Mini budget is not ‘Mini’

Malik Zohaib Nawaz

The incumbent Government has presented the Finance (Supplementary) Bill, 2021 (FSB 2021). The FSB 2021 has been presented in the wake of trembling economic situation of the country and striving to achieve targets of International Monetary Fund (IMF). For any political government, it is one of the most reluctant steps which results in adverse impact on lives of common man. However, government took this unwilling step to balance the economy. Opposition and economist are calling this step as Mini Budget. In the ensuing paras, I will analyze the potential impacts of the FSB 2021.
The key features of FSB 2021arethe proposed amendments introduced in the Sales Tax Act, 1990 (ST Act). Sales tax on goods is governed and administrated under ST Act. As obvious from the nomenclature, that through ST Act, sales tax is levied and collected on goods ultimate burden of which is borne by the end-consumer. By nature, sales tax is regressive tax measure. Whenever, there is any upward revision of sales tax rates or withdrawal of exemptions, it adversely impacts general public as their disposable income is shrunk. Since, it is inflationary in nature; government always remain very cautious while increasing the sales tax rates or withdrawing exemptions.
The major amendments have been made in the 5th, 6th, 8thand 9thSchedule to ST Act. If we carefully examine and analyze the proposed amendments, we can easily identify that despite the loud claims of government for providing relief to lower class, various exemptions have been withdrawn which would impact the low income class. As per the Government’s claim that exemptions have been withdrawn on those goods which are not used by a common man but the matter is not so simple and straight. As stated above that ultimate burden of indirect tax (sales tax) is borne by the end consumer then the withdrawal of exemptions would surely impact the general public most of which have low income levels. A counter argument is narrated by the representatives of incumbent government that most of the exemptions have been withdrawn to tax those sectors which were enjoying undue exemptions. This claim does not have sound support of the facts and reality because sales tax is a ‘pass through’ charge and it would not have direct impact on the income of persons who are dealing in these sectors as importers, manufacturers, distributors, wholesalers and retailers. The charge of sales tax is built at every stage of value addition or enhancement of utility of goods. This is a simple calculation through which it can be demonstrated that income / profits of manufacturers and middle chain would remain immune from the levy of proposed sales tax but would negatively impact the disposable income of common man.
Although thereare various proposals for enhancement of rate of sales tax and withdrawal of exemptions but few of those reflect the contradiction in policies and vision of government. For example; withdrawal of sales tax exemption from iodized salt, cottonseeds, sunflower and canola hybrid seed, computers & laptops (imported), sewing machine for household use etc. appears to be against the government policy of elevating lower class. Similarly, enhancement of sales rates on certain goods would reverse the incentives provided by the government with a long-term vision to document the economy. For example: rates of sales tax on supplies of textile and leather goods from integrated retail outlets have been increased from 10% to 12% which would adversely impact the drive of POS integration. Supplies of goods (other than leather and textile) from integrated retail outlets were provided an incentive of 1% sales tax reduction which has also been withdrawn. Even export policy of government is not aligned with these amendments. For example: export of exempt goods by manufacturer were zero rated which has now been withdrawn and resultantly it would increase the cost of production and ultimately lead to an exported product less competitive in international market.Another major contradiction is related to SME sector. For boosting the SME sector, government has been formulating various policies which have also been adversely affected through FSB 2021 as the threshold of annual turnover for exemption of cottage industry has been reduced from Rs. 10 million to Rs. 8 million.
The volume of Mini Budget has been estimated at Rs. 370 billion (approx.) which would trigger a new wave of inflation in the country. The Mini Budget could have received appreciation from economist had there been reforms in direct taxation. Unfortunately, there are hardlyany reform in the area of direct taxation. The target to increase tax-to-GDP ratio cannot be achieved without increasing the tax base and such tax base should be increased from measures of direct taxation. There is no argument in favour of any sales tax exemptions for any sector but considering the per capita income level in the country, unemployment and availability of basic facilities; relief should be confined to common public. Therefore, withdrawal of only sales tax exemptions without introducing reforms in broadening of tax base; would not attain goals which government is targeting to.
Historically, State Bank of Pakistan (SBP) has been using Policy Rate as tool to control inflation, but results show that every incremental percentage in policy rate further accelerate the inflation. The introduction of Mini Budget is one side of the story. The other side is still to be revealed which would be on the table Monetary Policy Committee(MPC). The policy rate is expected to be increased which would further exacerbate the situation as cost of doing business would also increase.
The Mini Budget is not ‘Mini’, but it is a huge burden on general public which in return do not receive basic facilities which Constitution of Pakistan has promised to them. It can be a solution from an accountant’s perspective but from an economist’s perspective there is no long-term sustainable solution to impose indirect taxes. Government claims that taxes of only Rs. 2 billion have been imposed on common man. If this claim is accepted, then how Rs. 370 billion would be collected as most of the tax measures pertains to sales tax ultimate burden of which is shifted on end-consumers. The government generates revenue from indirect taxes and then provide relief through ‘AhsaasPrograms’ which is not the solution of problems. Instead of reliance on relief programs through charity measures, a conducive business environment should be established so that people should not be dependent on government support but become self-dependent.
If government’s claim is accepted, then we cannot ignore the clear and load message from Chairman FBR that Government would have to pay a political cost of FSB 2021. It means that there is something fishy which both government and FBR are aware to.