Pakistan budget targets tax rises to shore up finances

Pakistan is targeting a near 16% rise in tax revenues in the fiscal year ending June 2017, Finance Minister Ishaq Dar said yesterday as he unveiled a budget aimed at shoring up the South Asian country’s finances.
Dar said Pakistan would cut its fiscal deficit to 3.8% of gross domestic product for the coming financial year, down from the 4.3% envisaged for this year, and helped by a planned rise in tax collection to 3.95tn rupees ($37.8bn).
Pakistan’s economy is growing at its quickest rate in eight years after a slide in oil prices and expansion in industry and services boosted demand. Investor confidence has slowly returned to a country that was battered by the global financial crisis.
“The dangers to the economy are now far behind us. Economic growth has hit an eight year high. This would have been even better if it had not been for a 28% fall in the cotton crop,” Dar told parliament.
Still, the economy remains structurally weak, hamstrung by poor infrastructure, struggling exports, the threat of militant violence and a very narrow tax base.
The GDP growth rate of 4.7% in the year to June 2016 was less than the government’s 5.5% target, and a contraction in the agricultural sector this year meant many Pakistanis do not feel much better off.
Pakistan’s economy needs to grow at more than 6-percent per annum to absorb new entrants coming into the workforce, experts say.
Dar said Prime Minister Nawaz Sharif’s government’s priority in the year ahead was to push Pakistan’s persistently low tax-to-GDP ratio to above 10% and raise taxation revenues. Pakistan’s financial year runs from July to June.
Khurram Husain, a Karachi-based analyst, said the government was proposing to raise taxes on turnover and financial transactions, which could hurt economic activity. It had largely left income and consumption taxes alone, he said.
“I see it more as a fire-fighting budget. The government is having a very hard time transiting out of fire-fighting mode into producing a growth-inducing budget. And this budget speech appears to confirm that,” Husain told Reuters.
Successive governments have promised to rein in tax evaders and boost revenues but face fierce resistance to change, including from the many politicians and businessmen believed to be among those dodging their taxes.
Fewer than 1% of Pakistan’s 190mn people pay income tax.
The low level of collection and the hefty cost of funding its military has left Pakistan with insufficient money to spend on modernising its schools and hospitals, to the dismay of donors who end up financing much of the social infrastructure.
Dar said total spending for the 2016/17 year was estimated at 5.08tn rupees, while the defence budget would rise 11% year-on-year to 860bn rupees.
Some economists predict that Pakistan will miss its fiscal deficit targets over the coming years and start hiking spending after it exits an International Monetary Fund programme later this year and heads into a general election in 2018.