Budget for the fiscal year 2021-22 is in the making amidst difficult times. All sectors of the economy need tax incentives to survive the Covid-19 pandemic that has already seen three deadly waves. Projections about GDP growth at the end of the current year are positive proving the International Monetary Fund (IMF), the World Bank, the State Bank of Pakistan and many others wrong. All these had predicted a gloomy future.

In the eleven months of the current fiscal year, the Federal Board of Revenue (FBR) has performed impressively. It achieved a historic milestone by collecting Rs 4.1 trillion for the first time since 1947. The FBR is optimistic about achieving the revised target of Rs 4.7 trillion for the current fiscal year. To meet the original target of Rs 5.5 trillion, fixed at the time of budget announcement, seems unlikely. A fiscal deficit and further borrowing with higher debt servicing are therefore inevitable.

The appointment by Premier Imran Khan on April 16, 2021, of his fourth finance minister, Shaukat Fayaz Ahmed Tarin – who held the same portfolio from 2008 to 2010 under President Zardari rule – has so far proved rewarding. Since taking oath of office he has made it clear that no new taxes and no increases in rates of existing ones would take place to meet IMF conditions regarding tax targets. He made a statement to the effect before the Standing Committee of the National Assembly on May 26, 2021. The very next day, Special Assistant to Prime Minister on Revenue and Finance, Dr Waqar Masood, told the same committee, “We are trying that less than Rs 500 billion worth of additional taxes should be imposed, including recently introduced corporate income tax measures [of Rs 81 billion]”. He admitted that the forthcoming budget would be presented “in the light of an understanding” with the IMF.

Before the release of a $500 million tranche by the IMF on March 24, 2021, the coalition government led by the PTI had agreed to make amendments to the Income Tax Ordinance, 2001, to withdraw tax exemptions or curtail those through tax credit involving complicated procedure and unreasonable conditions. Resultantly, the president, in exercise of his powers under Article 89(1) of the Constitution promulgated Ordinance VII of 2021 on March 22, 2021, with immediate effect. The notification says that this Ordinance “shall be called the Tax Laws (Second Amendment) Ordinance, 2021”. It was opposed by the opposition as unconstitutional and many experts have said that it is a money bill that cannot be presented in the manner the government has done (see details in IMF-Imposed Ordinance and IT Exports, TNS, [Political Economy] The News, April 11, 2021). This will now be made part of the Finance Bill 2021, which will be presented along with the budget, likely to be announced on June 11.

The cost of consumer goods will also go up due to withdrawal of sales tax exemptions. The target for petroleum levy will be around Rs 607 billion against the current year’s target of Rs 450 billion. The IMF report projects the higher collection on the basis of higher petroleum product prices—a sure recipe for cost-push inflation and growth slayer. 

Shaukat Tarin has said: “My first priority would be achieving higher and sustainable growth and increasing Rs 1 trillion tax revenue into the FBR’s collection in the next year”. This means the government will fix a tax collection target of Rs 5.8 trillion against the IMF’s demand of Rs 5.963 trillion.

Shaukat Tarin has also said that the government “will go close to the IMF demand”. When asked how the FBR would achieve the increase of Rs 1 trillion over the next year with a nominal growth of just 12.8 percent. He responded that there will be no new taxes in the budget and no increase in the existing taxes. He said that there will be nominal growth of 13 percent. The GDP growth target in 2021-22 will be 5 percent and inflation target 8 percent in 2021-22. A further 7 percent growth in FBR’s collection will be made through broadening of tax base with the help of technology. Prior to becoming the finance minister, he had said: “If the Federal Board of Revenue (FBR) does not raise its revenue to 15 percent, then the country will run out of money to spend. The FBR will have to bring revenue to 20 percent in 5-7 years, otherwise the country will not be able to achieve an economic growth rate of 7-8 percent“.

It is not clear yet who will prevail - Shaukat Tarin or Dr Waqar Masood - in determining how the tax target for the FBR, as agreed with the IMF, will be met. The finance minister has promised a policy of no new taxes and no raise in tax rates but the special assistant to prime minister claims that there will be new taxes worth Rs 500 billion. New taxes will hurt the masses as well as the businesses. Both, however, agree that a number of exemptions in all federal tax codes will be withdrawn. The IMF’s Country Report No 2021/073 makes it clear that the tax burden will increase. It will hurt salaried and fixed income groups the most. The cost of consumer goods will also go up due to withdrawal of sales tax exemptions. The target for petroleum levy will be around Rs 607 billion against the current year’s target of Rs 450 billion. The IMF report projects the higher collection on the basis of higher petroleum product prices—a sure recipe for cost-push inflation and growth slayer.

Contrary to the IMF’s prescriptions of higher taxes and costly energy leading to slowing of growth and further unemployment, business community is demanding massive tax reductions in the coming budget so that they can survive the difficult times and retain employees. The IMF’s agenda is diametrically opposed to the vision of prime minister and the finance minister to adopt economic policies aimed at sustainable growth and looking after millions of the underprivileged. Since taking charge, Shaukat Tarin has been saying that his top-most priority is sustainable growth and prosperity for all. Taxes will increase with growth and not by imposing high taxes. Will Shaukat Tarin be able to convince the IMF on this? Only the coming budget will tell.

The writer, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences (LUMS), a member of the Advisory Board and a visiting senior fellow of the Pakistan Institute of Development Economics (PIDE)