Last year, the PML-N had been in power for a week when the budget was presented before the assembly. As such, it was only broadly reflective of the new government’s policy. This year, the party has been in power for a year, has been lucky enough not to be fettered by the demands of any coalition partners, and is in power in the center as well as the country’s biggest province. It can’t get much better than that. In theory, the government should be ready to push for major reform, and should be in a place to implement bold (and possibly unpopular) policy measures. Is the budget reflective of that?
There is a lot of fluff and rhetoric in a budget speech, so its important to cut down to the basics – how does the government plan to tax and what does it plan to spend on? The Minister’s speech laid out principles of tax collection which all make sense and are all long overdue. He said that the share of direct taxes in the total collection would be increased, there will be an emphasis on expanding the tax net as opposed to squeezing those already in it, the cost of non-compliance with tax measures will hit the defaulters, and the tax regime will be simplified to facilitate payment. This is all music to the ears of economists.
The proposals that follow also sound good. The Minister has made a commitment towards phasing out SROs over a period of three years, thus removing the extensive concessions given to big business at the expense of small and medium enterprises. This is crucial to provide a level playing field to all businesses in the country, and would be key to reducing the corruption and rent seeking that is part and parcel of the grant of concessions.
But this is where the speech stopped. There was no further mention of which set of concessions would be abolished first, and which sectors would be affected. Given that the Minister said that a high powered committee had been looking at the issue, and had formulated definite proposals, it is strange that no details were forthcoming. Certainly the government’s first year in office, when not a single concession was withdrawn, and when additional SROs were issued, does not inspire confidence. In fact, the “specific” proposals as they are called in the speech are not so specific after all.
[quote]The government's pro-big business biases are apparent in its tax policies[/quote]
The government’s pro-big business biases are apparent in the other tax policies delineated in this year’s budget. Instead of increasing the rate of capital gains tax as promised, the government has decided to keep the rate stable for securities held for a period of 12 to 24 months, while increasing the rate by just 2.5 percentage points for securities held for less than a year. What had been promised earlier was an increase of 7.5 percentage points in the tax rate for all securities. Further, in a master stroke of obfuscation the government has significantly reduced (bringing it down to 20% from 34%) the corporate tax rate for new industries and the construction sector, but presented this news under the rubric of encouraging foreign direct investment. What is being presented as a means to promote FDI flows is in fact a major concession to large housing estate developers. And this is not all. The corporate tax rate for other companies in general has also been reduced by one percentage point. The PML(N)’s traditional constituency of middle-level businessmen based in urban areas will also see some concessions – the withholding tax on marriage halls and caterers has been halved from 10% to 5%.
There are still some rays of light though. The policymakers seem to be making an effort to reward compliant taxpayers and rope in non-compliant ones. As such, the budget proposes to bring in a system of “advance” taxes on airline tickets (barring Economy class), real estate transactions, on car registration, and on interest income and dividends amongst other things, where tax filers will pay at lower rates than non-filers. It is not clear how filing or otherwise will be established – will it be easy for departments to use NTNs to check if taxes have been filed or not? If the FBR can actually make this workable, it would be a major step forward. Combined with more comprehensive efforts to track down non-filers using national databases, it may even be the first step towards bringing tax evaders into the net. But it needs a lot of coordination and establishment of systems to facilitate information flows. Still, if the government manages to pull this off, it would be well worth the effort. It is telling though, that all these will be withholding taxes – the tax machinery doesn’t seem too confident about cracking down on evaders by using the more traditional methods of scrutinizing returns.
This shift to withholding tax is all the more interesting, because last year’s budget was all about collecting more sales tax, not least by bringing establishments like marriage halls, hotels, movie theaters etc into the tax net. This doesn’t seem to have yielded the desired results given that sales tax collection fell short of target as per the budget documents – Rs 1,005 billion was collected as opposed to the target of Rs 1,053 billion.
There are some interesting developments on the expenditure side. The defense budget has been bumped up to Rs 700 billion as opposed to Rs 627 billion last year. This was expected, not least because of the escalation of activity against the militants in FATA. Domestic debt servicing will be the single biggest expenditure item as has been the case for the last many years – Rs 1.2 trillion will be spent under this head in the coming year as compared to just over Rs 1 trillion last year. Energy subsidies have remained at about the same level as the year before, with little difference in the revised estimates from FY2013 to FY2014. The public sector development program again remains largely unchanged, which is probably a good thing given how badly that money is typically managed.
The Benazir Income Support Program (BISP) has received a major boost with an increased allocation of almost Rs 50 billion, and a pledge to reach out to more than one million additional persons, as well as an increase in the cash handout. That is positive, and interesting given the government’s obvious reluctance to keep BISP operational last year. Apparently pressure from donors and the poor optics of fiddling with the country’s only targeted cash transfer facility were too much for the PML-N.
On another note, the federal government’s refusal to cede control continues. The provincial surplus for the fiscal year which is about to close was originally estimated at about Rs 23 billion. At the end of the fiscal year, it turns out that provinces will actually be generating surpluses of Rs 183 billion. Did this happen because of fiscal prudence by the provincial governments or simply because the federal government did not transfer funds? In the coming year, the provinces are supposed to generate surpluses of Rs 289 billion. How exactly will this happen post 18th amendment, when they are supposed to be responsible for much of the government’s output?
