by Amna Memon
For the past three years, Pakistan has been pursuing macroeconomic stability under the patronage of the International Monetary Fund (IMF). It appears that the government has been successful to some extent, with the economy growing at a rate of 5.28%, the highest growth rate in almost a decade. The size of the economy also surpassed $300 billion for the first time, prompting declarations that Pakistan may be among the world’s top economies by 2030.
However, the Economic Survey 2016-2017 reveals that the government failed to achieve multiple economic targets, such as manufacturing, electricity generation, and agriculture. Even the high economic growth rate fell short of its target of 5.7%. Circular debt also remains an issue, crossing the Rs 400 billion mark once again.
Pakistan’s budget for the fiscal year 2017-2018 has set out a new GDP growth target of 6% and is marked by a sizeable allocation to the Public Sector Development Programme. The total size of this federal budget, the fifth budget revealed during the current PML-N government, has been estimated at Rs 4.753 trillion, about 8% higher than the previous budget of about Rs 4.4 trillion. The government is hopeful that FBR revenues will aid in meeting the expenditures set by the budget. The ambitious targets set by the budget are unsurprising, given that the next General Election is expected to take place within this fiscal year.
Though the targets and measures detailed in the budget have their own implications for Pakistan’s economy, the following analysis attempts to assess the budget in terms of its effects on businesses and industries. As a free market think tank, our main concern is how the budget facilitates or impedes the ease of doing business in Pakistan. Relief and revenue measures along with the outlay for development spending have been assessed, with the hope that this paints a picture of what the budget means for the business community.
- The total expenditure for 2017-18 is estimated at Rs 5,103.8 billion. This includes a resource availability (budget) of Rs 4,713.7 billion coupled with Rs 390.1 billion in bank borrowing in order to meet expenditures.
- Out of the expenditure of Rs 5,103.8 billion, current expenditure is Rs 3,763.7 billion
- Foreign loan repayments for 2017-18 are projected at Rs 286.6 billion
- Mark-up payments on domestic debt amount to Rs 1,231 billion, and Rs 132 billion on foreign debt
- Public Sector Development Programme (PSDP) is Rs 2,113 billion, including Rs 1,112 billion for provinces and Rs 1,001 billion for Federal PSDP.
- The defense budget is proposed at Rs 920 billion
- The expected budget deficit is 4.1% of GDP
- FBR revenues estimated at Rs 5,310 billion versus 4,013 billion rupees last year
- Total revenue estimated at Rs 5,310 billion, including a Rs 2,384 billion share of provinces
- Subsidies are estimated at Rs 139 billion
- Includes subsidies for WAPDA/PEPCO/ K-Electric
- Subsidies for utility stores for pulses, tea, rice, and other goods, as well as Ramzan Package
- Minimum wages increased to Rs 15,000 per month from Rs 14,000
Incentives for Growth
Exemptions/Concessions on Customs duty
Exemptions and concessions in customs duties were mostly for industry raw materials and poultry/bird farming. The list of exemptions/concessions in CD is as follows:
|Sr.||Measure||Existing CD%||Proposed CD%|
|1||Grandparent and parent stock of chicken||11+RD 5||3|
|4||Raw skins and hides||3||0|
|5||Aluminium waste or scrap||RD 10||5|
|7||Sheets for veneering||16||11|
|8||Prefabricated modular clean room panels||20||3|
|9||Non-woven fabric for pharmaceuticals||16||5|
|10||Uncoated polyester film and aluminum wire for making metallized yarn||20||10|
|11||Raw materials for baby diapers||20, 16||16, 11|
Regulatory duties and increased customs duties were introduced on some products. According to government documents, such measures are meant to give a boost to the local industry and protect consumers from substances injurious to health. Such duties have been levied on synthetic filament yarn, aluminum beverage cans, animal protein meals, betel nuts, and betel leaves.
Exemptions/Concessions in Sales Tax and Federal Excise Duty
Sales tax and Federal Excise Duty concessions were large to the benefit of the agriculture and energy sectors. Some key exemptions and concessions are listed below:
Agriculture and farming sectors:
- Sales tax on seven kinds of poultry machinery reduced to 7%.
