Budget 2016: Reforms vs Jugglery

The following is the original draft of the research article published in the renowned “Blue Chip” journal as an Op-Ed  in its July – September 2016 Edition.

Link to e-edition of Blue Chip:  http://www.bluechipmag.com/index.php/governance-234/251-reforms-vs-jugglery

Budget 2016: Reforms vs Jugglery

RI 2810 2

By: Omer Zaheer Meer

The budget for financial year 2016-17 was unveiled amidst the usual accolades from the treasury benches and criticism from the opposition. As is the norm in political debates, mostly the balance was lost to prejudices and rationale took a back seat. There were a few exceptions though.

In line with the rational expectations, this research write-up will analyze whether the shortcomings that needed to be addressed in the budget including structural reforms in the taxation system, pursuing a progressive regime, introduction of economic reforms and improvements in controversial laws hampering the economy were actually addressed. In addition to examining if that was the case, recommendations to resolve the problems will also be briefly discussed.

The Numbers:

Mr. Ishaq Dar, the finance minister, proudly announced many positive indicators from the economic survey as below:

GDP growth                                                4.71 % vs a target of 5.1%

Tax-to-GDP ratio                                     8.4%

Population under the poverty line   29.50%

Inflation                                                      2.82%

Tax to GDP ratio                                       10.50%

Fiscal deficit                                               4.30%

Budget deficit                                              3.40%

Proportion of GDP spent on Health     0.42%

Literacy Rate                                              60.00%

Per capita income                                       $ 1,561

Foreign exchange reserves (billion)     $  21.6

Public debt Rs. 19,168 billion (Rs. 5,769 billion foreign and Rs. 13,399 billion domestic)

Luck, not wisdom?

All these indicators showed improvements compared to the previous fiscal year. However, the improvements have been largely due to the significant reduction in global petroleum products’ prices and the resulting savings.

It is unfortunate that the structural reforms and/or economic policies did not come into play when they’re needed the most. The rich dividends from the massive lucky break of a crash in global petro products did not translate into effective reforms delivering relief to the masses.

Once bitten, twice shy:

Once bitten, twice shy is a reality of life. The opposition, citing the previous example of Mr. Dar’s ministry when forging the numbers resulted in Pakistan having to pay penalty to international institutions, questioned the authenticity of these numbers. For example the inflation figure raised serious eyebrows and it was queried that what were the constituents and the changes in them from last year, used to calculate this figure. Leaving this debate for now, let’s examine some key figures, policies and analyze the impact on Pakistanis.

Foreign Trust’s Status Issue – Shadow of Panama:

A controversial amendment has been proposed in the Income Tax Ordinance, 2001 by way of an explanation to include foreign trusts within the ambit of trusts.

This amendment has serious implications regarding offshore trusts involving Pakistani citizens. Currently, in case of local trusts, the beneficiary is only required to disclose the interest in the wealth statement on receipt of benefit from the trust which is then considered as a dividend and taxed accordingly on receipt basis.

It is surprising that a Government pursuing positive policy re differentiation between filers and non-filers with stated aim of documenting the economy would chose to encourage non-documentation. Some detractors and particularly the opposition benches connect this to the ongoing Panama Scandal.

Proposed Solution:

In line with the state policy of economic documentation, an amendment should be made to require disclosure of interests in all trusts including foreign and local in the wealth statement at the time of filing the return.

This should give rise to greater transparency.

Let us examine some sector specific matters before proceeding into the analyses of other general areas:

Textile and five export oriented sectors:

Let’s move forward with a positive measure. The export of manufactured goods largely drives from five main sectors – textile, leather, sports goods, surgical goods and carpets. These five sectors are proposed to be a part of the zero-rated regime with the objective of “no tax, no refund”. Local sale of the finished products shall however be charged to Sales Tax at 5%. This is a partially good move of the Government.

As exports are generally zero-rated, the proposed regime, earlier introduced in 2004, effectively provides zero rating for inputs used in manufacturing of export sector goods.

Previously, same regime was withdrawn on account of abuse of the zero-rating regime in respect of good having multiple uses. However this time no refund policy means that the manufacturers would suffer with the input tax becoming their cost of business resulting in higher costs to be either borne by them or passed onto the customers while competing in a highly cost-competitive global market.

Most manufacturers do not have an integrated unit covering all processes from start to finish in Pakistan and stuff like packing materials, e.t.c. has to be purchased.