Overall, the budget is once again a “safe” one. There is talk of implementing bold taxation proposals, but at this stage there is little detail of how these will be enforced. Expenditure patterns remain largely unchanged. Provinces will be squeezed further to ensure that fiscal deficit targets are met. Big business will continue to be nurtured. The only gleam of hope is in the proposals to remove SROs and tax non-compliant citizens at higher rates. Lets hope at least these measures materialize.
There is a lot of fluff and rhetoric in a budget speech, so its important to cut down to the basics – how does the government plan to tax and what does it plan to spend on? The Minister’s speech laid out principles of tax collection which all make sense and are all long overdue. He said that the share of direct taxes in the total collection would be increased, there will be an emphasis on expanding the tax net as opposed to squeezing those already in it, the cost of non-compliance with tax measures will hit the defaulters, and the tax regime will be simplified to facilitate payment. This is all music to the ears of economists.
The proposals that follow also sound good. The Minister has made a commitment towards phasing out SROs over a period of three years, thus removing the extensive concessions given to big business at the expense of small and medium enterprises. This is crucial to provide a level playing field to all businesses in the country, and would be key to reducing the corruption and rent seeking that is part and parcel of the grant of concessions.
But this is where the speech stopped. There was no further mention of which set of concessions would be abolished first, and which sectors would be affected. Given that the Minister said that a high powered committee had been looking at the issue, and had formulated definite proposals, it is strange that no details were forthcoming. Certainly the government’s first year in office, when not a single concession was withdrawn, and when additional SROs were issued, does not inspire confidence. In fact, the “specific” proposals as they are called in the speech are not so specific after all.
[quote]The government's pro-big business biases are apparent in its tax policies[/quote]
The government’s pro-big business biases are apparent in the other tax policies delineated in this year’s budget. Instead of increasing the rate of capital gains tax as promised, the government has decided to keep the rate stable for securities held for a period of 12 to 24 months, while increasing the rate by just 2.5 percentage points for securities held for less than a year. What had been promised earlier was an increase of 7.5 percentage points in the tax rate for all securities. Further, in a master stroke of obfuscation the government has significantly reduced (bringing it down to 20% from 34%) the corporate tax rate for new industries and the construction sector, but presented this news under the rubric of encouraging foreign direct investment. What is being presented as a means to promote FDI flows is in fact a major concession to large housing estate developers. And this is not all. The corporate tax rate for other companies in general has also been reduced by one percentage point. The PML(N)’s traditional constituency of middle-level businessmen based in urban areas will also see some concessions – the withholding tax on marriage halls and caterers has been halved from 10% to 5%.
There are still some rays of light though. The policymakers seem to be making an effort to reward compliant taxpayers and rope in non-compliant ones. As such, the budget proposes to bring in a system of “advance” taxes on airline tickets (barring Economy class), real estate transactions, on car registration, and on interest income and dividends amongst other things, where tax filers will pay at lower rates than non-filers. It is not clear how filing or otherwise will be established – will it be easy for departments to use NTNs to check if taxes have been filed or not? If the FBR can actually make this workable, it would be a major step forward. Combined with more comprehensive efforts to track down non-filers using national databases, it may even be the first step towards bringing tax evaders into the net. But it needs a lot of coordination and establishment of systems to facilitate information flows. Still, if the government manages to pull this off, it would be well worth the effort. It is telling though, that all these will be withholding taxes – the tax machinery doesn’t seem too confident about cracking down on evaders by using the more traditional methods of scrutinizing returns.
This shift to withholding tax is all the more interesting, because last year’s budget was all about collecting more sales tax, not least by bringing establishments like marriage halls, hotels, movie theaters etc into the tax net. This doesn’t seem to have yielded the desired results given that sales tax collection fell short of target as per the budget documents – Rs 1,005 billion was collected as opposed to the target of Rs 1,053 billion.
There are some interesting developments on the expenditure side. The defense budget has been bumped up to Rs 700 billion as opposed to Rs 627 billion last year. This was expected, not least because of the escalation of activity against the militants in FATA. Domestic debt servicing will be the single biggest expenditure item as has been the case for the last many years – Rs 1.2 trillion will be spent under this head in the coming year as compared to just over Rs 1 trillion last year. Energy subsidies have remained at about the same level as the year before, with little difference in the revised estimates from FY2013 to FY2014. The public sector development program again remains largely unchanged, which is probably a good thing given how badly that money is typically managed.
The Benazir Income Support Program (BISP) has received a major boost with an increased allocation of almost Rs 50 billion, and a pledge to reach out to more than one million additional persons, as well as an increase in the cash handout. That is positive, and interesting given the government’s obvious reluctance to keep BISP operational last year. Apparently pressure from donors and the poor optics of fiddling with the country’s only targeted cash transfer facility were too much for the PML-N.
On another note, the federal government’s refusal to cede control continues. The provincial surplus for the fiscal year which is about to close was originally estimated at about Rs 23 billion. At the end of the fiscal year, it turns out that provinces will actually be generating surpluses of Rs 183 billion. Did this happen because of fiscal prudence by the provincial governments or simply because the federal government did not transfer funds? In the coming year, the provinces are supposed to generate surpluses of Rs 289 billion. How exactly will this happen post 18th amendment, when they are supposed to be responsible for much of the government’s output?
Overall, the budget is once again a “safe” one. There is talk of implementing bold taxation proposals, but at this stage there is little detail of how these will be enforced. Expenditure patterns remain largely unchanged. Provinces will be squeezed further to ensure that fiscal deficit targets are met. Big business will continue to be nurtured. The only gleam of hope is in the proposals to remove SROs and tax non-compliant citizens at higher rates. Lets hope at least these measures materialize.