The promulgation of the ‘mini-budget’ through presidential ordinances on March 15, just three months before the announcement of annual Budget 2011-12 in June this year, would make an already hard lives of Pakistanis in general, and salaried class in particular, even harder and more unbearable. Is this an unfounded assumption? No, it is a fact that we would be explaining, quantifying and justifying in this write up.
The major opposition Pakistan Muslim League Nawaz, which enjoys the second top seats in the National Assembly and rules the most populated province of the country, Punjab, immediately rejected the mini-budget. It called the promulgation of the mini-budget through ordinances, without being tabled discussed and approved by the National Assembly. “New taxes could only be imposed by the National Assembly but the government had set a new precedent of violating the Constitution by imposing a ‘mini-budget’ through ordinances”, PML-N’s spokesman Ahsan Iqbal said immediately after the promulgation of the taxation ordinances.
The new tax measures were introduced with immediate effect for the remaining period of the current fiscal year (till June 30) through separate presidential ordinances to meet the conditionalities of the International Monetary Fund (IMF) ordering restrict current year’s fiscal deficit below 5.5 per cent of GDP.
The government had assured the IMF take major policy measures within a few days to remain engaged for a wider financial support from other lending agencies like the World Bank and Asian Development Bank.
Speaking at a “post-mini-budget” news conference at Islamabad on March 17, Finance Minister Dr Abdul Hafeez Shaikh said that Rs173 billion additional budgetary measures through Rs120 billion reduction in allocated expenditures and Rs53 billion additional taxes were announced with the full backing and support of the armed forces and other government institutions.
Finance Secretary Dr Waqar Masood Khan talking on the occasion said the government would slash spending by Rs120 billion, including Rs100 billion reduction in public sector development programme. An amount of Rs20 billion would be saved through a combination of steps, already mentioned above.
Let us understand the details and the nuances of the ordinances and what they actually mean.
First, the ordinances aims to collect an additional revenue of Rs53 billion- Rs20 billion from the levy of 15 per cent surcharge on income tax (on taxable income), Rs25 billion through withdrawal of sales tax exemptions, Rs6 billion by increasing excise duty on imports from one to 2.5 per cent and the remaining and Rs2 billion by what it calls the withdrawal of subsidy by imposing 8 per cent sales tax on sugar at the ‘real’ off mill price of Rs60 per kilogram instead of ‘artificial’ off mill price of Rs28.80 per kilo. The ordinances said that the ‘mini budget’ was effective with immediate effect till the end of the fiscal year on June 30.
The government also announced to slash its expenditure by Rs120 billion the brunt of which would have to be borne by the people through Rs 100 billion reduction in public sector development programmes and the remaining Rs 20 billion from an array of measures including slapping of a ban on fresh government jobs and purchase of air-conditioners, furniture, computers and many other such items.
One of the ordinances amends the Sales Tax Act 1990 so as to withdraw general sales tax (GST) exemptions on fertilisers, pesticides and tractors. The zero rating taxation on plant machinery and equipment, including parts has also been withdrawn which means that That would mean 17 per cent GST on the agricultural inputs and engineering items would now be subjected to a 17 per cent general sales tax.
Similarly, zero rating on export-oriented sectors has also been withdrawn. This means that plant, machinery and equipment and domestic sales of export-oriented items like textiles, leather, carpets, sports and surgical goods would now be subjected to 17 per cent general sales tax. Duties on all beverages, cigarettes and cement will also be increased.
Talk about ‘burning the candle at both ends’ which in plain language means ‘barely managing to carry on an already unbearable existence’ just as candles could only be lit at both ends if held horizontally, a position that makes them drip and, thus, burn out much more quickly.
