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June 18, 2019

Planners need nerves of steel to execute finance bill 2019/20


June 18, 2019

LAHORE: The dilemma for the economic managers is that they cannot afford to concede any demand for change in the finance bill, as it will open a Pandora box, encouraging others to exert pressure on them. This will jeopardise their tax collection plan.

Except for banks and the capital market, almost all other sectors of the economy are in shock. Withdrawal of exemptions is bothering some, while increases in powers of the Federal Board of Revenue (FBR) are worrisome for others.

The retailers want to avoid the condition of CNIC number of the buyer on their retail receipts, while the increase in the rate of compulsory turnover tax from one to 1.5 percent is bothering the corporate manufacturers.

Even the bureaucrats are not happy, as five percent increase in salaries of grade 17-20 employees and no increase in salaries of grade 21 and 22 is accompanied with increase in income tax rates for everyone earning Rs600,000 or more.

Many employees in grade 17-20 would see a net decline in their take home salary, despite five percent increase.

Each of them draws over Rs70,000 salary per month and would be required to pay five percent on income above Rs600,000 and those drawing over Rs100,000 or above would be paying 10 percent above income of Rs1.2 million and 15 percent over Rs2.4 million.

The government will have to bear the pressure of almost the entire taxpaying and tax evading sectors. We have come to this situation after decades of delaying the reforms needed to remove distortions in the economy.

Now the distortions are being removed in one go. There are no two opinions that the government is inefficient and corruption has seeped at all levels. The sad fact is that the government is also the sole provider of the basic services to people like gas and power. The pleas of international agencies to hand over these services to the private sector were ignored by all governments.

Now, we have reached a situation where each unit of electricity we produce is supplied at discount to the consumers. Based on actual transparent production and distribution of electricity, the power rates should be half the present level.

However, our inefficiencies are so high that even at current extremely high rates the government incurs billions of losses per year. Rulers seem to have conceded that these efficiencies cannot be removed so they are increasing the power tariff to a level that covers all state inefficiencies.

This is definitely hurting the lower middle and middle class consumers. The economic planners have decided that efficiencies would be improved later; for the time being the entire losses in this sector should be recovered from the consumers.

The same philosophy has been employed in all sectors. The planners are convinced that they cannot collect actual sales tax on local sales of sectors where they are exempt to pay taxes for inputs meant for exports.

So, the entire exempted sectors are being taxed with an assurance of refunds once the export proceeds are received. Again it has been decided to address corruption in these sectors regarding sales tax at a later stage.

Successive governments have been announcing tax amnesty to no avail and the black money continued to rise in the local economy. This time around, another amnesty scheme has been announced.

After its expiry, the revenue officials are empowered to raid any place to unearth tainted money and assets. They will have access to even the bank lockers. It would be extremely difficult for the officials to carry out this search, as the people involved would mostly be from the higher strata of the society. The middle class rents bank lockers to deposit their jewellery and important documents.

The rich keep lots of gold, foreign currency, prize bonds and other valuables that they do not declare in their asset statements. The segments involved are likely to include politicians and businessmen, including traders, smugglers and maybe persons involved in terrorist activities.

Many lockers would be ‘benami’ like that in real estate. These people live in mansions and are members of elite clubs. If they can be apprehended, 70 percent of the revenue issues would be resolved. But apprehending them would require nerves of steel. The resolve and determination of the present economic team has not yet been really tested. Coming weeks would show how much pressure they could withstand.

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