By Muhammad Khurram Shabbir, Ph.D. student of finance, NUML Islamabad
“The budget should be balanced not by more taxes, but by reduction of follies” – Herbert Hoover
Pakistan’s finance minister Shaukat Tarin, under the Tehreek e Insaf (PTI) leadership of Imran Khan, presented the PKR 8.5 trillion federal budget for fiscal year 2021-22 in the national assembly of Pakistan on 11 June. The budget includes tax measures and other provisions aimed at optimizing sustainable economic growth.
The major relief in the budget for the corporate sector came from the reduction in the capital gain tax from 15 percent to 12.5 percent. The budget also removed a series of withholding taxes. The amount of business subsidies in the budget has been targeted at PKR 682 billion (USD 4.3 billion). The budget also includes tax relief for women entrepreneurs.
The finance minister also announced plans to bring e-commerce transactions into the sales tax net. In addition, to boost the telecommunication sector, the budget reduced the federal excise duty on telecommunication from 17 percent to 16 percent.
Also with respect to taxation, the finance minister announced that there would be no new taxes imposed on the salaried class in the budget. He added that to support small businesses, the annual turnover tax ceiling has been increased from PKR 10 million to PKR 100 million (approximately USD 63,000 to USD 630,000).
Furthermore, the finance minister expressed his view that locally manufactured small cars (up to the engine capacity of 850cc) might be exempted from value-added taxation, and they might also benefit from a reduction in sales tax from 17 percent to 12.5 percent. He also welcomed support for the manufacturing of electric cars.
Apart from these tax measures, there were also key announcements regarding an increase in the minimum wage, which is now set at PKR 20,000, and a 10 percent increase in the pensions and the salaries of federal government employees. Agriculture was allocated PKR 12 billion. For higher education, PKR 66 billion is to be allocated, and PKR 44 billion for the development fund. For climate change mitigation projects, PKR 14 billion is to be allocated. To tackle the Covid-19 pandemic, PKR 100 billion is allocated for the Covid-19 emergency fund, along with PKR 1.1 billion for vaccine procurement.
For the revenue side, the plan massively relies on the indirect form of taxation. Similarly, a large chunk of revenue is to be gained from the petroleum levy, which clearly indicates that inflation is expected to go higher in the next fiscal year. The provincial share of taxes is also to be increased. Taxation is to be computed and reported according to a self-assessment scheme, which is to be balanced by a third-party audit.
Political and economic climate leading to budget
With the recent political mess between the ruling government and opposition, the budget in the national assemble has sparked debate.
With the passing of the budget 2021-22, the new finance minister has finally taken the reigns. Shaukat Tareen is the fourth finance minister under the three-year Pakistan Tehreek e Insaf’s (PTI) political ruling.
The new finance minister has a decorated career background. He is no doubt an accomplished banker. He was also a finance minister in 2009 under the Pakistan People Party’s government led by President Asif Ali Zardari. He is credited with being the architect of the seventh national finance commission award. This formed the basis for the financial grants distributed to the provinces of the country.
Before the budget for the fiscal year 2021-2022 was announced, the country was stirring in high inflation. The Covid-19 pandemic added oil to the furnace.
The news came with a surprise that the Pakistan bureau of statistics revealed the GDP growth rate for the year 2020-2021 at 3.94%. Furthermore, the current account deficit also reduced significantly. This boosted the confidence of the ruling political premiership. With only two years left until the next election, the political members of the ruling regime demanded some economic reforms and a budget that was more people-friendly, which they could leverage towards winning of the coming election for the next term.
Budget expenditures and economic goals
The finance minister began his budget speech by saying it was an honor for him to present the third budget of the PTI. He remarked that there were a lot of difficulties, but the current government has laid the grounds for the economy to revive. He said that the total expenditure for the next year stood at PKR 8.487 billion, almost 19 percent higher than the last year’s PKR 7.136 billion.
The finance minister also said that the PTI government for fiscal year 2022 has set the GDP growth target at 4.8 percent. Furthermore, he expressed that the government wants to increase the growth to 6–7 percent in the coming years.
The current expenditure budgeted for FY22 stands at PKR 7,523. The fiscal deficit for FY22 has been budgeted for PKR 3,420 billion, which is around 6.3 percent of the GDP. The total allocations for the public sector public development program (PSDP) have been budgeted at PKR 2,135 for fiscal year 2022.
According to the budget, the PTI government wants to keep inflation at 8.2 percent. Moreover, the government has set the tax collection target for the federal board of revenue (FBR) at PKR 5,829 billion for fiscal year 2021- 2022.
Debt and IMF program
There is an extensive problem with regards to the circular debt which the country is experiencing. The finance minister clearly stated that there will not be power tariff hikes. The power division was expected to submit a new circular debt management plan to the International Monetary Fund (IMF) and the World Bank at the end of June with a much more innovative approach, according to the sources from a leading local newspaper.
Pakistan is currently under a bailout program with the IMF. According to the finance minister, the government aims to complete its next review with the IMF. The officials are renegotiating with the IMF to avoid raising income taxes and electricity tariffs, the finance minister said at a post-budget news briefing. The finance minister also said that Pakistan is going to propose alternative measures to the IMF to increase revenues and reduce energy debts. Moreover, Saudi Arabia has agreed to allow Pakistan to import oil on a delayed payment basis.
Concluding remarks
In brief, among the federal government’s main priorities for fiscal year 2021-22 are sustainable economic growth, optimal mobilization of revenue and certain special initiatives of the prime minister.
The main objectives of the budget include striking a balance between fiscal deficits due to Covid-19 and boosting growth of the economy, resource mobilization with required changes in tax structure, and successful continuation of the IMF program.
The budget depends largely upon the country’s creditors, such as the IMF. It has become pivotal for the political leadership to make reasonable economic grounds to bring relief to the public. The decades of the 1960s and 70s are considered decades of major theoretical contributions. The 20th century’s political business cycle theory can better shed light on the current affairs understanding. After all, it’s just a theory, isn’t it?
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