Proposed Solution:

Appropriate checks should be put in place to ensure the system will not be abused while allowing input tax adjustment as the local sale has already been brought within the ambit of taxation.

Measures for Agricultural Sector:

Agricultural sector is vital for Pakistan’s economy as it constitutes 21% of the GDP while employing 42.3% of the workforce.

The Government has introduced some positive relief measures for the Agricultural sector which had taken a severe hit particularly the cotton sector which declined by a drastic 28% in the last fiscal year.

While the reduction in the prices of fertilizers and electricity for agricultural tube wells along-with Rs. 10 billion subsidy are good steps they do not address the root-causes of the severe decline in the agricultural sector.

There have been no reforms or steps announced to address the major issues of:

  • Import of low quality and cheap agricultural produce from India
  • Issues of availability of quality seeds and the problematic imported seeds causing infertility in various belts
  • Lack of proper crop management system resulting in a crises both in the case of bumper crops and shortfall
  • Middle-men and mills taking advantage of the farmers who often are left with little more than the costs of production, discouraging them from cultivating certain crops
  • Lack of a proper flood management system where every other year make-shift arrangements are undertaken after heavy losses by flooding (once again no properly funded schemes announced to address this issue)
  • Lack of proper water storage facilities like “Kala Bagh Dam” and smaller “shorter-term completion” dams to address the growing issue of acute water shortages particularly for the tail lands. While funds have been announced for some dams like Diamer Bhasha, they’re long-term in nature and simply not sufficient.

Proposed Solution:

Structural reforms should be undertaken to address the core issues identified above in order to support the agricultural sector.

Also some key reforms in the taxation policy are required for this sector. The proposed reform should be undertaken along-with the policies volume over margin and increased impetus on direct taxation The agriculture sector should be taxed at a reasonable rate for large landlords with holdings over 12.5 acres, say 5%-7% and the revenue raised should be used to subsidize the water and electricity for the agriculture sector. This would enhance the yield, subsidize the worst hit small farmers and therefore help grow the GDP.

The detractors’ argument that there isn’t any income for feudal having large landholdings doesn’t stand. For if there is no income, they won’t have to pay any tax and if there is, as evident from their lavish lifestyles and tens of millions in bank accounts, then the due contribution to the sector and country in form of a low tax rate needs to be collected. Moreover, the other two reforms mentioned above will ensure that net impact on the sector will be lower as more direct taxes will help reduce the inflation and cost of production, creating opportunities for increased output and thereby GDP growth.

Services Sector:

Another vital sector for the economy is the services sector which has been one of the growth areas generating employment opportunities in the country.

While the good news is that the services sector exceeded the growth target, there were still core issues left unattended. Also, providers of IT services and IT enabled services, as defined in Clause (133) of Part I of Second Schedule, are also proposed to avail rationalized Minimum Tax Regime, subject to fulfillment of prescribed conditions. However, again this should be extended to all service providers.

One good step announced was that the FED on certain services which are now subject to provincial sales tax has been proposed to be withdrawn. This was merited post 18th amendment with the provinces in charge of sales tax on services.

However the core issue of leaving the minimum tax on services un-adjustable (Section 153(1)(b) ) of the Income Tax Ordinance 2001) has been left unresolved. This minimum tax is levied regardless of whether the service provider is profitable or loss-making. In case of the later, this tax will be paid from the capital reserves, effectively becoming a loss penalty on those investing in the services sector. This is an unfair burden while already having in place a turnover tax under Section 113 of the Income Tax Ordinance 2001 has created cost-competitiveness issues for the sector.

What this does is to increase the cost of business for the service sector, discouraging new entrants and SMEs by increasing the cost of capital and thereby assisting the existing players in creating a cartel.

As if that was not enough, a proposal has been made to withdraw them adjustment of input tax paid to provincial revenue authorities, effectively converting that into a cost for the business and creating liquidity issues.

Proposed Solution:

In the presence of Section 113 already dealing with minimum tax on turnover, the minimum tax should not be applicable on companies providing services. These should be subject to the normal tax regime (by reinstating the deleted clause 79, Part IV of Second Schedule).

As a minimum, this minimum tax should be made adjustable against future tax liabilities. This would have a net positive impact on the treasury in terms of increased revenues over the long term as the business eco-system will improve resulting in healthier growth in the sector translating into increased GDP and more tax monies into the coffers of the treasury.

As mentioned before, services sector has been one of the largest growing employer and contributing to national economy as well as the treasury. This should help expand the sector leading to improved revenue collections in the long term.