The mini-budget, thus, would squeeze the Pakistanis, the majority of whom could only be categorized in just one category; poor of varying shades of gray- absolute, better than absolute, above absolute and on the higher step of ladder at beast as low or middle income classes (the last being a category that exists in books here) at both ends. The salaried class with taxable income would have to pay an additional 15 per cent surcharge on income tax; an already flattened purchasing power of its non-income-taxable poorer counterparts taking a further severe beating due to increase in prices of many essential commodities due to levy of additional federal excise duty, withdrawal of sales tax exemptions and increased tax on such essential item as sugar, increasing petroleum prices, electricity tariffs and the likes. They would be squeezed at the other end with the tremendous cut in the public sector development projects and without any hope to find a half decent government job which no more would be available to them with the slap imposed by the government.
The government has also announced to increase an already high electricity power by an additional 2 per cent and imposition of 17 per cent sales tax of purchase of one of the most essential agricultural machinery, tractor, the cost of which would be paid by the end consumers of agri commodities.
It may be mentioned here that tractors along with fertilizer and some pharmaceutical products are some of the examples exemptions of sales tax etc. The collective cost of sales tax exemptions was estimated to be over Rs.27.409 billion during the fiscal year 2009‐10- tractors, Rs 6.246, Fertilizer Rs 8.797; pharmaceutical products Rs 3.754 billion and others Rs 8.612 billion.
We have said in the introductory paragraph of this write up that the mini-budget would make an already harsh life of poverty ridden Pakistanis even more harsh. Let me highlight the flaws in the income tax structure in Pakistan that seems open to abuse so rampantly to under-declare the real income to save the tax.
Here we go: In 2010, a total of 1.706 people collectively paid Rs373.685 billion income tax. This means that less than 1 per cent of the 180 million population of Pakistani paid income tax last year. A whopping 97.5 per cent, or 1.663 million, of the 1.706 million income tax payers, who collectively paid Rs 87.662 billion, comprised the lowest tax group that paid less than Rs 0.5 million income tax. Just 21,000 paid income tax between Rs 0.5-1 million; less than 20,000 paid between Rs 1-5 million, only 7,600 paid between Rs 1-1.5 million; a negligible 3,000 who paid between Rs 1.5-2 million and 2,414 paid between Rs 2-2.5 million. A negligible 1,526 paid between Rs 2.5-3 million; only 838 paid between Rs 3.5-4 million; 602 paid Rs 4-4.5 million tax and only 526 taxpayers paid Rs 4.5-5 million. There were only 4,426 people who paid income tax of Rs 5 million or over and all of them were all corporate and businesses income-tax payers.
Here is something interesting to note: In the latest 2009-10 issue of the Economic Survey, an official document highlighting various aspects of economy and trade published by federal ministry of finance, the government calling tax‐to‐GDP a key pillar of the government’s economic strategy boasted of having already taken measures to improve tax administration and to reinstate tax audits. The relevant part of the Economic Survey 2009-10 said that “the cumulative effect of these policy measures is expected to be an increase of Pakistan’s Tax‐to‐GDP ratio to 13 percent by 2013 from 8.9 percent in 2008‐09.
Increasing the Tax‐to‐GDP ratio to 13 percent by 2013 from 8.9 percent in 2008‐09? It gets really interesting here because according to World Development Indicators database Pakistan ranked 122nd at the bottom of the list of 140 countries with a low tax to GDP ration of 9.53 per cent in 2005 which means that if the officials figure of 8.9 per cent is correct, and it should be, Pakistan’s tax-to-GDP, low as it was, dipped even further by over 0.6 per cent between 2005 and fiscal 2008-09.
The fact remains that only the salaried class pay income tax in Pakistan and they could not escape paying it because it is deducted at source. The ruling elite comprising politicians, bureaucrats, businessmen, traders, wholesalers, private businesses hardly contribute anything to income tax in a country that reeks from widespread poverty, low income, unaffordable inflation, rising cost of living, spiraling prices of essentials and non-essentials, growing hunger and unemployment. Just 1.7 million income tax payers in a population of around 180 million? Something is seriously wrong with Pakistani tax structure and policy makers remain least concerned with it primarily because they just don’t like to pay taxes.
Syed M Aslam is an award-winning journalist. He won the 15th (1999-2000) APNS- Pakistan’s top journalist award by All Pakistan Newspapers Society- for the article titled “Economic and Social Cost of Tanneries.”
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