on expenditure side. We need to analyse it.

The Federal Board of Revenue (FBR) has shown satisfactory performance but even then funds are not enough to meet current expenditure, what to speak of funding development outlay of Rs. 900 billion by the federal government. Simple calculation from the facts provided in Federal Budget 2021-22: Budget in Brief and Federal Budget 2021-22: Annual Budget Statementexpose the claims of fiscal consolidation. These are narrated below:

• Total current expenditure is estimated at Rs.7523 billion
• Debt servicing alone is Rs. 3060 billion
• Defence, excluding military pension of Rs. 360 billion, is Rs. 1370 billion.

The federal government, after paying the above two is left with only Rs. 67 billion. It means that not only federal public sector development programme (PSDP) of Rs. 900 billion but current expenditure of Rs. 7456 billion will be met from borrowings. What is the position of fiscal deficit? The following are official figures:

• Total net revenues (tax and non-tax) of the federal government after transfers to the provinces under 7th National Finance Commission (NFC) Award and other direct grants for FY 2021-22 is Rs. 4497 billion.
• Total expenditures (current and developmental) are Rs. 8487 billion.
• Fiscal deficit is of Rs. 3990 billion.

The picture is crystal clear: more borrowing of nearly Rs. 4 trillion in the FY 2021-22. It is also surprising that the federal government has forecast surplus of Rs. 570 billion from the provinces to meet the monstrous fiscal deficit. In these testing times, when the overwhelming majority of the population is in dire need of financial support from respective provinces, the federal government is incentivised not to spend, what to speak of helping the poor but for necessary provincial development programmes. After transferring funds under the 7th NFC Award, is it justifiable from any angle on the part of the federal government asking the provinces to show surplus and for them to oblige?

Revenues, taxes or non-taxes, during perpetual Covid-19’s toll must be spent by the provinces to restore economy and move towards growth, but on the contrary the federal government blatantly violated Article 160 of the Constitution by keeping fiscal deficit within the limits agreed with the IMF. What makes the situation more painful is the fact that oppressive taxes, sales tax of 17% is proposed from 1 July 2021 on eatable items like wheat, flour and sugar. The levy of the same high tax on crude oil will lead to enormous cost for all the sectors. Farmers use diesel oil for tractors that are also used for transportation, other than in basic cultivation processes. High food inflation, rising food security and cost-push inflation in the end will result in slowing of growth. Taxes are meant for spending on welfare of masses and not to be kept in the kitty by provinces in the most difficult days when millions are jobless. Why should provinces show surplus when millions need financial help to mitigate heavy financial toll of three waves of Covid-19 endemic.  

The Prime Minister wants to help the marganalised sections of society but the budget is anti-growth, anti-poor and inflation-prone. Besides, relying on surplus of Rs. 570 billion from the provinces, other sources of meeting the huge fiscal deficit are:

• net external financing of Rs. 1246 billion;
• net internal financing of Rs. 2492 billion; and
• privatization proceeds of Rs. 252 billion;

The first and the last one are mere expectations!

There is nothing in the Finance Bill, 2021 to raise revenues by lowering tax rates and broadening the base. Of course, there are clichés of using technology but where is the research showing actual tax base? With meagre growth of below 4% in the current fiscal year and hope to achieve 5% in the coming one cannot improve tax-to-GDP ratio to meet even half the projected fiscal deficit of Rs. 3990 billion (it will go further up after failure of FBR to achieve the impossible target of Rs. 5829 billion for the FY 2021-22 and current expenditure will increase than estimated).     

Though the worthy Finance Minister looks firm and determined (some time even hot-headed) but, as in the past, he is hoodwinked by incompetent political leaders in power [no matter which party is ruling], technocrats-imposed by lenders/donors and crafty bureaucrats pushing the country towards further debt enslavement by killing growth through withholding taxes, more damaging at import stage, that are anti-business in nature. Every Finance Minister, politician, technocrat or banker, poses like a magician who can do wonders, whereas facts speak otherwise. Even the basic figures like growth rate and per capita income are clearly manipulated to paint a rosy picture with hollow claims of stabilisation evident from Federal Budget 2021-22: Annual Budget Statement as under:

• “During the last three years of the present Government, it has faced numerous economic challenges, aggravated by the Covid 19 Pandemic. The Government has successfully progressed from recovery and stabilization to sustainable growth”.

The reality check:

Even the primary deficit estimate for FY 2021-22 is of Rs. 360 billion[Table 3, page 8 of Federal Budget 2021-22: Budget in Brief]. Nobody will talk about it in the National Assembly, as treasury and opposition benches have now started physical bouts and exchange of filthy abuses that one could never imagine. This is what they are giving to the future of Pakistan. Has their favourite scapegoats, “establishment”, IMF, World Bank etc. asked them to behave in such a rowdy manner tarnishing the image of the country irreparably—especially when even our foreign minister was among hooligans, without realising that all diplomatic missions were closely and keenly watching the budget session. If highly educated lady ministers and parliamentary secretaries indulge in such behavior, how can we accuse others of open and naked violations of democratic norms?       

• “The provisional GDP growth rate for FY 2021 is estimated to be 3.94% against the targeted growth of 2.1% through the policy initiatives undertaken during FY 2020-21”. 

The reality check:

See comparison of Pakistan and Bangladesh done none other than by the State Bank of Pakistan in its first and the third quarterly review, The State of Pakistan’s Economy for fiscal year 2021-22. Bangladesh, once part of our beloved motherland, facing the same challenges as we have been, is going to grow by 6.8​% by the end of June 2021 and we, even after all manipulation of base and using other gimmicks, only 3.94% at the best. It can be less but definitely not more. Per capita income figure, we all know is taken using census of 2017. In 2021 we are not less than 220 million! What a mockery that we are not certain about our exact population figure!

All said and done, this official document is an eye-opener: Summary of tax expenditure 2021:

“Tax Expenditure Report 2021 for federal taxes, based on data pertaining to FY 2019-20, amounted to an estimated Rs. 1,314.27 billion. Tax expenditure in sales tax amounted highest at Rs. 578.46 billion (44% of the total), while in income tax amounted to Rs. 448.05 billion (34%), and in Customs, to Rs. 287.77 billion (22%). In last fiscal year 2019-20, FBR’s tax collection was Rs. 3,997.4 billion. Hence, tax expenditure to total collection ratio comes to about 33%, and tax expenditure to GDP ratio stands at around 3.2%”.

Fixing of unachievable tax target for FBR and then tax expenditure of 44% of total collection! Prime Minister and Finance Minister please do not blame FBR and business community and look towards erratic taxation and unjustified tax concessions to elites. Majority of the measures announced in Finance Bill 2021 amount to over-taxing the economy that is in deep recession while huge tax benefits to vested interests continue. Shamelessly, the burden is shifted to salaried class by taxing their medical facility/allowance. It is the worst one can think of, let alone justifying it on any grounds!  

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The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).