Budgeting on hope

If ever a budget raised more questions than answers, this is it. Just consider some of the numbers. Revenue collection is to rise by Rs1.175 trillion rupees of which Rs391 billion will come from direct taxes and Rs784 billion from indirect taxes. The total revenue to be collected from new tax measures is Rs355 bn.

In direct taxes the bulk of the increase is budgeted from income tax (Rs387 bn), of which the new measures account for Rs316 bn. The revised slabs so far are a net revenue loss for the government, with much of the increase to come from hikes on banks’ net income, and other items like increase in tax on sale of cars of engine capacity above 1600ss.

Likewise with indirect taxes. Paradoxically they are counting on a reduction of imports by almost $6 billion, while collections from customs duties are programmed to rise by Rs168 billion, of which new measures account for Rs34 billion. Rising custom duty collections in a time when imports are actually falling can only mean one thing: higher duty rates. But for now all the announcements only tell us where duty reductions have been applied. Nothing about what has been raised.[restrict level=1]

Same story with with Sales Tax, the other big head that comes under indirect taxes. Recoveries here are budgeted to rise by a whopping Rs570 billion, of which Rs90 billion is to come from new measures (this figure includes new measures under the FED). Once again, since most sales taxes are collected at the import stage, it is important to look at how they intend to make this happen while imports are supposed to decline. The only way would be to raise the rates on many products, but the only thing that was announced during the budget speech was those items where these taxes are going to be eliminated (such as solar panels).

Next up check out the increase in collection under Petroleum Development Levy. Last year the government announced a target of Rs610 billion under this critical head, which sounded alarmingly high at the time and would have meant a sharp increase in the price of petrol by Rs30 per litre just on account of collections to meet this target. Of course they didn’t manage to collect even half of that amount because oil prices started climbing in July and then Prime Minister Imran Khan ordered a reduction in applicable taxes and levies to keep the retail price constant.

Three PDL increases were announced from November to January, bringing it to Rs12 per litre, to satisfy the IMF. Along with this a commitment was given that there will be a Rs4 per litre increase every month after that to eventually bring the total PDL to Rs30 per litre by June. That was in January, but the very next month Khan backtracked, announced a price reduction, zeroed the collection under PDL and froze retail prices “till the budget”.

This year they have announced Rs750 billion to be collected under the PDL, higher even than last year. It is hard to see how this will be possible under present conditions. The only way would be if oil prices in global markets drop sharply from the $120-125 range they are in these days to below $90 in a few months. That way the government could keep retail prices at the pumps steady and collect the difference through the PDL.

But this is unlikely to happen. So far all oil market prognoses for the next 12 months are saying prices are expected to continue rising, with some, such as Goldman Sachs, forecasting them to reach $135 and others going so far as to say $150 could also be possible. Hardly anybody in global oil markets is expecting prices to come down in the near future, so it remains to be seen how this government will reach its target of Rs750 billion.

Something similar is the case in the Gas Infrastructure Development Cess (GIDC) that is programmed to rise from Rs130 billion to Rs200 billion. Coming at a time when industry (the main party responsible for paying this Cess) is already reeling from gas shortages and proposed price hikes, it is difficult to see how the government will squeeze this additional bit of revenue out of an already overburdened economy.

The revenue plan is at the heart of this budget. In a few days further details will emerge about how they intend to meet these ambitious targets at a time when the growth rate is tapering off and imports are being compressed. For now we can see that some innovative thinking is at play.

For example, the speculative holding of “non productive assets” like land is being discouraged. Land held for less than one year will be taxed at 15 percent, although its not clear yet how the valuation will be done. After the first year the value of the tax will drop by 2.5 percent every year till it reaches zero in six years. The idea is to reduce speculative buying and selling of land. This is not the first time the government has tried this, and the last time it was tried it didn’t work mainly because the FBR was not particularly eager to do all the work that it takes to operate such a tax scheme. Let’s see how much luck they have this time round.

Moreover, people who are sitting on multiple properties will now have to pay a tax on all those they are not using for their own residence. Any property worth above Rs2.5 crores will be liable to a tax at 1 percent of fair market value (not clear how this will be assessed) or 20 percent of “deemed rental income” which will be assessed as a percentage of the property value. The idea here is to generate revenue from people who are sitting on large holdings of land, whether productive or not, in an effort to squeeze revenue out of the rich. Whether this works is also question mark.

Those with declared earnings above Rs300 million per year will pay a “poverty alleviation tax” of 2 percent, a throwback to the “supertax” that was imposed on large enterprises in the wake of the floods in 2010.

One strong signal sent by the budget is the increase by 15 percent of government salaries because private sector employers will now be under pressure to follow suit. How they will manage this in an environment of rising costs and taxes will be their headache.

A number of items have been added to the Sixth Schedule of the Sales Tax Act 1990, making them exempt. They include newsprint  (although these were already exempt for newspapers, all this means is now everybody can import newsprint without paying GST and sell it in the market), books, solar panels, tractors, seeds, gold and silver, and raw materials for export purposes. Some of this will come as good news to the users of these goods. In the case of solar panels, the distributors are now in a small fix since some of them already hold inventory on which these taxes have been paid and they will have a hard time selling them from here on because buyers will demand the exemption right away. But that’s their headache. The elimination will help reduce prices of solar panels at a time when their sales are picking up and will help spur their adoption further. It is important to normalize solar panels like other household appliances. People need to start seeing rooftop solar like they do any other essential household appliance like TVs and fridges.

On the whole the budget seems to be riven with its challenges. There is a visible effort to push the burden of the tax effort onto the rich, but the steps don’t seem to go far enough. The government is hoping that the steps they have announced this time will work where they didn’t last time, and that oil prices will come down in the near future. Both of these are a very large hope, and a very large risk facing their budget.

The next step will be to convince the IMF that the projections around which this budget is built are realistic. After that, the real challenge will be to proceed with what the budget envisages, without burdening the poor any further, and without falling afoul of the commitments given to the Fund. The whole enterprise rests on a hope and half.[/restrict]