In his budget speech last year, Finance Minister Ishaq Dar had set the GDP growth rate target at 5.1pc, inflation at 8pc and the tax-to-GDP ratio at 11.5pc for this fiscal.
As the fiscal year comes to a close, inflation seems to be comfortably ahead of its target, but two other critical milestones remain significantly behind.The State Bank of Pakistan has forecast 4.3pc GDP growth rate, while the IMF has recently scaled down its projection from 4.3pc to 4.1pc on the back of lower inflation and poor large-scale manufacturing performance in the first 10 months. For next year too, the IMF has reduced its growth rate forecast from 4.7pc to 4.5pc.The Asian Development Bank, on the other hand, has forecast a 4.5pc growth rate for this year and 4.6pc for next year.
Finance Minister Ishaq Dar, when contacted, quite understandably, declined to give another forecast at the last moment, when the National Accounts Committee is expected to come up with its finalised provisional estimates today. The next year’s growth target is expected to be around 5.5pc, down from the previous medium-term target of 6.1pc.
Inflation during July-April 2014-15 at 4.8pc, and 2.1pc in April, has been the lowest in 12 years.
While the tax-to-GDP ratio has improved, thanks to the taking of repeated taxation measures over the past nine months to meet IMF benchmarks, it has remained short of the target. For example, the total tax revenue improved steadily from 9.9pc of GDP in FY13 to 10.4pc in FY14 and 11.2pc in FY15. The target for FY15 is 11.5pc.
The total tax revenue improved steadily from 9.9pc of GDP in FY13 to 10.4pc in FY14 and 11.2pc in FY15. The target for FY15 is 11.5pc
Likewise, the FBR’s revenue has gone up from 8.6pc of GDP in FY13 to 8.9pc in FY14 and 9.4pc in FY15. This is also behind the budgeted target of 9.7pc.
According to Dr Talat Anwar — the Planning Commission’s former adviser on macroeconomic and monetary policy issues — economic growth of 3.5pc per annum over the last seven years has increased unemployment and poverty, as the governments undertook two IMF programmes that resulted in a low growth trap due to typical stabilisation.
In an interview last week, he said the growth prospects, nonetheless, have improved owing to a significant decline in international oil prices and higher remittances. Yet, there is a strong need to switch from a stabilisation-oriented to a growth-oriented policy in the next budget to revive the economy and reduce poverty. Growth prospects can be improved further if the government implements structural reforms and overcomes energy shortages.
But more importantly, the government needs to promote growth along with equity. He said the country’s tax regime is highly distortive and inequitable, and benefits the rich and the influential.
While removing these distortions, the government would be well advised to introduce measures that curtail the growth of the undocumented economy and promote the formal economy, said Dr Anwar.
He suggested that the high corporate tax rate be reduced from 33pc to 29pc to encourage corporatisation and job creation. The customs duty on agricultural and industrial inputs and machinery should also be cut. A level playing field needs to be created by removing tax exemptions.
The economic growth of 3.5pc per annum over the last seven years has increased unemployment and poverty,
as the governments undertook two IMF programmes that resulted in a low growth trap due to typical stabilisation
— Dr Talat Anwar
He appreciated the government’s intention to phasing out trade-related SROs and move to a system with three slabs and 0-20pc rates, and suggested that the regulatory duty on luxury goods should be increased by 5pc. The SROs that allow concessions on sales tax for import of raw materials are being misused, and they need to be urgently reviewed and abolished.
Dr Anwar said it is important to broaden the tax coverage by bringing 3.2m qualifying wealthy citizens, according to Nadra’s database, into the tax net. It is high time to coordinate and support the provinces to bring agricultural income into the tax net, as well as to tax remittances at the receiving end.
More importantly, the distinction between the taxable incomes of the salaried and non-salaried classes should be removed and all incomes should be taxed at the same rate. However, the highest tax rate should be reduced to 25pc and the number of tax slabs should be slashed to three to make the taxation structure progressive.
Keeping in view the stock market’s high returns in 2014-15, the capital gains tax should be raised from 12.5pc to a uniform 17.5pc, and dividend income should be taxed at 12pc. Dr Anwar also advocated cutting the telecommunication sector’s tax rate by 5pc, as the segment faces the highest withholding tax in the region.
He said a withholding tax should be charged on the telegraphic transfer of foreign exchange from Pakistan. There is also a need to reform the urban property tax system to address the undervaluation of property in official documents.
He argued that the GST on the purchase of costly mobile and smart phones should be levied at 17pc, and zero-rating under sales tax should only be allowed for sectors whose products are mainly consumed by the poor. The federal excise duty on the cement sector should be lowered to 3pc on the retail price to boost construction, and the duty on international travel should be increased.
Dr Anwar said the government’s expenditure structure needs to be rationalised by merging several ministries and attached departments to save taxpayers’ contributions. Facilities like vehicles and housing for senior civil servants, judiciary, and military officials should be monetised and indexed with inflation, while transport pools should be completely abolished.
He said high-growth projects like those in energy should be prioritised in the development budget to create jobs. The throw forward in the PSDP should be decreased through alternate financing modes like PPP, BOO and BOOT.
The prime minister’s schemes for interest-free loans, business loans, free reimbursement for less developed areas, youth training and skill development scheme, and housing should be reviewed by independent experts to determine their future.
In the social sector, the allocation for education — both at the federal and provincial level — should be raised from the current 1.8pc of GDP to 2pc in the forthcoming budget, and the allocation for health should be increased currently from 0.7pc of GDP to 1pc.
Published in Dawn, Economic & Business, May 18th, 2015