Pakistan's tax plan hinges on October recovery

Budget made on assumption economy will recover from Oct 1, Senate panel told

ISLAMABAD: The Pakistan Tehreek-e-Insaf (PTI) government made the new budget on the assumption that the economy would fully recover from the impact of novel coronavirus on October 1, said a senior government official on Monday.

The government has apparently played a gamble as the country currently stands at 13th place in the list of total Covid-19 cases in the world and is at the third spot in terms of fastest increase in the number of new cases.

The government has set the Federal Board of Revenue’s (FBR) tax collection target at Rs4.963 trillion on the assumption that the economy will recover from Covid-19 from October 1, said FBR Member Inland Revenue Policy Dr Hamid Ateeq Sarwar. He was responding to a question raised by a member of the Senate Standing Committee on Finance during deliberations on tax proposals.

“We believe that economic recovery from October 1 and revenues from taxes imposed in the last budget will help us achieve the Rs4.963-trillion revenue collection target,” said Sarwar.

“If the coronavirus spread could not be controlled by September, it will be difficult to achieve the target and we may have to make adjustments in the budget,” said Sarwar.

Amid confusion in government ranks, the country has neither been able to control the spread of the virus nor save the economy from damage. There has been an exponential increase in the number of new cases and total cases have increased to 181,088 - the 13th highest in the world.

The number of new confirmed cases stood at 4,471 - the third highest after Russia (7,600) and Mexico (5,343), according to data compiled by the World Health Organisation (WHO). There was a difference of opinion among standing committee members over whether the FBR would be able to achieve its target but none of them wanted a reduction in the target.

“Telecom and banking services have not been impacted by Covid-19 and our only concern is large-scale manufacturing that is expected to contract 6%,” said Sarwar.

He said the government had taken into account the negative impact of Covid-19 in the first quarter of next fiscal year, therefore, target for the period had been set only at Rs960 billion. The FBR member emphasised that the Rs960-billion target was achievable but the next three quarterly targets were steeper.

“When the economy and people are dying, no government can collect taxes from people and if things do not improve by October, the government may have to rely on budgetary borrowing,” said Sarwar.

The government had set the Rs4.963-trillion tax collection target on the wrong assumption that the economy would fully recover from the impact of Covid-19 from October, said Senator Talha Mehmood.

Senator Mohsin Aziz of the PTI voiced hope that the construction package and reduction in import duties could help the economy kick-start after the first quarter, adding that the FBR would be able to achieve its annual target of Rs4.963 trillion.

However, the government’s biggest budget proposal to support small and medium enterprises by lowering taxes on imports did not impress the treasury senators, who wanted the government to continue the preferential treatment for industrialists. The standing committee recommended the government not to change the income tax regime on imports after senators belonging to the ruling party opposed the government’s budget proposal.

In the budget, the government has proposed to end the difference between withholding tax rates for manufacturers-cum-importers and commercial importers aimed at providing a level playing field for small and medium enterprises. The government has proposed that anyone can import capital goods by paying 1% withholding tax, raw material at 2% tax and finished goods at 5.5% tax.

“Manufacturing concerns should have an edge over commercial importers and the existing regime is better than the proposed one,” said Senator Zeeshan Khanzada of the PTI. He was also backed by JUI-F’s Senator Talha Mehmood and MQM’s Senator Mian Ateeq.

“Commercial importers have vanished from the market in the past four years and the manufacturers are importing goods and selling them in the market,” said the FBR’s member policy.

On the proposal of Senator Khanzada, the committee recommended giving a 10-year income tax holiday to greenfield projects.

The FBR opposed the proposal of giving further tax concessions, saying the government could not abolish the tax under the IMF programme. Senator Khanzada also recommended allowing unlimited sales to unregistered persons, which the committee did not accept.

On the proposal of Senator Mohsin Aziz, the standing committee recommended a reduction in tax rates on the import of raw material for the manufacturing of personal protective equipment to combat Covid-19.

As against Hammad Azhar’s claim of allocating Rs10 billion to fight locust, the joint secretary budget told the committee that the allocation was only Rs6 billion. The joint secretary said the remaining Rs4 billion was for non-locust activities. On a proposal of Senator Seemi Ezdi, the standing committee recommended an increase in the locust-related budget to Rs8 billion.

The committee also proposed an increase in fertiliser subsidy to Rs75 billion for the next fiscal year as against the budgetary allocation of Rs50 billion. 

Published in The Express Tribune, June 23^rd, 2020.

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