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Budgeting the impossible

Why anyone would enjoy being the Finance Minister of a Third World country in the present world-wide recession escapes sensible logic but obviously Sartaj Aziz relishes his job and thrives in it. An honest, unassuming person, his workaholic nature blends well with his bureaucratic background and present political image. The articulate, confident manner of the Presentation of the Federal Budget was no surprise, neither were there any real unpleasant surprises within the Budget document itself. While it will take some time to go through the complete document, the immediate reaction by the ready economic indicator, the Karachi Stock Exchange (KSE) was favourable. The special Post-Budget session remained upbeat on the PM’s earlier pronouncement showing 52 gains against 18 losses while the KSE Shares Index rose to an unprecedented record peak of 1772. This is despite the fact that there seemed to be a tone of uncertainty at the fag end.

Total gross Federal revenues are estimated to be Rs.212.551 billion. Of this Rs.136.544 billion comes from Tax Revenues with Direct Taxes (Income & Wealth Tax) contributing Rs.24.489 billion while tax receipts from Commodities and Transactions make up the Indirect taxes of Rs.112.055 billion. Non-Tax Revenues are taken from Income from Property & Enterprises (Rs.32.385 billion) and Receipts from Civil Administration and other Functions (Rs.22.263 billion) amounting to a total of Rs.54.649 billion. Surcharges on Natural Gas (Rs.7.579 billion) and Petroleum (Rs.13.779 billion) make up the balance Rs.21.358 billion. When you deduct the Provincial share in taxes (Rs.59.163 billion) as per the NFC Award, the total amount comes to Rs.153.388 billion, which comprises the net Federal Revenue available.

Current expenditure is estimated at Rs.185.648 billion with Debt servicing Rs.80.717 billion and Defence Outlay Rs.70.956 billion taking up the largest chunk amounting to Rs.151.673 billion. The increases in Defence spending have not kept up with inflation and we have a net decrease in expenditure, in the present circumstances that is hardly prudent but bereft of funds we have no choice. Of the balance Rs.33.975 billion, General Administration takes up Rs.8.277 billion, Law and Order Rs.3.492 billion, Community Services Rs.2.484 billion, Social Services Rs.5.637 billion, Economic Services Rs.1.203 billion, Subsidies Rs.5.455 billion, Grants to AJK, Railways, etc Rs.5.416 billion and Unallocable Funds are earmarked at Rs.2.006 billion. When we compute the net Federal Revenue of Rs.153.388 billion against the Current Expenditures of Rs.185.648 billion, we have a shortfall of Rs.32.260 billion. Self-financing by autonomous bodies amounts to Rs.14.339 billion while net Capital Receipts contribute Rs.24.017 billion, a total of Rs.38.356 billion. When taken with the shortfall of Rs.32.260 billion we have a surplus on Internal Resources of Rs.6.096 billion. From External Resources our intake is estimated to be Rs.25.710 billion (from Project Aid and Rs.22.326 billion from Non-Project Aid), a total of Rs.48.036 billion. Since the Annual Development Budget is estimated to be Rs.72.660 billion, we are left with a shortfall of Rs.18.526 billion. The Government’s expenditure is generally estimated to be about Rs.28 billion more in comparison to last year, thereby additionally Rs.10 billion will have to be raised from somewhere, the intelligent opinion is that most probably funds will be diverted from the selling off of State-owned and nationalised enterprises. This is a grey area and needs mature handling because large unallocated deficit can result in galloping inflation, already officially pegged at 12.5%. In his Post-Budget Presentation Press Conference Sartaj Aziz has declared the deficit to be Rs. 24.5 billion, of which Rs.6.5 billion will be met by deficit financing while Rs.18 billion will be covered by various revenues gathering and resource mobilisation measures.

To give some tangible relief to the common man there has been a deliberate effort to cut down the prices of Atta, Pulses and Ghee. By enacting the new measures, Atta should be about 50 paisas per kg cheaper on an average (12%) while Grams and Pulses are to come down Re.1 per kg (14%) and Ghee by Rs.2 per kg or about 10%. This will entail an additional expenditure to the exchequer of Rs.3 billion, proposed to be recovered by a surcharge of 1% on certain loans by banks and other financial institutions, surplus of this will go towards the establishment and funding of a Baitul Maal for providing funds to widows and orphans. Taking off some of the protection given to local industry, Sartaj Aziz has proposed that Customs Duties on over 1,500 items be reduced in different slabs. This will act as an incentive to local industry to increase their competitiveness while the Government comes into line with one of the main IMF conditionalities.

There has been a genuine effort to give relief in taxes and duties. The rate of income tax on individuals has come down from 45% to 35% and on registered firms from 35 to 25% while in certain cases the basic exemption rate has been raised from Rs. 24,000 to Rs. 30,000. Capital gains have been exempt from taxes for another two years while Income Tax exemption limit for Company Director’s salaries has been increased to 40% or Rs. 30,000 per month. Company Headquarters expenditures will be allowed on the basis of total income after deduction of expenses. Subsequently donations for educational or welfare projects will be allowed on the basis of total income after deduction of expenses in the ratio public companies 10%, Private 7.5% and in other cases limit will be 25%.

