With the halls of the assembly not echoing with the shouts of the opposition and the table thumping of the treasury benches, it is now time to evaluate the budget that has been presented. In a span of two days, the government gave out its Economic Survey for the last year and then presented a plan on how it was looking to achieve those goals. Much of the speech seems like the same old same old that is presented by the Finance Ministry every year.
After all, the budget is the same struggle every year. The government plays catch up with rising expenses and to deal with them they find new sources of revenue. The main hope is to collect this money through taxation. This year, the government has chosen to do this through two methods. The first part of this two pronged approach has been to further tax the already burdened formal parts of the economy. These are salaried individuals, exporters, importers, listed companies, and all other businesses that are already registered with tax authorities and are documented.
These individuals will understandably be upset. It seems the government of Pakistan consistently fails to bring a majority of people into the tax net, and every year instead of fixing this problem their answer is to further squeeze those already in their grasp. Filing your taxes is essentially a punishment at this point.
And while salaried individuals and registered businesses have just cause for concern, there is some hope. The government is promising this year to make life a living hell for non-filers by increasing taxes on them, blocking their sims, and any other number of measures. But are these just words? If there is one thing about the government of Pakistan, it is that its word cannot be trusted.
It is a cyclical conundrum. The government instead of incentivising being a filer punishes being a non-filer. But they make it so dire that people find new ways to evade their taxes. In response, the government punishes filers, which makes non-filers want to file even less. The loft targets the government have set seem overambitious, and they might know it themselves. As a result, the formal sector will face most of the pain from the budget while the informal sector will try to evade coming into the tax net as much as possible.
The two sides of the budget
The budget that has been presented can be divided into two broad categories. One is the implications it will have on the formal sector while the other deals with the informal part of the economy. Till date, the problem with the taxation system is that the formal economy is taxed at every possible avenue while the informal sector gets to evade coming into the tax base of the country. As the weight on the formal sector keeps increasing, stricter measures are used in order to bring the informal sector into the taxing fold. Sadly, this does not happen. The reason? Lack of enforcement. The apex body for taxing and enforcing tax laws is busy being Nero while the country burns.
Going up in smoke
Let’s consider an example. Cigarette manufacturing is a legitimate business that is carried out. With companies like Philip Morris Pakistan and Pakistan Tobacco, there are companies which are involved in producing cigarettes at a mass scale. They are part of the formal segment of the economy and have tax laws that are applicable on them. On the other hand is the illicit cigarette trade which takes place. Smuggled cigarettes from across the border are brought into the country and then sold at the local dhabas to the customers. Both these businesses are raking in the cash from their business. However, there is only one who is giving out Federal Excise Duty (FED), General Sales Tax (GST) and then corporate tax on their income. No points for guessing who this might be.
So what has been given in the new budget for these cigarette manufacturers?
Let’s start from one end of the cigarette. Literally. The filter of the cigarette uses a cellulose acetate fiber tows through which the smoke is filtered and then inhaled. According to the minister, this duty will not have an impact on the formal sector as most of the informal sector will end up paying this price. Similarly, the filter rod used, which is the cigarette body casing, will see its FED increased by Rs 1,500 per kg to take it to Rs 80,000 per kg. A good thing for the cigarette manufacturers is that the price threshold was increased from Rs 9,000 to Rs 12,500. What is the price threshold? In simple terms, if the price of 1,000 cigarettes crosses Rs 12,500, a higher FED is applied. This allows manufacturers to be able to increase the price of each of their cigarettes to Rs 12.5 without having additional FED imposed on them.
As smoking becomes unfashionable and expensive, companies are looking to diversify their product portfolio by offering vapes and nicotine pouches. Consumers get their nicotine fix without having to suck on the harmful chemicals. The government has also looked to impose FED on nicotine pouches of Rs 1,200 per kg and e-liquids will also be enhanced further.
The goal of the government is to collect more taxes from the formal sector and this will be seen as cigarette manufacturers will have to document their production and sales. As they have to disclose all this information, the taxes will be collected.
So what about the other part of the budget? What will happen to the informal sector selling illicit and smuggled cigarettes? In terms of the proposals, the government has used stern words in order to show how serious it is in dealing with non compliant sellers. They have granted themselves the powers to seal any business premises of retailers who are selling these illicit cigarettes. The problem? The enforcement of these measures.
