Pro-growth budget: to be managed with caution – Opinion

The 2021-22 budget is certainly a consumption-oriented budget, but it is also directional. There are signs of medium to long term thinking with some traditional fourth year budget nuggets. The budget is in an expansionary mood in its limited space. The key to safeguarding the stability achieved and converting it to long-term stability is government confidence in the independence of the SBP in matters of monetary policy and exchange rates. Nonetheless, many measures taken in the budget are aimed at long-term sustainability.

The idea is to stimulate economic growth to increase income, which will take time. Meanwhile, the government will have to live with budget slippages. It is of the utmost importance that there is a stable balance of payments (BoP) where import growth is complemented by exports – growth in goods and especially services, optimistic dynamics of remittances and investments foreign direct in export sectors.

In this budget, building on previous efforts, the government did all it could within the limited space of the IMF program to alleviate tax complications – both in terms of rate and compliance. There is a deliberate removal of overreliance on the indirect form of direct taxes to generate income by abolishing up to 12 WHT taxes. Import tariffs and industrial taxes and duties are also in line with the thinking of the ministries concerned. The digitization and promotion of digital transactions is a major pivot to increase the documentary footprint.

That said, the government gave ample concessions to anyone who was demanding. In some places, merit may have been put on the back burner, with political and economic considerations taking center stage. There is no doubt that this is a budget that builds confidence. But in the process, the economy could overheat. Not all decisions will be taken well by the International Monetary Fund (IMF) and if there is a shortfall, the government must give something.

With rising global commodity prices and the possible boost in demand from budget relief measures, inflation may return more quickly. The government cannot push the box any further indefinitely. He must choose his battles. It is not prudent to tax more on a limited basis. It is not possible to further increase the price of electricity. The budget deficit could widen. The tax base cannot expand and produce results in a year.

Tax revenue targets are elusive from day one. In non-tax revenue, the critical element is the petroleum tax (PL). Rs 610 billion are budgeted there at an average of Rs 25-30 per liter PL for both gasoline and diesel. Right now it’s less than Rs5 / liter and the way oil prices move, it will soon be zero. And the way the oil trajectory is predicted, the time is not far behind when the government grants subsidies to keep prices unchanged.

It is a dangerous path. Don’t go there and destroy the stability. It is better to start raising oil prices and cutting income here to make room for other areas. Otherwise, the government must jeopardize the growth of its public sector development budget by around 40%. There could be pressure for other forms of taxes.

Directional steps do not work in a year or a term. Economic expansion will take time, which will be reflected in tax revenues within the existing base. But how to ensure stability at this time? This is why it is imperative to redouble our efforts to widen taxes. Some good steps are being taken. There is now an anti-smuggling law, where retailers must be held responsible for the preservation of legitimately imported goods. The self-assessment system is improved and encouraged. SME compliance just got easier.

The government has taken the right steps, but it takes a lot more to stick to it and expand the scope. For example, in digital payments and linking them to the Federal Board of Revenue (FBR), the focus is on point of sale (POS) machines and the overall electronic tax system. The good thing here is that the Minister of Finance keeps the Pakistan Fintech Association on board. The link at the moment is with the textile and leather retailing. In the background, work is underway where other brands will be involved. The next in line has to be to catch the elephants – wholesaler and distributor in the supply chain. It is imperative to have the provinces on board because the sales tax on services is their domain.

The government has reduced turnover taxes at all levels and the drop is higher in some cases. This is good for formal industry and consumers as the turnover tax is usually passed on and the incidence of the tax is higher for low margin industries. The key is that businesses pay their share of income tax. For this, the tracking and tracing system is imperative – especially in four industries.

All of these, along with the abolition of the WHT on banking transactions, will help bring the economy down the documented path. To date, a third of the money supply (M2) is in cash. For an immediate boost and attractive interest in the capital markets, the capital gains tax on stocks has been lowered. This with better stages for the listed sectors, the bulls are in the game. The trap is to attract foreign portfolio investment. Once that starts to happen, the next step is the IDE. Not to mention that it is also vital to have the IMF on board and the approval of the FATF. Geopolitics is apparently in favor of Pakistan. The intrigue to obtain foreign flows thickens. it works better; or the party is short-lived.

Copyright Business Recorder, 2021

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