Health & Education:

Societies and modern economies are built upon social structures particularly education and health services. Unfortunately both have been severely neglected. Even the developed economies of the world with adequate infrastructure continue to spend a lion’s share on these areas but not so in Pakistan.

Only 0.42% of the GDP has been spent on health in the last fiscal year. Similarly, less than 1.75% has been falling under the head of education.

This is despite a severe crisis in both these sectors within the country. The biggest testament to the dismal condition of both these core areas of the society is the fact that anyone who can afford does not rely on the public health and education systems including the ruling elite itself.

Even as per the glossy figures of the National Economic Survey 2015-16, these areas are facing the following major issues:

  • 1,038 people to be attended by 1 doctor
  • 1 bed for the treatment of 1,613 people
  • 178 women out of every 100,000 die during child-birth due to inadequate medical facilities
  • High infant mortality rate
  • The claimed 60% literacy rate practically only refers to someone being able to “write” their names

Proposed Solution:

Atleast 5% and 6% of GDP should be allocated to education and health with ensuring the funds are not re-allocated to other heads during the year and actually spent on the development of these core areas currently in an abysmal state.

Having analyzed some key sectors, let us now move onto the important policy and other general areas:

Direct vs Indirect Taxes:

Currently, there are several types of indirect taxes levied within Pakistan including:

  • Customs Duty,
  • Sales Tax,
  • Federal Excise Duty,
  • Petroleum Levy,
  • Gas Infrastructure Cess,
  • Natural Gas Surcharge, e.t.c.

The proportion of indirect taxes to total taxation revenue remained largely the same as below:

Total Taxation Revenue
2015-16 2014-15
Rs in Billions Rs in Billions
Direct Taxes
           Income Tax 1539.00 1308.00
           Workers’ Welfare Fund 17.00 14.00
1556.00 1322.00
Indirect Taxes
           Sales Tax 1437.00 1230.00
           Customs Duty 413.00 349.00
           Federal Excise Duty 213.00 201.00
           Petroleum Levy 150.00 135.00
           Natural Gas Surcharge 35.00 32.00
           Gas Infrastructure Cess 145.00 145.00
           Others 7.00 6.00
2400.00 2098.00
Total Tax Revenue (TTR) 3956.00 3420.00
% of Direct Tax to TTR 39.33 38.65
% of Indirect Tax to TTR 60.67 61.35

As evident from the above table, there is a heavy reliance on indirect taxes which are supposed to be used as a tool to expand tax base and not to be used as a cash-cow to generate lion’s share of the taxation revenues.

All this focus on indirect taxation leads to inflationary pressures in the economy as increased prices translates into increased cost of production, services and living. The resulting impacts are hyper-inflationary in nature as there is a multiplicative rather than an additive element in the inflation passed-on at every level. This results in higher costs of doing business, which leads to declining exports and GDP due to the lack of cost competitiveness and missed opportunities.

Taxing the poor, funding the rich:

Moreover, while direct taxes are levied at higher rates to the income of those earning more, indirect taxes, on the other hand actually heavily tax those earning less.

To elaborate, let’s consider a feudal lord earning tens of millions in tax exempt income who pays the same amount and a very low proportion of tax compared to his total income on daily use items such as a bottle of milk as compared to his driver who pays the same amount of sales tax and thereby a higher proportion of his income as tax to the treasury. This is effectively a system where the poorer segments of society pay a higher proportion of taxes to fund the richer segments and the state.

Proposed Solution:

This increased reliance on indirect taxation is large due to the inability of the Government to widen the tax net instead of pursuing the policy of increasing the burden of indirect taxes on those already been heavily taxed.

What is astounding is why the Government is reluctant to use the databases of various Government institutions as well as the withholding tax database showing those people who have paid higher withholding tax rates of non-filers to expand the tax base.

Consider the magnitude of such a move and we haven’t even talked about the 3 million plus people living lavish lifestyle and not paying any income tax as per multiple FBR Chairmen. The solution is simple, a serious drive to expand the tax base using various databases and not ill-conceived amnesty schemes.

High Rates of Taxes:

Pakistan’s tax-to-GDP ratio is one of the lowest in the region. Despite increase in taxation revenues, it was a mere 8.4%, in comparison to:

  • India 14%
  • Sri-Lanka 13%
  • Indonesia 15% and
  • Malaysia 14%

One of the key reasons for this is the existing high taxation rate policy in Pakistan with tax rates being one of the highest in the region. This results in increased burden on those within the tax net and a lack of incentive to widen the tax base effectively.

