Pakistan Budget 2019-20 – ”Rich Budget and Poor Tax”
The recent budget has been a topic of discussion as the opposition labelled it 'anti-people' due to the taxes levied at the salaried class, but is it so?
Pakistan Budget 2019-20: Pakistan is the land of pure, it galore on the shores with bounties of the Lord, with people who are mentally strong, economy which other countries propose, country management in the hands of mature, were these words still oppose; since the slogan of “democracy is the best revenge” snores and eventually Pakistan economy is floored. We use to listen from our elders that how our 5-year economic plan was copied by Korea and Singapore; but what we shall tell our children and grand children?
The economy by the middle of year 2018 was sinking as fast as Shoaib Akhtar didn’t bowl fast. How on earth can any of us would believe that how fast we deteriorated our economy and overall country within a few years where our real GDP growth rate was touching 6% and now it drowned to mere 3%. Ironically not only the GDP growth rate halted, we are observing the worst economic hit as twin deficits (current account and budget) are ploughed as well that provoked the incumbent government to think out-of-the-box solutions.
Along with low GDP growth the Large Scale Manufacturing (LSM) observed the negative growth, Service Industry which is becoming the real backbone of our economy grew by 3.3% against the expected 6.2%, agriculture which is considered as the back bone of our economy (which is not except implying a large portion of our population) grew only by 0.8% against the estimation of 3.8% (though climate change played a heavy role as well) and the industry grew by only 1.4% against 7.6% expectations.
There is macroeconomic imbalance in the country due to high fiscal deficit (6.5%), current account deficit is historically on the rise (6.3%), where significant amount of revenue are spent on debt servicing and foreign exchange reserves are very low. If we compare the Tax to GDP Ratio and the Debt to GDP ratio then a clear situation is revealed which is really not promising because it is shameful, as a nation we borrow much and earn less or can be said don’t give taxes so that the government does not bother to borrow.
Before this incumbent government the total debt & liabilities ware mere 28.87 trillion and it increased by 6 trillion to reach 35 trillion at the end of March 2019. The total debt to GDP ratio sprinted to 91% and on the other hand tax to GDP ratio is mere 11%. This comparison is truly discouraging as an honest nation.
Do we all know that $11.3b is owed by Paris Club alone, $27b by donors and multi laterals, international bonds and sukuk by $12b, moreover the IMF outstanding loan is mere $5.765b, its really easy to chant that this budget is heavily impacted or induced by the IMF whereas the situation is too way different, the previous governments are solely responsible for this mess by taking the debt to GDP ratio from 25% to 90% at the end of FY 2019.
When we don’t have enough reserves as Dollars, then Dollar will go up against PKR which actually went up by more than 20% and became the weakest currency in Asia (until May/2019), Inflation will be on the rise which is it at 9% (May/2019) and Central Reserve Bank will maneuver policy rate which it did to the level of 12.25%.
There are two ways left for the government to balance the country’s poor economy i) Borrow or; ii) Raise Taxes. We have gone through the blatant yet shameful situation of out borrowing situation and impact; now let’s discuss the second option i.e. raising taxes; though it is very unpopular for the true governments but it is the best solution in the current scenario; keeping the low popularity of raising taxes the previous governments heavily borrowed; but this incumbent government thinks otherwise as clearly depicted in the budget or finance bill 2019.
Countries usually borrow money for the development expenditures or investing in industries like technology, agriculture or commerce but if borrowed for private or public consumption then it is behemoth since the borrowing start.
Furthermore the governments must encourage the masses to save more and use those funds in investing the government projects or invest privately for businesses particularly for the export sectors, hence bridging the big saving-investment gap. Due to low savings by the government to spend on the infrastructure, masses under-go to low income levels and mostly these savings are consumed.
But before we get into it, let’s do one thing that after the premises set above to analyze the taxes in the budget heading to heading briefly, take 3 questions to answer at the end:
- Are we really being cruelly/heavily taxed?
- Are poor segments of our society being taxed more than the others?
- With special focus on the tax on the businesses and individuals who is being affected and in what way?
FBR given ambitious tax target:-
FBR has been given to collect tax revenue which is an historic number in the whole economic scenario of Pakistan; that number is Rs5,555b for the FY 2019/20. The FBR Chairman explained in the press conference that how is he going do that; let’s all put some belief in him and wish him good luck.
