More recommendations on the budget - Dr Ashfaque H Khan - Tuesday, May 03, 2011

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In my article on April 26, I put forward several recommendations for the forthcoming federal budget. These included shifting the federal budget date from May 28 to June 11, treating expenditure instead of revenue as residual to minimise budgetary slippages, setting next year’s revenue target for the FBR between Rs1,765-1,775 billion based on actual collection of Rs1,530 billion this year, bringing agricultural income under direct tax net, implementing RGST, improving withholding tax regime and declaring the forthcoming budget as reform-oriented budget.

In this article, I shall give some more recommendations on taxes and expenditure sides of the budget. Pakistan’s petroleum sector is heavily taxed. The Shaukat Tarin effect (depreciation of the exchange rate) has further compounded the difficulties for the people of Pakistan. In the last fiscal year (2009-10), the government collected Rs351 billion from the petroleum sector which amounted to 26.5 percent of total FBR revenue. Such a heavy reliance for taxes on petroleum products is not only damaging the economy but also putting extraordinary strain on the common man.

The oil prices are expected to rise further and with the base of taxation grossly inflated as a result of the Shaukat Tarin effect, the domestic price of petroleum products will go beyond the reach of even the middle class. The government must set up a committee of experts to review the entire taxation structure of the petroleum products. The issues that need to be reviewed include the number of taxes on petroleum products, the rates of taxation, tax on tax, the various commissions and charges. The objective of the reform should be to reduce the burden of taxation on petroleum sector and compensate the loss in revenue by bringing other sectors into tax net. The reform should be the part of tax reform of the next budget.

The provincial tax efforts have been on a regular decline for over two decades. The recent NFC Award has made the provinces even more complacent as they are not pushed to mobilise more resources. Improving provincial tax effort is essential to achieving overall fiscal consolidation. The provincial governments can raise their own resources by improving property tax and stamp duties regime, for which, the valuation tables need to be updated for both urban and rural property transactions. Motor vehicle tax is yet another source of provincial revenue along with the implementation of RGST on services.

Irrational allocation of resources between provincial and federal governments under the new NFC Award has sowed the seeds of perpetual macroeconomic crisis in the country. In the larger interest of maintaining fiscal discipline and saving the new NFC Award, it is absolutely essential that a consensus must be reached on some binding constraints for provinces to generate surpluses before finalising the budget.

Let me turn to the expenditure side. The federal government has very little room for reduction in expenditure. Interest payments (thanks to the unprecedented surge in public debt) and security-related expenditure would consume 75 percent of the FBR revenue. It is therefore essential to review the state of the rotten public-sector enterprises (PSEs). Can we afford to pay over Rs300 billion of taxpayers’ money to keep the PSEs afloat, and for how long? Restructuring and changing the board of the PSEs have not worked and will not work going forward. Time has come to offload these institutions even if we get Rs1.0 for each PSE. The government will save Rs300 billion, which can be spent on the voiceless masses of this country.

Circular debt is emerging as a major expenditure item of the budget as well as one of the factors responsible for increased load-shedding in the country. The government has been trying to address this issue with a one-track mind, that is, keep on raising the power tariff. Raising power tariff alone has not worked over the last 13 years and will not work in the future.

How should this issue be addressed? Firstly, the government must stop giving free electricity to Wapda/Pepco employees. Secondly, some of the Wapda’s and IPP’s plants have become fuel guzzlers. Energy audit of these plants needs to be undertaken to identify inefficient plants with a view to making targeted investment. Thirdly, the CEOs of all the DISCOs must be given line losses targets and their performance must be monitored by a parliamentary committee. Fourthly, Wapda’s finance department is weak and its accounts are highly fragile. The recent news about the overcharging of consumers simply suggests that not all is well in Wapda’s finance department. Besides auditing Wapda’s accounts, the government needs to strengthen its finance department by hiring professionals at market salary. Fifthly, the government must earmark PDL to eliminate circular debt.

The overall budget deficit target for the next year should not be more than 4 percent of GDP. The federal government must not finance any provincial development project, new or on-going, as the provinces will be receiving enormous resources under the NFC Award. The quality of expenditure must be improved by allocating resources towards physical infrastructure and higher education, as health and education (primary and secondary) have been devolved to the provinces.

These reforms are sufficient to transform the forthcoming budget into a reform-oriented budget. What can go wrong in Budget 2011-12? The government does not appear to be ready to implement tax and expenditure reforms as described above. The FBR is not operationally ready to collect income tax from agriculture if it is asked by the provinces to do so. Is the FBR ready to collect the RGST? Has the FBR devised any mechanism to improve withholding tax regime? My information is in the negative. If the FBR’s tax collection target is set at Rs1,952 billion, this will simply confirm the non-serious attitude of the finance team. Slippages in the budget will be built-in from day one. All budgetary targets will then become moving targets. I hope and pray that sense will prevail.

The writer is principal and dean at NUST Business School, Islamabad.

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