New taxes of Rs255bn in FY14-15 budget likely

Mubarak Zeb Khan

- File Photo

ISLAMABAD: The Pakistan Muslim League-N government is all set to introduce a number of revenue-generation measures in the budget for financial year 2014-15, including new taxes that are expected to yield an estimated Rs255 billion.

Sources in the finance ministry say these measures are likely to hit the middle class the hardest.

The new proposals, guided by Finance Minister Ishaq Dar, aim to bring down the budget deficit to 4.8 per cent next year from this year’s 5.7pc. The burden of this decrease will largely be shouldered by the middle class and non-industrialists as the cost of living is expected to increase as a result of the new indirect taxes.

The revenue measures are tailored to fulfil the conditions attached with the International Monetary Fund’s (IMF) Extended Fund Programme for Pakistan. The new revenue collection target was agreed upon by both sides at a recently-held IMF review meeting in Dubai.

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Revenue generation measures may hit the middle class hard

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In order to qualify for the next IMF tranche, the government has proposed a revenue generation target of Rs2,810 billion for FY2014-15, an increase of 24pc or Rs535bn from this year’s revised target of Rs2,275bn.

The IMF had given clear indications to Pakistan’s economic team regarding the finalisation of budget proposals if Islamabad wanted to bring down the fiscal deficit as per the plan agreed upon with the IMF.

On the orders of the finance minister, the tax proposals for the next budget are being based on three key pillars: the withdrawal of tax exemptions granted through Statutory Regulatory Orders (SROs); an increase in existing tax rates; and the bolstering of revenue collection by widening the tax base.

Sources told Dawn that additional revenue, over and above the current fiscal target of Rs2,275bn, would have to be met through other measures and the withdrawal of tax exemptions.

The exemptions granted through SROs currently stand at Rs480 billion. Of this, Rs103.96bn is expected to be withdrawn in the budget for FY2014-15.

However, the total amount of exemptions that can be withdrawn is Rs240bn. This means that the remaining Rs136.04bn in exemptions will be withdrawn over the next two years – FY2015-16 and FY2016-17.

New taxation measures may include an increase in the federal excise duty rate to 17pc, new adjustable taxes aimed at bringing the undocumented sector into the tax net and higher rates for non-taxpayers.

The expected measures also include the introduction of a string of new withholding taxes as well as an increase in the rates of existing ones and the withdrawal of customs exemptions and concessions.

However, it is yet to be determined whether the Federal Board of Revenue (FBR) can raise this money simply by imposing new taxes or will some part have to be collected through administrative measures, by plugging the many loopholes in the taxation system and improving revenue generation.

The finance ministry has projected growth in the rate of inflation at 8.5pc in FY2014-15 and expects the economy to grow by 5.5pc.

Due to inflation and economic growth, nearly Rs280 billion are expected to be raised in FY2014-15 outside of the tax measures.

Finance ministry sources say a proposal to introduce asset-based taxes is on the table, but it may be difficult for the PML-N to implement it because of the real estate mafia, which is an influential lobby within the party. It is a similar story with sugar, as general sales tax on the commodity stands at 8pc instead of 17pc, due to the influence of millers.

This year, FBR’s tax-to-GDP ratio is expected to fall to 8.8pc from the budgetary target of 9.9pc.

Talking to Dawn, former finance minister and Institute for Policy Reforms Managing Director Dr Hafeez A. Pasha says that Pakistan today has one of the lowest tax-to-GDP ratios in all of Asia; lower than Bangladesh’s 10pc, India’s over 16pc, Sri Lanka’s 12pc, Malaysia’s 14pc, Thailand’s 18pc, the Philippines’ 12pc and Turkey’s 21pc.

He said Pakistan’s taxation system did not collect as much revenue as it should and that there were far too many concessions and exemptions granted, which cut into the overall revenue generation figures.

Mr Pasha suggested that the principal focus of the tax proposals for FY2014-15 should be on the development of a direct tax regime, in order to make federal taxation more buoyant and progressive