Theodore Roosevelt used to have a saying associated with him. Speak softly and carry a big stick and you will go far. It seems that the Q-block looks to go in the opposite direction. They speak loudly and, to their credit, very boldly but the stick they carry is too little or of any consequence. The speaking loudly is the rhetoric part that is used by the dear minister in the assemblies giving their speeches. The little stick is the part where agencies and authorities have to implement the laws that are already on the books.
Free real estate
And this phenomenon is not just restricted to cigarette manufacturing.
One of the biggest sectors which generates a huge amount of income is the real estate sector. It is no hidden secret that the sector generates huge revenues which are not taxed to the rate they should be. Most of the deals that are carried out are under the table and carried out in cash. Even when the deals are disclosed, the value of these transactions are understated by as much as 50% in order to decrease the tax liability that is payable on them.
So what have the geniuses at the Ministry come up with?
They have placed an FED of 5% on plots, commercial and residential properties. Barring the fact that the values used to calculate will be lopsided, there will still be some generation of tax revenues. This is again going to target the formal part of the economy which is disclosing the information mandated on it. What about the non-filers who are going to be buying these properties?
In terms of paying income tax on buying and selling of property, non-filers will be charged 12%, 16% and 20% for properties valued up to Rs 50 million, between Rs 50 to Rs 100 million and exceeding Rs 100 million respectively. This compares to 3%, 3.5% and 4% for filers on the same slabs. For any gains made on the sale of the property, the minimum tax suggested is 15% for non-filers which can go as high as 45%.
Big words by the big man.
Something similar seems to be taking place here as well. The Ministry is setting ambitious goals in terms of bringing non-filers into the tax net and giving them an incentive to do so. The measures can only work once implementation of the laws is carried out. Who in their right mind would want to become a tax filer when they can easily stay non-filers and evade paying taxes. If they need to buy or sell a property at a profit, the best solution is to understate the values and avoid paying any taxes for the income that they have earned.
Your salary just dropped. Literally.
One of the worst examples of treatment of the two sectors of the economy would be epitomized by the salaried persons and people earning from other sources. Even after giving constant assurances that taxes would not be increased, the salaried slabs have seen an increase in their tax rates. Other than people earning below Rs 50,000 a month, all the remaining five slabs see their tax rates range from 5% to 35%. The impact of this change is such that anyone earning a salary below Rs. 200,000 per month will see their tax expense increase by almost 40%.
Even for people earning Rs 500,000 per month, the tax expense is expected to increase by at least 25% as they will end up paying a higher amount of tax. The sad reality of the situation is that the government knows this and still uses these measures. Under the hollow rhetoric of coming down hard against the non-filers and no formal sector of the economy, the government knows that this is the best way to extract tax revenues.
Non-salaried people having income from other sources will see tax rates ranging from 14% to 45% but again these seem like empty words as there is an incentive for these people to circumvent the laws and avoid paying any tax at all. The formal sector has to disclose everything to the government and due to that they cannot use the same ploys and tactics that can be used by the informal sector.
What ends up happening is that tax revenues increase as the formal sector is taxed further while the government lauds the efforts of the FBR in reaching a bigger target every year while the formal sector languishes. The government can look to window dress its efforts and measures as much as they want. When they still have to increase the petroleum levy by 33% from Rs 60 to Rs 80 per liter, someone needs to tell the foreign Finance Minister that the emperor is wearing no clothes. Probably the IMF.
One more example of how the budget is more fluff than action is the fact that non-filers are seeing restrictions being increased on them. Recently, there was a suggestion to block the sims of non-filers in order to bring them into compliance. The backlash faced by the government from the phone companies alone showed how half cooked of an idea it was. This is an example of how difficult it is for the government to implement their decisions. Now it is being suggested to cut the utility connections and foreign travel of these individuals. Even the agencies who would be responsible for doing the aforementioned can be reprimanded for not doing their job. Retailers who do not become part of the Tajir Dost Scheme can see their shops closed and legal action can be taken against them.
Don’t get us wrong. We will be one of the first ones to ask for implementation of the laws and regulations on the books which can boost tax revenues generated by the government. But having such soaring goals without effective implementation means they fall flat on the face. Mr Aurangzeb needs to get a bigger stick if he needs the non-filers and informal sector to fall in line.