- Exemption from sales tax on combine harvesters
- Exemption from sales tax on agriculture diesel engines
- Exemption from sales tax on imported seeds for growing
Other concessions and exemptions for industrial development:
- Excess sales tax of 2% withdrawn from lubricating oil
- Zero rating of five export-oriented sectors to continue this year
- Sales tax exemption on vehicles for the development of Gwadar port
- Exemption from sales tax on items for renewable sources of energy and conservation of energy
- Parts for manufacturing LED lights exempted from sales tax
- FED on telecommunication services reduced from 18.5% to 17%
Income Tax Relief Measures
- Corporate tax rate reduced to 30% from 31%
- Withholding tax for mobile phone subscribers reduced from 14% to 12.5%
- Exemption from taxes on profits, minimum tax, and withholding tax for start-ups
- Withholding tax exemption on cash withdrawals by branchless banking agents
- Enhancement of limit from 110% to 125% of previous year’s imports for importing raw materials by manufacturers without collection of income tax at import stage
- Advance tax threshold for individuals increased from Rs 500,000 to Rs 1,000,000 income
- Increase in lower limit of tax credit from Rs 100,000 to Rs 150,000 for individuals and associations of persons paying health insurance premiums
- Reduction in withholding tax rate for filers registering motor vehicles
- Extension of period for tax credit from two to four years for companies listed on the stock exchange
- Reduction of minimum tax rate from 8% to 2% on services rendered by the Pakistan Stock Exchange
- Enhancement of limit from 5% to 10% of turnover for advertisement by pharmaceutical companies
- Reduction of withholding tax on fast moving consumer goods for companies and non-companies
The sales tax and FED exemptions offered on machinery and seeds bode well for the agriculture sector – though this does raise the question of why farmers’ protests on the eve of the budget announcement were met with such resistance. Custom duty exemptions appear to be to the benefit of poultry farmers, and exemptions from custom duty on ostriches may usher in a new era of bird farming.
Some energy-friendly concessions have also been introduced, including sales tax exemptions on energy saving items and parts for LED lights. This is likely to encourage the adoption of such technology to ease the burdens of the energy crisis.
Though regulatory duties are presumed by the government to have a pro-growth effect on the local industry, they may only result in increased prices for raw materials as well as raised costs being passed onto consumers. Instead of increased regulations, better tax incentives may do a better job of improving the business environment and improving local manufacturing.
The continuation of zero-rating for export-oriented sectors is also a positive step, as it is likely to help revive the country’s dwindling exports. There is a need, however, to improve the tax refund system. Pending refunds have led to a liquidity crisis in the export sector, which results in falling exports and thus a failure of zero-rating to achieve the intended effect.
Exemptions introduced on industry raw materials will hopefully serve as a boost to the manufacturing sector, as will exemptions for developments in Gwadar. In addition to multiple existing concessions and exemptions, vehicles to be used in the development of Gwadar port will now also be exempt from sales tax. It would have been better, however, had more measures been introduced to boost local manufacturing, as very few items have received exemptions. Nonetheless, we may hold out hope that investments in Gwadar will allow local businesses and industries to flourish as well. Extending the incentives offered to foreign investors will definitely be a step in the right direction.
Increase in Customs Duty
- Regulatory duties levied on 565 non-essential items on rates ranging from 5 to 15%. The exact items are unclear at present.
- Concessions on hybrid electric vehicles above 2500 cc withdrawn
- Additional duty levied on cylinder heads for motorbikes
Increase in Sales Tax and Federal Excise Duty
- Sales tax slabs on mobile phones changed from three slabs of Rs 300, 1000 and 1500 to two slabs of Rs 650 and 1500
- FED on cement increased from Rs 1 to Rs 1.25 per bag
- Sales tax on electricity consumption for the steel and related sectors to be increased from Rs 9 per unit of electricity to Rs 10.5
- Increase in sales tax on retail sales of five export sectors, from 5% to 6%
- Zero rating of commercial import of fabrics to be replaced with sales tax of 6%
- Minimum sales tax of Rs 425 per metric ton of locally produced coal
- Subsidy on fertilizers to be abolished and replaced with decreased sales tax
Income Tax Revenue Measures
- Tax on dividend income increased from 12.5% to 15%, and on dividends from mutual funds from 10% to 12.5%
- Capital gains tax on stock market transactions simplified to 15% for filers and 20% for non-filers
- Tax credit of 3% withdrawn from manufacturers making 90% sales to tax registered persons, as this was seen to have failed to encourage persons to enter the formal sector
- Minimum tax increased from 1% of turnover to 1.5%
- Continuation of super tax of 4% on income of banking companies
- Increase in withholding tax from retailers of electronics from 0.5% to 1%
- Imposition of withholding tax on dealers of batteries
The revenue measures introduced seem to be ones that will most affect common people, as taxes introduced on the retail of goods will be passed onto consumers. The ending of the Rs 300 slab on mobile phones, for instance, is a measure that is sure to affect low-income individuals as mobile phones have become a necessary purchase.