To elaborate this point, consider existing rate of Sales Tax at an average of 17% in Pakistan, one of the highest in the region as compared to:

  • 36% in India
  • 10% in Indonesia and
  • 6% in Malaysia

Proposed Solution:

A policy of volume over margin should be pursued. As per some studies, the cost of tax evasion in Pakistan ranges between 6-8%. The number of income tax return filers (just filing returns and not those paying some tax) is just over a million.

If the tax rates are brought down to single digit and ideally within the range of tax evasion costs, along-with the structural reforms proposed in this research article, the filers’ base can be increased to 15-20 million. The net impact would be surplus revenue with a highly documented economy.

The increase in the tax base would more than compensate for the loss from lower rates. Currently Pakistan has one of the lowest tax bases and tax-to-GDP ratios in the region. If implemented this proposal can turn this around and increase them both substantially.

In order to address the reservations of some sections of bureaucracy in this regard, this can be launched as a pilot project in industry/city with a thin revenue contribution.

Mr. Ishaq Dar’s blast from the past:

It may be worth mentioning here that during a recent pre-budget event at the Lahore Chamber of Commerce and Industry (LCCI), I was informed that this proposal of “volume over margin” was proposed by Mr. Dar during his tenure as President of the LCCI.

It may be pertinent to remind our honorable finance minister to recall and implement the reform, he himself used to support and which the majority of professionals and technocrats in the country believe to be a key element in readdressing the issues facing our economy.

Taxation policy lacking purpose:

The purpose of an effective taxation policy is not just to gather maximum revenue in the short-term but to create policies to drive a positive business eco-system where cost of doing business is reduced increasing competitiveness and creating employment opportunities resulting in expanding GDP and thereby greater taxation revenues for the treasury. Unfortunately a mirror image policy seems to be in place in Pakistan.

Proposed Solution:

A progressive tax regime where wealthy segments of the society are taxed more should be pursued with increased focus on direct taxes and volume over margin.

  • Withdrawing exemptions

Moreover large landowners and the various exempt sectors must be brought within the tax-net and the revenues raised should be utilized to subsidize the weaker segments of society and to support reforms.

  • Structural Reforms within FBR

Also some structural reforms as outlined below in the taxation system can go a long way to assist the authorities in meeting their revenue targets:

  • Resolving issues within IRIS to make it more user friendly
  • Integration of Federal and Provincial Revenue Authorities’ systems
  • Reducing the discretionary powers vested in FBR officials and shifting towards an objective criteria based approach
  • Developing the existing policy of differential tax treatments and incentives for filers while penalizing non-filers
  • Introducing impact on economic sectors (GDP development) along with collections target as a performance evaluation criteria for FBR functionaries
  • Ensuring time limits specified in laws are adhered to
  • Facilitating the tax payers
  • Resolving the outstanding refunds issue positively
  • Introducing confidence by establishing a swift response complaint resolution cell to deal with corruption and harassment of tax payers
  • Ensuring no post remains vacant for more than a week to avoid delays in resolving tax-payers issues arising out of transfers, postings and additional charges, e.t.c.
  • Tax Reforms

In addition, to restore the faith of the taxpayers a multi-dimensional tax reforms agenda which has been constantly recommended by this writer must be implemented, where:

  • Taxpayers are encouraged and incentivized for paying taxes.
  • Taxpayers are facilitated by making the process easier and fairer, focusing on maximum automation in order to stem out corruption.
  • Instead of increasing the tax rates the tax net is constantly widened.
  • More focus is given to direct taxation.
  • Meaningful tax rebates and reliefs are introduced for the less able sections of the society.
  • A system of proportionate taxation is adopted with more affluent contributing more to the treasury.
  • Certain exempt sectors are brought into the tax-net (subsidies can be given for assisting any under-pressure areas/products).
  • Tax rebates and incentives are introduced to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
  • Tax money is actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
  • The massive corruption in public contracts/projects, now routinely in the range of 40-50% of tender values, is eradicated for better and efficient use of public money through revamping the pay and accountability structures.

 

Minimum Tax on Turnover of Loss Making Businesses:

Presently, a minimum tax on turnover has to be paid under Section 113 of the Income Tax Ordinance, 2001 except for by companies having gross loss (turnover less allowable expenses before depreciation and other inadmissible expenses).