FBR takes measures:-
To increase tax revenue by 516b, and given as follows;
- Increase in tax rates for salaries/non-salaried persons
- Increase in immovable properties market value (85%)
- Raise in sales tax on sugar from 8~17%
- Freezing corporate tax rate @29%
- 17% FED on edible oil
- Enlarged scope of FED on locally manufactured cars
- Transfer of certain sectors from FTR (final tax regime) to MTR (minimum tax regime)
- Increased FED on Cement and Cigarettes
Impact (expected) from the above measures:-
- 70b from FED
- 200b from Sales Tax
- 200b from Income Tax
- 30b from Customs Duty
- Beside these measures the exemptions will fetch about 300b
- 50b from increasing tax rates on salaried/non-salaried persons
How many Fresh Taxes?:-
It has been suggested that fresh taxes will give boom in revenue not only in the foresaid year but the coming years too;
|Tax Revenue (PKR b)
Source: Ministry of Finance
Tax to GDP Ratio:-
With the fall of the current tax reforms, the expectation is to increase the tax to GDP ratio. It is estimated to increase to 15.4% until FY21/22
Increase in number of Tax Payers:-
The incumbent government is expected to increase the number of tax payers from 1.9m to 2.6m until FY21/22
Prominent Changes in Industrial Tax:-
- The restoration of Normal Sales Tax Regime for steel sector to generate 25~30b
- Real estate between 20~40b
- Health tax on cigarettes yet not approved by the cabinet
- FED on cigarettes/beverages as been increased w.e.f June 12th, 2019
- FED on beverages is increased from 11.3% to 13%
- FED on cigarettes changed
- A box of retail price 5,960/k will be charged with Rs5,200
- A box less than the above, will be charges with Rs.1,650
- FED on cement increased from Rs1.5/kg to Rs2/kg
- 5% FED on non aerated juices, syrups and squashes on its retail prices.
- FED on LNG has been leveled with local Sui Gas @10/mmBTU
- FED on cars
- 5% on 0~1000cc
- 5% on 1001~2000cc
- 5% on 2001~above
- 17% FED on edible oil/ghee/cooking oil
Is being brought under the Normal Tax Regime (NTR) , however on the open plots, the story is a bit different, as it will be taxed on the full capital gain if the holding period is upto 1-year, and 1~10 years 75% of the gain shall be taxed. Gain on sale of constructed property is fully taxed if holding period is upto 1-year and 75% if 1~5 years and above 5-yrars “no-tax”.
It has been proposed that FBR rates of immovable property are being brought closer by 85% to the actual market value and 3% extra if no source disclosed is “withdrawn”. With-holding-tax (WHT) on immovable property; irrespective of property value it will be taxed.
Transition or phasing out of FTR:-
According to the finance bill 2019, the income tax by its inherit nature is taxed charged and levied on income. This measure is designed to gradually phase-out the Final Tax Regime (FTR) and transition to income based taxation of all persons.
The rule of thumb is defined as the person whose income is 75% or more from salary is a salaried person, if less than 75% then he is non-salaried person. However, the slabs are changed for both persons as follows;
- Salaried:- 11 slabs are being introduced with increase in tax rates and taxable income limit of over 600k from 5%~35%
- Non-Salaried:- 8 slabs are being introduced exceeding 400k from 5%~35%
It has been estimated that 11b can be gathered after change in taxation rates making it close to a total of 113b for the FY 2019/20 which is just 1.5% of total tax revenue by FBR; whereas 66b can raise from high non-salaried individuals. The estimation from Association of persons (AOPs) is about 19b.
We can conclude that Pakistan has one of the worst tax to GDP ratio in the world, whereas the salaried individuals are only 2% of the total tax revenue; this answers to all our 3 questions; it depicts at the end; that Pakistan has a huge budget but poor tax collection, moreover the symphonies that ring the bell that IMF induced the budget are totally absurd and are complete disconnect.
The government is ambitious in collecting more tax in this budget from the rich and spending on all the segments of society, it’s clear and obvious that government has suggested an egalitarian budget and rightly said it’s a “break from the past”.
Good Luck Pakistan!
An Analysis by Muhammad Ehsan Iqbal (CPM-Asia)