ISLAMABAD - The budget 2015-16 does not bring happiness in everyone's life. I call it partly friendly in my previous article. Nevertheless, there are certain problems which are not addressed. Let's look at the neglected sectors which are not addressed in the budget and forgotten issues.
Services sectors contributed more than 50 percent to GDP but it is totally neglected once again. Services sector is neglected and the major emphasis is on the commodity producing sector, i.e. manufacturing and agriculture. What constitute the services sectors? It includes drivers, road transporters, telecom sector, storage sector, cobbler, barber, electrician, plumbers, tailors, shopkeepers (wholesalers and retailers), banks and bankers, insurance agents and other staff, construction workers, public administration and defense, and social services. Therefore, in nutshell not everyone is working in industrial sector and in agriculture sector. Furthermore, the neglected sector has maximum share in GDP and 40 percent of employed labour force.
Although the components of services sectors are inter-linked with the production of industry and agriculture thus making policies for commodity producing sector will enhance growth of services sectors as well nonetheless, services sector has its own significance through domestic commerce (at term introduced by Dr Nadeem-ul-Haque, former deputy chairman Planning and Development Division and former Vice Chancellor PIDE in 2006 in Pakistan). Increase in domestic commerce leads to more employment opportunities for the people, local competition in open market will increase which helps in generating innovative ideas; these ideas thus result in expansion in business and eventually increase in exports. These local industries which look for the demand of local buyers are known as organic industries. The domestic commerce will increase the need for space in the market as well as create new cities. Therefore, budget should bring certain reforms which helps domestic commerce to flourish. This would also reduce the income inequality and poverty in the country.
It's been more than 2 and half decades when Paul Romer wrote an article on endogenous growth. It is among the most quoted articles since then. It says that investment in human capital innovation and knowledge are drivers of economic growth not the external forces which are in general known as exogenous factors. Moreover, the outcome of this investment will have spillover affect which results in better economic development. However, the budget makers may not know the importance of investment in innovation and knowledge. This seems to be the only reason that even after 20 years the allocation of budget on research and development in all the sectors is negligible. I am sure that out of thousand billion budget government may allocate few billions to the research and development and grant it to various universities depending on the research projects they are running. It is very much possible that dues to this allocation they may not have to introduce billion rupees incentive structure to the industries.
The budget, every year, gives us the equation of revenues and expenditures. Expenditure heads are initially decided and then deciding on the magical number of budget deficit, revenue target is set. After the decision of revenue target several possible algorithms are made to achieve the impossible target of total revenues, this year its Rs. 3100 billion. This year tax reforms commission has been established which gave several recommendations to the government. Moreover, Dr Pasha has also given several recommendations to increase the revenues, nevertheless, no major initiative has been taken to improve the tax administration, cover the loopholes, and abolishment of exemption apart from abolishing the SROs issued by FBR.
Apart from these reforms, construction sector and agriculture income is still un-taxed. Although agricultural income tax is a provincial matter but people get exemptions by declaring their income coming from agriculture sectors. In general it is seen that agriculture income tax becomes controversial, nonetheless, it is not. The same rules will be applied on the agriculture income, which is applied on the income from other sources. Most of the investment is either going into real estate sector. Prices of the real estate sector are also changing frequently at rapid speed, which implies higher profitability of the investors in the real estate sector. Since mostly it is undocumented sector, therefore, it is difficult to tax, nonetheless, looking at the profitability it is pretty sure that FBR can raise a significant amount of revenues from this sectors. Neglecting both the sectors for revenue collection affects negatively to the revenue collection efforts.
Similar to the real estate sector several informal activities are undocumented and are not paying sales tax especially albeit consumers are paying them sales tax when they use their services. For instance, restaurants, fast foods, bakeries, etc. Vague estimates show that FBR is losing close to Rs. 250 billion every year by not collecting taxes from informal sector.
The writer is an Islamabad-based economist.