It has now been proposed to extend this to even those entities incurring gross loss. Needless to say this will discourage startups and SMEs as the cost of doing business would rise. Surprisingly, the net impact on the business eco-system and the national economy are being ignored here.

Solution:

The proposed amendment should be withdrawn and the rate of turnover tax should be reduced to facilitate the businesses. Instead the focus should be on other reforms discussed to increase the tax base and document the economy.

Legalized Money Laundering Scheme:

Section 111(4) of the Income Tax Ordinance 2001 has long been a bone of contention between the proponents and detractors. The controversial law sanctions no tax or questions to be asked about origins on foreign remittances making this route a heaven for money laundering and legitimizing black money.

To elaborate, a corporate business paying 32% (proposed 31%) tax can instead go under the radar and use illegal money transfer services to transfer and bring back the illegal proceeds under the above mentioned sections at a cost of 2-4%. This creates a huge incentive to doge the system, legally.

Traditionally the professionals have been arguing to abolish this section while the Government arguing its’ necessary to facilitate foreign remittances.

While legitimate foreign remittances are a great support for developing economies like Pakistan’s, the use of the above mentioned law for legalizing the black money actually costs more to the economy in terms of the lost revenue and the impact of black businesses on related industries.

Proposed Solution:

We therefore propose a different middle ground. An addition should be made to this section requiring disclosure of the source of income with evidence such as payslip, tax return, e.t.c.

This should not cause any concern to any legitimate business or employee; however Ayan Alis won’t find it easy to manipulate this lacuna anymore. To facilitate investment in the short-term, an exemption from source disclosure can be given for investment in some sectors. However such a provision should be a one-off and short-term in nature.

 

Pay Increments and Government Borrowing:

Furthermore the pay-rises are not proportionate to the increase in the actual costs of living. Only a 10% increase has been proposed in the federal budget compared to the massive increases the lawmakers awarded themselves shortly before.

Such imbalance between cost of living and earning forces people towards unfair means or on relying on expensive credit in order to make their ends meet. Similarly, the extensive borrowing by the Government in the local market results in lesser finance being available for businesses.

Together, these may result in a hyper-inflationary environment and decreased purchasing power that can lead to higher interest rates which negatively impacts the businesses as many otherwise viable projects become non-feasible. The declining business output results in lower employment opportunities which coupled with the limited money-supply puts recessionary pressures on the market. This ultimately results in the devaluation of the currency which in turn translates into increased foreign debt. As a result, financing costs of the foreign debts increases leading to a higher proportion of GDP being spent on debt financing. All this combined with the inflation drags the already weak economy further back in Pakistan’s case.

 

 

Harmonization Issues:

The conflicts between various provincial revenue authorities and between them and the federation resulting in double taxation of services owing to classification and jurisdiction disputes should be resolved to create a business-friendly environment and facilitate the tax-payers.

At present there are serious conflicts between the various taxation bodies in Pakistan including FBR (Federal Board of Revenue), SRB (Sindh Revenue Board), PRA (Punjab Revenue Authority) and KPRA (Khyber Pakhtunkhwa Revenue Authority) which need to be clarified in order to facilitate a friendly business eco-system in Pakistan which in turn should translate into bigger size of the cake resulting in bigger pie of revenue for the treasury.

Conclusion:

As this writer has stressed repeatedly over the years, Pakistan has been blessed with all kinds of terrains and weathers, fertile lands, valuable natural resources, a high proportion of population been young and hardworking with cheap labor availability. A fairer system of taxation coupled with some key structural reforms culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The proposals outlined above can largely resolve the current issues facing the treasury. The caveats are proper implemented with a focus to rely on and develop indigenous capabilities,

Pakistan has both the potential and the ability to stand on its own feet and become an economic hub not only for the region but the whole world with the above reforms put in place along-with the ongoing CPEC mega plan.

Let us hope that our representatives will give this all a serious thought while passing the amendments to the federal budget.

The author is Director of the think-tank “Millat Thinkers’ Forum” and Managing Partner at Millennium Law & Corporate Company. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure and can be reached at ozmeer@mlcc.pk

Education: The neglected step child?

The following article has been published in Daily Nation, dated 15th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-15/page-9)

(Onlinehttp://nation.com.pk/business/15-Jun-2015/education-the-neglected-step-child)

Education: The neglected step child?

