News Analysis |
Amid strong protests from opposition parties, and a hype created around a so-called populist budget, ruling party may have presented the budget much to the relief of businesses and businessmen, but, in fact, certain regressive taxation measures can lead to inflation.
Government and the newly elected finance minister Mifta Ismail had given the impression of floating a relief budget. It may have reduced the income taxes much to the delight of salaried government officials and professionals, but regressive taxation can haunt them in the long run.
The government came under severe criticism for providing huge Rs. 541 billion in tax exemptions, which included Customs duty relaxed by Rs. 198.2 billion, and exemptions in sales tax and income tax of Rs. 281 billion and Rs. 61.8 billion respectively. It included the huge exemptions of Rs. 31,415 million on Chinese imports under the China-Pakistan Free Trade Agreement.
Together, these additional taxes will be able to generate enough to counter the effect of exemption and concessions provided under this so-called populist budget. These measures will certainly increase the cost of doing business.
Currently, a major chunk of Pakistan’s $32 billion trade deficit is due to the bilateral trade deficit with China. Under FTA China’s exports jumped from $3.5 billion to over $16 billion, making it the biggest trading partner of Pakistan. These concessions may not be in Pakistan’s interest as they benefit China at the expense of Pakistan and overshadows the increases in exports and workers’ remittances and can lead to increase in current account deficit.
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Moreover, reliefs were given to Indonesian, Sri Lankan, and Malaysian imports. In addition, general concessions were granted to automotive industry, cotton, Exploration, and Production (E&P) companies on the import of machinery equipment & vehicles, raw materials and components etc. for the manufacture of certain goods (Survey based), and CPEC imports.
Major exemptions in sales tax and their tax expenditures during FY2018 included losses of 61.3 billion due to (leather, textile, carpets, surgical goods etc.) and  Rs96.2 billion and Rs75.9 billion under local supply under 6th Schedule and imports under 6th Schedule respectively. The government will also incur the loss of Rs61.777 billion on direct taxes on various exemptions and concessions.
Nevertheless, to bridge the gap government has decided to levy the regressive taxes which will be collected from masses. Some economic analysts termed it a dangerous budget, which might lead to high inflation. In recent past, Pakistan’s core inflation prices have remained stable, nevertheless, it was 0.7 percentage points above the core inflation in 2016. But, consumer price inflation was higher as compared to core inflation prices.
Currently, a major chunk of Pakistan’s $32 billion trade deficit is due to the bilateral trade deficit with China. Under FTA China’s exports jumped from $3.5 billion to over $16 billion, making it the biggest trading partner of Pakistan.
Though, inflation remained below average overall. It remained 2.2 percentage points below the target of 5 percent. But it did rise after the depreciation in rupee. However this mild depreciation has not led to a higher inflation so far. World Bank is its assessment of Pakistan’s economy had concluded that inflation will rise in FY2019 and will remain on the higher end in FY2020. Since Pakistan has devalued currency twice and chances were that it will get depreciated once more in June.
Anticipation was that further decline in exchange rate coupled with a decline in oil prices will decrease the domestic prices. But, FM Mifta has ruled out another round of depreciation, given the fact that external debt has reached to $90-91 billion and can increase to $100 billion, if the currency is depreciated further. To slow down the pre-empt pressure on the economy Pakistan increased the interest rate slightly at the end of January by 25 bps. Nevertheless, the question is that given the regressive taxation measures, can we still call this a populist budget?
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As per reports from World Bank, IMF and ADB Pakistan’s twin deficit posed a major threat to Pakistan’s economy in the medium term. In such a situation, can Pakistan afford these steep cuts and such huge concessions to above-mentioned industries and countries? To bridge the gap and to hit the target current deficit, Mifta has introduced following regressive measures:
- Increase in petroleum levy from revised Rs. 170, 000 million in 2017-18 to Rs300, 000 million in 2018-19.
- The surge in customs duties on imported items [other than the ones on the concessionary list given above] which will generate Rs. 93, 300 million.
- Increase in sales tax rate to 3% which will generate Rs. 12, 000 million
Together, these additional taxes will be able to generate enough to counter the effect of exemption and concessions provided under this so-called populist budget. These measures will certainly increase the cost of doing business. The increase in the cost of production will be passed on to consumers and inflation will have an impact on almost every aspect of life.
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The government aims to increase consumption and create new demands, given the concessions and subsidies provided. But, it also poses a risk of increasing inflation which remained subdued in the preceding years. Whichever Government that comes next will have to face immense challenges and with a mix of relief and additional taxes, the target current deficit will be difficult to achieve.