Super-tax was also not viewed favorably in the last budget, but it is being continued. This brings into question the efficacy of reducing corporate taxes.
The ‘non-essential’ items being taxed are not clear at present, but will likely result in a price hike for consumers. There appear to be multiple tax hikes for businesses and retailers, and it appears that most taxes are introduced to the detriment of smaller businesses such as retailers of batteries and electronics.
The government has also continued its policy of intimidating non-filers through higher rates, for example through stock market taxation. Such measures prevent businesses from entering the formal sector and listing themselves on the stock exchange. Interestingly, a tax credit for manufacturers selling to registered taxpayers was withdrawn as an effect was not seen in tax documentation. Perhaps it would be useful if the government made public the effect of increased taxes on non-filers, as such measures are consistently imposed in every budget.
The government has aimed for a lofty development plan this year, with the Public Sector Development Programme (PSDP) hiked to Rs 1001 billion, almost 40% higher than last year’s spending estimate of Rs 715 billion. A large chunk of this is being allocated to CPEC, at Rs 180 billion. The government showed hopes that an increase in development spending will spur job creation and encourage private sector investment.
Some salient features of the PSDP allocation are as follows:
- Infrastructure has been allocated 67% of the development outlay, at Rs 411 billion. This includes:
- Rs 320 billion for national highways
- Rs 43 billion for the improvement of railways
- Rs 44 billion for other projects including aviation
- CPEC-related projects will receive Rs 180 billion, which includes the development of road link networks and the port at Gwadar.
- The power sector has been assigned Rs 401 billion, including an ‘Energy for All’ project with an initial outlay of Rs 12.5 billion. Other energy project allocations include 76.5 billion for two LNG power plants in Balloki and Haveli Bahadurshah; Rs 54 billion for Dasu Hydro Power Project; Rs 21 billion for Diamer Bhasha Dam; Rs 19.6 billion for Neelum Jhelum Hydro Power Project; Rs 16.4 billion for the fourth extension of Tarbela Hydel Power, Rs 16.2 billion for a coal-fired plant in Jamshoro; and an unspecified allocation for nuclear power plants in Karachi and Chashma.
- The water sector has been given an outlay of Rs 38 billion this year, in addition to the aforementioned hydropower projects.
- Rs 35.7 billion will be allocated to the Higher Education Commission
- Allocations to the health sector include Rs 8 billion for a new program of hospitals and Rs 10 billion for the second phase of Prime Minister’s National Health Programme. Rs 12.5 billion has also been set aside for a ‘Clean Drinking Water for All’ program
The government has presented what appears to be an effective election year budget, with the usual revenue and relief measures, coupled with a high budget for development spending.
The relief measures introduced are commendable, though even well-meaning steps such as zero-rating and tax credits tend to fall flat because of administrative hurdles. There needs to be a considerable reduction in red tape to facilitate ease of doing business.
The country’s economic managers have not deviated from their policy of relying on indirect taxes which affects the poorest segments of society. Instead of these regressive taxes, there is a need to bring about structural reform in the taxation system. These reforms should ensure steps to make taxation lower, simpler and more predictable to discourage tax evasion and facilitate businesses in long term planning.
One way to make sure that budget reforms work for, and not against, citizens is to take civil society and the business community on the board prior to formulating the budget. This will prevent any unpleasant surprises and allow all stakeholders to weigh in on the effects of past measures as well. Only by making the budget more inclusive and the process more transparent can it be ensured that it achieves what it sets out to do.