By: Omer Zaheer Meer

For almost four decades after independence, Pakistan was economically ahead of its’ arch-rival and estranged neighbor India despite the huge market and mass of the latter. 1990’s brought about the reversal with India leaping ahead and now reaching a situation where it has placed itself much ahead of Pakistan economically. While we often refer to the economic exploits of India and commonly cover reasons such as the IT boom and missed opportunities by Pakistan, have we ever thought that perhaps the real reason was education?

Yes, education that has been neglected by every succeeding Pakistani government. On the other hand, the Indian policy makers realized the importance of quality education and ensured appropriate steps were taken to develop their huge human resources, on the basis of which their current economic apparatus is booming. Their continuous investment in education bore fruits and placed India as a leader in IT outsourcing from where it really took off. Rather than becoming stagnant, Indians continued to invest in education with substantial results in bio-technologies, medical and education industries besides others.

On the other hand, while Pakistanis continue to outshine Indians and most of the world on an individual level, the overall state of affairs of its education sector, particularly public sector education, remains dismal. While we often criticize the rising unemployment levels, the lack of quality human resource availability remains a concern for local businesses. Most business owners complain that even the available human resource is not up to the international standards they’re competing against. Add to this the high illiteracy and we are faced with a dire situation demanding immediate corrective measures.

Infact, if you look at all major economies, with the exception of most Gulf countries relying on oil, they’re based on educated and trained human resources. Gone are the days when hard labor alone could turnaround national economies. Without continuously developed and upgraded education, no nation can hope to compete on the modern global stage. What’s more inspiring is that being a Muslim seeking education is mandatory even at the cost of hardships.

Furthermore as the right to education is a fundamental right of every human being recognized by the United Nations, perhaps the member countries should sought to deliver this key right to their citizens. The good thing is that the decision making circles in Pakistan have started saying the right things about education, of late. The problem is the lack of implementation.

All major political parties in Pakistan acknowledge the above facts and affirm their commitment to improving the human resources development in the country via education to ensure less disillusioned youth are attracted to extremism fuelling law and order problems for the nation. Similarly owning to political competition when Mian Shahbaz Sharif led Punjab government proposed substantially increasing the education budget, a feat it did not actually achieve, the PPP’s federal government proposed a budgetary allocation of 7% which was again something of a political statement which was not implemented.

However, it were the high hopes from the electoral promises of Mian Nawaz Sharif led PMLN in the 2013 general elections campaign with promises of 4% allocation of the GDP (not the budget) to the education sector that made segments of intelligentsia excited. Unfortunately it was again not to be. While the 14% increase for education in the 2015-16 budget proposed through the finance bill is a positive step in the right direction, the promised height of 4% of GDP still remains a dream.

Infact the manifestos of all major national parties including PTI and PPP committed to increasing the budgetary allocations for education. The upcoming Sindh and KPK budgets would reveal how much of those promises would be kept. Moreover, post 18th amendment the education sector has largely been within the ambit of provincial governments. This is not to make light the significance of a proper federal allocation to education sector setting a precedent and direction for the provinces to pursue.

What’s tragic is that although it is an established fact that investment in education lays the long-term foundation for economic prosperity and reduction in acute poverty, none of the parties in power have been able to meet their promised increases for the education to date. Unfortunately, election promises have become wish lists. Revenue constraints are almost always cited as a major constraint despite under-utilized budgetary allocations in several sectors including developmental. While one can respect the genuine constraints, perhaps better management of available resources can free up additional revenues for the neglected education sector. Similarly the ever increasing allocations to political gimmick based schemes can serve the nation well if utilized in educational sector.

Rightly or wrongly, some argue that given the improved quality of life, political awareness and a demanding populace resulting from a higher outlay on education, the traditional political class particularly from the rural belts across all political parties, ensure that the declared goals to invest in education by their respective parties are not met. Their common interests in this case ensure an unwritten alliance across the board. It is upto the policy makers and top leadership of these parties to take corrective measures to dispel this notion.

One thing is for sure, if we want to develop Pakistan into a sustainable and independent modern economy, there is no other option but to invest heavily in education and human resource development. This in due time will rid Pakistan of the both extremes it is currently facing as a properly educated nation would realize and implement the way of balance being the best course, as told to us by the greatest leader of all times, Prophet Muhammad PBUH.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Budget: An Objective View

The following article has been published in Daily Nation, dated 08th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-08/page-9)

(Onlinehttp://nation.com.pk/business/08-Jun-2015/budget-an-objective-view)

Federal Budget: An Objective View

By: Omer Zaheer Meer

The wait is over. One of the most awaited events of year, the federal budget was announced on Friday, 05th June 2015. The incumbent government has claimed it to be a historic one as all governments do while the opposition saw only red as the oppositions normally do. The reality however lies somewhere in the middle. There have been some positive steps that should be appreciated while others are left to be desired.

