Published in Jul-Aug 2022
The government needs money and tons of it. With the IMF breathing down its neck to make the fledgling unity government keep its promises made in the budget for FY 2022-23 before restoring the stalled six billion dollars funding programme, it was then forced to rewrite its fiscal plan within 15 days of its presentation before Parliament. In what was the first instance in Pakistan’s history, the Shehbaz Sharif administration announced significant additional revenue measures even before the original budget was passed.
The government’s original fiscal plan comprised tax and nontax revenue mobilisation measures, such as an unrealistically large petroleum development levy (PDL) collection target of Rs 750 billion and recovery of Rs 200 billion in gas infrastructure development cess (GIDC) from industrial consumers, as well as populist steps, such as tax cuts for salaried individuals falling in the low-middle-income bracket and smaller businesses. At the same time, it sought to charge a two percent tax to companies and individuals earning above Rs 300 million a year in addition to netting unproductive real estate holdings of the rich and bringing retailers under a negligibly small fixed tax regime.
However, neither its understated expenditure estimates nor its bloated revenue targets went down well with the IMF, delaying a staff-level agreement that would pave the way for the programme’s revival.
The second round of taxation increases the government’s tax collection target from initial estimates of over seven trillion rupees to nearly Rs 7.5 trillion. It has also revised downwards the PDL target to Rs 550 billion and scrapped GIDC from the projected nontax revenues.
Given that the new taxes are meant to mainly meet the IMF loan conditions, the ‘final FY 2022-23 budget’ not only withdrew exemptions given in the first draft of the budget for the working classes and small businesses, it also radically increased the tax burden on them.
Another important change made in the original budget was the retrospective imposition of a one-time 10% super tax on large companies from 13 sectors with earnings of over Rs 300 million in the last fiscal ended on June 30, 2022, or in the calendar year 2021 in case of commercial banks. These sectors include automobiles, aviation, banks, beverages, cement, chemicals, cigarettes, fertilisers, LNG terminals, oil and gas, steel, sugar and textiles. The rest of the corporate sector will be subject to a four percent super tax. The budget also imposes one to four percent incremental poverty tax on individuals and companies earning Rs 150 to over Rs 300 million. The Finance Minister, Miftah Ismail, was quoted in a report as saying that the “companies outside the 13 specified sectors will be required to pay either a four percent super tax or an incremental poverty alleviation levy.”
Financial analysts have projected the potential impact of the one-time super tax on the earnings of the 13 firms to be about 14%. According to one analyst, the move to gather additional revenues through the super tax will impact different sectors and companies differently. Banks, for example, are already subject to a four percent super tax in addition to 35% corporate income tax compared to 29% for the rest of the corporate sector. As a result, their earnings will take a hit of between 12.6% and 15.4%. Fertiliser makers will be affected by nine percent and cement manufacturers by 7.6 to nine percent. The oil and gas sector’s profit is estimated to be hit by 8.2-8.7%, steelmakers’ by 3.3-9% and chemical firms by 10.4-11.5%.
The Pakistan Business Council (PBC) and the Overseas Investors Chamber of Commerce & Industry (OICCI), were quick to express their dismay at these measures.
Ghias Khan, Chairman of OICCI and President of Engro, tweeted that “imposing a super tax on industries is regressive and will hamper industrialisation, curb manufacturing and not reduce the current account deficit. Pakistan needs a wider tax base through documentation, taxing unproductive sectors and long-term policy development.”
The PBC’s official Twitter account was critical of both the government and the IMF for not committing to fundamental reforms of the Federal Board of Revenue (FBR). “Hence, (the) short-term, knee-jerk and front-ended revenue-seeking measures to tax the already taxed will compromise sustainable growth. No innovation. Pure expediency.”
Since the new taxes have been implemented on last year’s profits, these are not likely to produce much inflation. Yet, the government has already squeezed businesses and consumers by imposing the super tax, a massive hike in the price of fuel and planned adjustment in electricity and gas tariffs from July. That is not all.
Overall, the taxation measures give a perception of heavy tilt towards direct taxes. They are. Nonetheless, the FBR’s reliance on businesses to collect taxes continues. If withholding taxes and indirect taxes are combined the effort-based taxation by the FBR is reduced to the minimum, which raises the question of whether it is justified in maintaining a team of over 20,000 people.
The measures to tax the corporates over and above regular levies on their profits are no more than good optics and a populist move to show that the government can take ‘tough’ decisions. Many have supported the unity government for imposing the super tax, describing the “right and unavoidable step at this time to save the country from default.”
The excessive profits made by the 13 specified sectors in the last couple of years are believed to have led the government to impose the super tax. Their profits for the last fiscal year are estimated to be nearly Rs 900 billion. Moreover, most industries are believed to have prospered on the back of hefty government handouts.
Does this represent a bold move on the part of the government? After all, the ‘rich corporates’ are being asked to pay additional taxes only once. This will not affect the broader narrative of increasing the tax base, reducing the cost of doing business, taxing all incomes equitably in order to document the economy and boost the tax to GDP ratio of below nine percent or one of the lowest in the world. More importantly, the decision conveniently spares the PML-N’s core constituency — the traders – and stops short of netting other untaxed and under taxed segments of the economy, such as agriculture, and it also frees the PML-N and its coalition partners from the need to slash the wasteful expenditure on state-owned enterprises (SOEs) that have been haemorrhaging taxpayers’ money for years. The disinvestment or closures of some loss-making public-sector entities may actually have saved more cash than any extra revenue earned through the imposition of the super tax on the documented sectors.
There also was no dearth of analysts critical of the move to impose more taxes on the already taxed. In their view, this will only serve to dampen investor confidence due to policy uncertainty and discourage the documentation of the economy. In response to the criticism, the Finance Minister tweeted, “If our country was on the brink of default, what was the government supposed to do? If we want our poor people to bear the brunt of rising global oil prices in the form of high petrol and diesel prices, and if we want our middle classes to bear 17% consumption tax and high utility rates... then shouldn’t our rich also pay?”
The fact of the matter is that these measures will not affect the pace of economic growth. They may, however, help the government overcome its immediate financial problems, restart the IMF programme and draw political mileage in the next elections. In essence, these measures represent short-term policy goals at best and may cost the economy dearly in the long run in terms of capital flight on policy inconsistency and failure to reform a broken tax system.
Nasir Jamal is Bureau Chief, Dawn, Lahore. firstname.lastname@example.org