ISLAMABAD: In a clear footprint of the International Monetary Fund (IMF) programme, the Federal Cabinet on Tuesday approved the Budget Strategy Paper (BSP) for next fiscal year (FY22) envisaging significantly higher contribution from provinces to finance fiscal deficit and almost a freeze on major expenditures like defence, pension and running of civil government to ensure enough funding for higher interest payments.

The BSP targets economic growth rate of 4.2 per cent for next year, about 8pc rate of inflation, budget deficit at 6pc of GDP and 84.3pc of public debt to GDP ratio. Gross federal revenues are estimated to go up by more than 25pc to Rs7.99 trillion as the government pushes forward a series of tax adjustments like widening of GST and income tax net, besides continually banking on a number of non-tax revenues like petroleum levy and so on.

The budgetary allocation for FY22 has been put at Rs1.330tr for defence which is just 2.7pc higher than the current fiscal year. Estimates for debt servicing have been put at Rs3.1tr for next year — about 6.3pc higher than the current year. Gross federal revenues are estimated to go up by a significant 25pc.

Presided over by Prime Minister Imran Khan, the meeting also approved revised estimates for current fiscal year because of some key slippages on the expenditure side. The meeting also cleared the Medium-Term Budget Strategy Paper (MTBSP) for FY2021-22 to FY 2023-24.

Budget Strategy Paper eyes higher provincial contributions to finance fiscal deficit

For FY21, the government expects GDP growth rate at 2.9pc which is higher than the budgeted 2.1pc. The revised rate of inflation is at 8.7pc which significantly higher than the 6.5pc target. The government has also now revised budget deficit estimate for current fiscal year to 7.4pc of GDP against 7.1pc budget target while the debt-to-GDP ratio has been revised to 86.8pc instead of budget 87pc.

After transfer of provincial shares, net federal revenue for FY22 is targeted at Rs4.462tr compared to revised estimates for current fiscal year at Rs3.66tr, showing an increase of almost 22pc.

The BSP noted that the overall primary balance targeted at 0.5pc of GDP this fiscal year had turned into 1.2pc of GDP and would be contained at 0.1pc of GDP in FY22.

Informed sources told Dawn that the BSP presented by Secretary Finance to the cabinet estimated FY22 expenditure at Rs8.056tr compared to Rs7.334tr revised expenditure estimated for FY21.

The BSP once again agitates the fiscal disbalance caused by the 7th National Finance Commission (NFC) Award and apparently expects to more than double the cashback from four provinces. It claims to have achieved agreement from provinces to provide Rs440bn surplus (0.9pc of GDP) in FY22 against Rs210bn this fiscal year.

“The major fiscal challenge being faced by the federal government since introduction of the 18th Constitutional Amendment and 7th NFC Award is the transfer of 57.5pc of divisible pool taxes and straight transfers to the provinces, constituting almost 59.7pc of the gross federal revenues, which leaves very limited fiscal space for current and development spending,” the BSP said. It further insisted that ‘provinces will be required to have the desired levels of provincial surpluses by increasing their own revenues and rationalising the expenditures’ to attain the projected overall fiscal balance.

Subsidies and Pension allocations

Pension allocations for FY22 have been set at Rs480bn against Rs470bn in current fiscal year while running of the civil government would consume Rs510bn next year against Rs488bn this year. The BSP envisages Rs501bn for subsidies in FY22 as total subsidies amounted to Rs459bn during current fiscal year, more than double the Rs209bn budget allocations.

The federal Public Sector Development Programme (PSDP) is projected to be Rs800bn in FY22 against Rs650bn during current fiscal year. Overall grants in which many expenditures are generally camouflaged are estimated to be around Rs994bn against Rs937bn during FY21.

According to the Ministry of Finance, the MTBSP has a focus on sustainable growth, job-creation, protection of vulnerable segments of society, inflation and price control, prime minister’s special initiatives, and reduction of twin deficits. The basic strategy to achieve the objectives envisaged in the MTBSP paper is two-pronged: optimal mobilisation of revenue through broadening of tax base and increase in the tax net, removal of exemptions, simplification of procedures, and augmentation of the capacity of revenue administration, especially through IT-enabled services.

On the other hand, it is predicated on rationalisation of expenditures without compromising the social and development priorities of the government, integrated with better public financial management. In the coming weeks, the government will seek input from all stakeholders on its taxation and expenditure policies.

Taxation measures

The paper says that the Federal Board of Revenue (FBR) aims at re-designing the tax system on ideal principles of taxation — moving towards taxation of net profits under income tax and subjecting all taxable supplies to a standard sales tax regime. The initiative involves removal of tax distortions, unnecessary exemptions, tax reductions and zero-rated regime.

Major guiding principles of tax policy include corporate income tax reforms for removal of undesirable tax credits, accelerated depreciation, exemptions, reduced rates, exemption from specific provisions etc, that have already been down recently through promulgation of Tax Laws (Second Amendment) Ordinance, 2021. Also agreed in the IMF programme matrix are the personal Income Tax Reforms for removal of unnecessary exemptions and rationalisation of tax rates and reduction of tax slabs.

The measures further aim at reducing dependence on withholding taxes through reduction in number and rates of tax lines without compromising the documentation purposes of these taxes. Nine withholding taxes have already been abolished and further reduction is under consideration. The FBR will also be rationalising presumptive and minimum tax regimes.

Regarding General Sales Tax on goods, the paper involves removal of unnecessary exemptions, reduced rates, zero-rated and special tax regimes. The broad guideline is that exemptions and concessions available to all goods except essential food items, health and education-related goods are to be reviewed.

The FBR will also pursue sales tax harmonisation with the provincial revenue authorities which includes common definition of goods and services, common minimum threshold, harmonised tax rates, single portal and single sales tax return. The initiative is expected to complete in the medium-term.

Published in Dawn, April 14th, 2021