To understand the current budget better we need to review the performance of the last fiscal year as per the Economic Survey 2014-15 released by the finance ministry. As per the data released, inflation has reached the lowest level of this decade with substantial improvements in the foreign exchange reserves. This has resulted in State Bank of Pakistan reducing the discount rate at 7%, the lowest in last four decades.

While the issue of sukuk bonds and receipt of loans and donations were a direct result of governmental decisions, the improvements mentioned above were largely due to a key factor not affected by the governmental policies, that was the reduced oil import costs and resultant reduced inflation in the country due to material reduction in oil prices in the international market. Furthermore, manufacturing and agriculture sector which are the prime drivers of economy and employment opportunities haven’t shown the improvements expected. Private sector is sluggish and the cherished dream of the Tax-GDP ratio in line with the developed economies remained a dream.

With this backdrop and an economic growth rate of 4.24% the federal budget 2015-16 was supposed to overcome the shortcomings mentioned above and in several article before. Some key proposals were provided on these pages on Monday, 1st June 2014 in an article titled “Budgetary Dreams”. It was good to see some of the proposals getting implemented like the announcement of rebate on solar-panels and provision of concessionary loans to small farmers for some solar-powered projects. Similarly the incentives to the construction industry and rebates announced for the rice manufacturers are positive steps too. What’s interesting is that incentives announced has been for small farmers owning less than 12.5 acres of landholding, thereby substantiating the perspective that those over this threshold should have been brought within the tax net.

On the other hand, the critical proposals including bringing agricultural sector within the tax net and using the proceeds to subsidize provision of free or low-cost water and electricity to the sector has been ignored. Creating a new body for providing seeds, fertilizers and all other necessities to farmers at discounted prices due to the volume of business with the mandate of buying all crops from the farmers at the Government approved rates and supplying them to various industries and markets, thereby ensuring the farmers getting their dues while the stockists’ induced shortages and inflation getting stemmed out has not been implemented either.

While almost a 14% increase has been announced in the federal budget for education, which must be appreciated, the promised level of 5% of budget still remains a dream. Similarly the research and human resource development proposals have not been incorporated into the budget despite their importance for a modern national economy. As elaborated in previous write-ups, the impact of this allocation may not have been very drastic in terms of volume post 18th amendment but it would have been a strong signal and precedent for the provinces to pursue.

There was a hue and cry over a paltry 7.5% rise in the salaries of federal employees particularly considering the inflation levels. While the finance ministry has defended this citing certain limitations, there is much left to be desired and an increase of at-least 15% was very much realistic and achievable.

However the most shocking oversight was yet again ignoring the proposals of broadening tax base that has been presented to the various ministry officials for over a decade now. Once again the computerized national identity card (CNIC) has not been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This could not only have made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but would also have helped broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Continuing from this, the proposal of focusing more on a progressive direct tax regime is deferred once again. While there is no substantial change in the ratio of the direct taxes to indirect taxes, the positive reductions on the focus on indirect taxes is missing. The current policy of relying more on indirect taxes in the shape of customs duty, sales tax, federal excise duty, petroleum levy, gas infrastructure cess, natural gas surcharge and others will give rise to inflation and increased productivity costs leading to lower exports and purchasing power. The costs of this policy certainly outweigh the benefits. Similarly the volume over tax rate policy could have helped increase the tax net and the tax to GDP ratio by substantially reducing the tax rates, making it economically feasible to pay taxes instead of using the costly means to avoid them.

Although the budget is supposed to be a benchmark to act as both a planning and a control tool, this has not been the case for quite some time now. With all sorts of mini-budgets and flexible forecasting, the budget has been reduced to a mere constitutional formality that is met every year. Let us hope that the most important proposals not incorporated in the proposed budget may get the attention of our lawmakers and make way into any policy changes.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

The Cherished Dream of Budget

The following article has been published in Daily Nation, dated 1st June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-01/page-9)

(Onlinehttp://nation.com.pk/business/01-Jun-2015/the-cherished-dream-of-budget)

The cherished dream of budget

 (Budgetary Dreams)

Prof Dp

By: Omer Zaheer Meer

“I have a dream”. These were the famous words uttered at a junction of history which saw a drastic change in the United States of America. With the budget looming around the corner, this scribe too has a dream to share with the readers.