Reforms are being introduced in the Income Tax sector with Fixed Income Tax for those not having permanent business abodes. This system will incorporate millions of shopkeepers of various municipalities, the rate being different for different areas. Production capacity is being made the basis of assessment of tax in consultation with the concerned units and trade bodies to determine their production capacities. Telecommunication system should get an additional Rs.7.6 billion by the raising of 25 paisas per local call and 20% on trunk calls. The Government has rightly lifted the duty on newsprint but there is apprehension about falling back on the permit system and the ills associated with it. One feels that a direct tax should be imposed by the Government based on the daily/periodic circulation, say about Re. 1.00 per newspaper, Rs. 5.00 per magazine and so on. Since the acquiring of advertisements is directly related to circulation, newspapers invariably claim larger circulation. In this manner by adding a direct tax newspapers/magazines will be discouraged from fudging their circulation figures to acquire more newsprint or claim greater advertisement. It is an open secret that some people have been selling newsprint in the open market because of the high price of paper.

The Budget is a fairly pragmatic document which tries to incorporate various strategies, the cornerstone being resource mobilisation and privatisation. Sartaj Aziz has tried to end our normal reliance on loans to shore up the deficits while cutting down development and non-development loans. It is also incentive-oriented towards resource mobilisation by the giving of various matching grants to Provinces towards development. Emphasis has been made on consultation with trade bodies before levying of fresh taxes or enhancement thereof. While the Finance Minister has promised to use the money to be generated by the sales of government-owned industries for education, training and welfare, this is easier said than done. If any of the props of resource mobilisation fail, this is the fund the government will dip into to meet the Budgetary shortfalls.

While the Budget Presentation was done in a very effective and forthright manner and is a workable document in the circumstances, it is clearly one that is tilted towards privatisation and thus the rich class. Some effort has been made to ameliorate the effect on the poor by keeping the prices of essential foodstuff in check but this is not enough. No additional burden may have been put on the poor but they have not been given the same quantum of relief as the rich, who stand to turn their benefits into making themselves richer.

We have a myriad number of taxes, hardly anyone of them is ever paid. One suggests to Sartaj Aziz that the present Federal Income Tax system has totally failed for the individual tax-payer as well as the nation. If the emphasis is on decentralisation, Income and Wealth tax should become the domain of the Provinces who should further bring it down to the Community level so that there is a reasonably fair assessment of an individual’s worth. At the same time, the Tax Accountants should be made accountable to the Government including imposition of hefty fines and cancellation of their operating licences to ensure that creative accounting is not resorted to. Without seeking to soak the rich, a flat tax on a graduated scale should be resorted to which should be imposed on a taxpayer’s (a) Annual Earnings and (b) Wealth. To give an example, upto Rs. 50,000 annual income should be taxed 10%, i.e. a taxpayer pays Rs. 5,000, between Rs. 50,000-100,000, 20% should be the taxes i.e a man earning Rs. 100,000 pays Rs. 20,000. Between Rs. 100,000 – Rs. 200,000, a flat tax of 30% should be imposed whereas over Rs. 200,000 – Rs. 500,000 it should be 40 % and over Rs. 0.5 million, 50% flat tax should be imposed. One senior banker should have paid approximately Rs. 275,000 on his annual income of about Rs. 550,000 instead of the Rs. 150,000 or so that he paid last year. Similarly he has a house in the posh KDA-1 Scheme on a 1000 yards plot easily worth over Rs.10 million at today’s market prices but which his accountants have valued at Rs.0.45 million, only 20 times less. By levying a flat tax, he would pay Rs. 100,000 annually as wealth tax on that property. Without computing his other known wealth, this man should pay about Rs. 0.25 million in taxes annually on what is evidenced. In Karachi alone, there must be 50,000 (if not 100,000) such people, thus the State can raise at least Rs. 12,500 million or Rs. 12.5 billion annually from one city alone.

At the same time there is a tremendous burden imposed by irresponsible, wasteful use by the rich and elite on the Services such as electricity, gas, water and telephones. These should be a graduated increase in charges for use in the residential sector. A representative median should be evaluated for the utilities by the upper middle class. Beyond that median, escalating charges should be applied to (1) ensure that the rich pay more as they can afford it and (2) discourage unnecessary use by them so that these utilities are available for use by the poor.

Ms. Benazir has made a point when she calls this a rich man’s Budget. Wholesale privatisation, denationalisation and deregulation requires us to go along this route, yet discretion could have been used to avoid politicisation of the issues. Sartaj Aziz should have tempered the Budget with more emphasis on social conscience and obligations of the State and the rich-elite to the poor while enacting practical curbs on the wastefulness which the rich flout with great abandon. The Finance Minister has made a great effort to balance the issues, one expected that he would continue the momentum and spirit of the last 180 days of economic history and create further wholesale changes in the economic and administrative edifice. Unless and until we are prepared to do complete restructuring of the whole system so that there is a more equitable sharing of wealth and resources, any Budgetary proposals will be heavily weighted in favour of the rich-elite. As we all know the pendulum has a propensity to swing back with a vengeance.

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