The second supplementary finance bill presented by Federal Finance Minister, Asad Umer, to parliament, contains bold proposals (though many may agree that the current state of the country's economy necessitates taking these high risk measures) given that it supports tax incentives to productive sectors including industry, agriculture and services worth an estimated 10.8 billion rupees while it seeks to enhance revenue by 4.398 billion rupees giving a net loss to the treasury of 6.8 billion rupees. Whether this relatively small amount, contrast it with the 180 billion rupee export promotion package announced by the previous administration, would be sufficient to meet the lacunae in productive activities in Pakistan, remains to be seen. It has also extended fiscal incentives to stock market in the hope that trades will pick up in the exchange and lead the way to an increase in economic activity.
However, what Business Recorder has been advocating for decades remains valid to this day: the administration would have to enhance documentation to raise revenue, widen the tax net instead of relying on existing taxpayers and disable non-filers from continuing to operate outside the documented economy through the levy of an appropriate withholding tax on high end consumer items/services.
What is however relevant to note is that the government has incorporated two critical legislations in the supplementary finance bill that, if passed, may lead to greater revenue in times to come but one of them militates against the stated aim of documentation of the economy. First and foremost, the finance minister introduced the concept of provisional assessment of offshore assets that envisages enabling the government to assess and tax foreign assets held by resident Pakistanis and in the event of non-payment of assessed tax, appropriate their local assets to recover the tax due. This would obviate the need to undertake cumbersome and arduous proceedings in foreign jurisdictions for tax recovery/appropriation of foreign assets. This as a possible key source of additional revenue has been a primary objective of Prime Minister Imran Khan.
Secondly, the finance act second amendment bill to restore the presumptive tax regime for commercial importers. This measure if approved will undo a major shift that was made in the tax policy by the finance act 2018 that had abolished presumptive tax regime for importers whereby the tax collected at the import stage was to be the minimum tax liability and not the final tax liability. This measure should be revisited as it is at variance with the stated objective of documentation of the economy that is the need of the hour.
The federal government also backed refund payments - more than 200 billion rupees according to the Finance Minister - through issuance of promissory notes at 10 percent rate of return would be redeemable after just 3 years. Three concerns need to be highlighted: (i) these notes would raise domestic indebtedness which has already assumed serious levels and contribute to high inflation, (ii) three years is perhaps too short reflective of an optimism on the part of the government with respect to an economic upturn, and (iii) banks are already too exposed to government notes and may not be too inclined to accept these as collateral on normal margins.
The finance minister in the presence of the prime minister also stated that the International Monetary Fund (IMF) bailout package would be the last ever for Pakistan, a statement that is as inane as it is misleading - inane because global economic conditions as well as domestic economic/policies conditions determine the need for an IMF package while it is misleading because it does not clarify what IMF terms and conditions would be acceptable to the government. The government appears to consistently lack basic understanding of a bailout package by the Fund which does not trim its conditions based on the amount of the loan but determines the conditions based on the state of the economy. Given the current state of the economy inherited by the PTI which Umer at length dwelt upon there is very little room for maneuverability and with the latest incentive package with no commensurate decrease in expenditure (particularly current expenditure) the Fund no doubt would considerably tweak both revenue measures and expenditure allocations for the current year that have been announced by the finance minister in the first and second supplementary amendments to the finance bill 2018.
To conclude, the second supplementary finance bill is not technically a 'mini-budget' as it neither identifies a change in expenditure allocations nor a change in revenue expectations but is rather an industrial promotion package. Its impact on the poor and the vulnerable would be limited to promotion of productive sectors and the consequent trickle-down effect as well as the 19 percent lower tax on banks to fund low-cost housing schemes as well as other sectors including SMEs and agriculture (from 35 percent plus super tax to 20 percent) though that does not guarantee loans without appropriate collateral. The thrust of this bill is to alter the direction of the economy from trading/services to industry/manufacturing with a focus on ease of doing business in the country.