The dream starts with the federal budget of Islamic Republic of Pakistan having just been announced. There are widespread celebrations across the country, for many of the promised reforms have been delivered with path for a longer term change laid down. Pakistan Muslim League’s government has fulfilled its commitments despite some very challenging circumstances. Some of the major reforms and steps taken along-with their justifications, as outlined by the finance minister Mr. Ishaq Dar are detailed below.

Tax Facilitation: Several steps have been taken to reform the taxation system and structures. Firstly the computerized national identity card (CNIC) has been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This has not only made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but is also expected to help broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Corporate and Agricultural Exemptions: Furthermore exemptions on various businesses as well as the agricultural sector have been withdrawn. This is expected to generate substantial additional revenue as these sectors constitute 30 to 40 percent of national economy as per various studies. These sections have previously been out of the tax net without any substantial benefit to the GDP despite the relaxation. Therefore the Government has now decided to instead facilitate the farmers to increase the productivity as outlined below while ensuring the agricultural sector is brought within the tax-net.

Tax Volume over Margin: Moreover to make taxation less cumbersome and support the initiatives aimed at broadening of the tax base, the strategy of volume over margin has been pursued in that the tax rates have been drastically cut for both individuals and businesses to the lowest level in the entire region. This has not only positioned Pakistan as one of the most tax-attractive destinations in the region with substantial forecasted investments expected to create job opportunities in the country particularly in the power, agriculture and textile sectors but has also created an incentive for businesses and individuals to pay their due taxes, being less cumbersome than the cost of avoiding it with the threat of stringent possible penalties.

Free electricity & water for Agriculture: Another long-awaited major reform to turnaround the ailing economy in an agricultural country has also been taken. Keeping in view of the fact that the Indian Punjab’s output and productivity has been surpassing Pakistan’s and contributing materially to the Indian economic strategy, the Ministry of Finance has given its strategic vision to place Pakistan as the agricultural leader in the region. Water and electricity are declared free for agriculture for those farmers having small holdings or renting the land. The taxes raised from agricultural sector are mostly reserved to fund this initiative.

Further Agricultural Reforms: Furthermore a new body has been created to buy all crops from the farmers at the Government approved rates and supply them to various industries and markets, thereby ensuring the farmers will get their due while the stockists’ induced shortages and inflation can be stemmed out. Furthermore all seeds, fertilizers and other necessities can be brought through this body at discounted rates which has already listed all major quality suppliers in its approved lists. The volume of potential business has motivated suppliers to offer discounted rates in the hopes of additional business increasing their profitability and helping them expand, in turn creating more job opportunities.

HR development & Educational Reforms: To promote the culture of learning and human resource development, the listing criteria of stock exchanges now includes a requirement for the companies to annually spend atleast 1% of their total revenue on the education and/or professional trainings of their workers. Also, new non-corporate businesses spending more than 2% of their turnover on the education and training of their workers are offered tax rebates. These steps are topped up by an increased budgetary allocation of 5% to the education. The impact of this allocation is not very drastic post 18th amendment but is a strong signal and precedent for the provinces to pursue.

Further reforms to support HR development, Education & Entrepreneurship: Supporting the drive for education and entrepreneurship, Government has required all banking institutions to lend interest-free, atleast 5% of their total business to students and startups without any guarantees. To provide assurances to the banks, a fund has been launched backed by insurance to provide monthly returns to the banks to compensate for the loss of interest income while the fund along-with the insurance serves to act as a guarantee for abnormal bad debts in this sector.

Short-term Energy Reforms: Besides the CPEC and other energy projects, to address the severe energy shortage in the shorter term, the solar energy sector has been given a tax-break for five years with a requirement to cap margins at 15%, in order to ensure the benefits of the cost reduction will be passed on to the masses. This step is expected to assist in resolving the severe energy shortage problem in the shorter term as the cost of setting up solar energy systems has been one of the biggest hindrances in its widespread use despite Pakistan’s climate been extremely conducive for it. Furthermore windmill energy sector has also been extended the same favor to capitalize on its potential for cheap electricity generation with minimal initial investment and running costs.

It was here, that this writer woke up. The sadness on missing many more positive reforms engulfed me but the realization struck that this is the same sadness that engulfs every Pakistani post budget every year. Let’s hope and pray that this year will be different.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk