Positives and Negatives of Pakistan Budget 2014-15

Posted on June 5, 2014 by islamiceconomicsproject

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Salman Ahmed Shaikh
Recently, Finance Minister of Pakistan, Ishaq Dar announced budget for Pakistan
economy for the fiscal year 2014-15. Below, we try to briefly analyze the positi
ves and negatives of the budget.
Positives of Budget include the following measures:
Corporate tax rate reduced to 33%.
Maximum general tariff rate of 30% is reduced to 25%.
For textile sector, tax credits is allowed on garments (4%), Made ups (2%) a
nd Processed fabrics (1%). Plus, an extension of duty free import of machinery f
or another two years. A training program with a cost of Rs 4.4 billion is also a
nnounced to enhance the quality of final products. Mark-up on long-term financin
g facility is also reduced from 11.4% to 9%.
For retailers, sales tax at 5% is announced in case of monthly electricity b
ill up to Rs 20,000 and at 7.5% of the monthly electricity bill exceeding Rs 20,
000. For other retailers that operate international franchises or operate in air
-conditioned malls, normal GST regime will be applied.
To encourage electricity generation from local coal, it is proposed to exemp
t the profits and gains of coal mining projects in Sindh supplying coal exclusiv
ely to power generation projects and also to tax their dividends at a reduced ra
te of 7.5%.
For domestic electricity consumers, it is proposed to collect adjustable adv
ance tax at 7.5% on the monthly bill of above Rs 100,000.
To discourage perpetual declaration of losses or very low income using tax a
voidance means by companies, an alternate corporate tax at 17% is proposed to be
imposed on accounting income. The companies shall have to pay ACT or corporate
tax whichever is higher. In order to facilitate companies that have genuinely lo
w income for some period of time, the ACT paid is proposed to be carried forward
up to 10 years.
To broaden the tax net, it is proposed to make obtaining NTN a compulsory co
ndition for obtaining commercial/industrial electricity and gas connections.
In order to discourage CGT avoidance in bonus shares, it is proposed that bo
nus shares be treated as dividend and tax shall be deducted at the rate of 5% on
the ex-bonus price of the shares.
Currently, foreign institutional investors in stock exchanges are neither vo
luntarily paying due taxes on capital gains by filing returns nor are they subje
ct to deduction of tax like many other investors. It is proposed to bring FIIs u
nder the WHT regime.
10% raise is announced in government employees salary. Minimum wage is also r
aised by Rs 2,000, minimum pension by Rs. 1,000 and BISP funds per family are al
so raised from Rs 1,200 to Rs 1,500.
Export Refinance Rate is reduced from 9.4% to 7.5%. Export focused bank is t
o be established as well.
Karachi-Lahore motorway, agriculture credit and insurance and 10% reduced GS
T on tractors are further steps in the right direction.
Government, through SBP, will provide guarantee to commercial, specialized a
nd micro finance banks for up to 50% loss sharing.
Rs 81.12 billion allocation for establishing new hydropower projects.
FED from telecommunication services is withdrawn from those provinces which
have imposed GST on telecom services. In areas where FED shall continue to be co
llected, the rate is proposed to be reduced from 19.5% to 18.5%. WHT on telephon
e services is also reduced from 15% to 14%.
Additional tax for those persons who did not file income tax returns 5% for
dividend income, 5% for interest income above Rs 500,000, 0.2% for cash withdraw
als from banks and 0.5% in case of advance CGT collected from the seller of immo
vable property.
The rate of tax on advertising agents has been raised to 10% from 5%; exempt
ion from deduction of WHT be withdrawn on foreign news agencies; the rate of tax
on dividend distributed by Mutual Funds to companies in respect of interest inc
ome shall be 25%, instead of 33%, applicable to companies.
Five-year income tax exemption will be given for setting up processing plant
s for locally-grown fruits in Balochistan, Malakand Division, Gilgit-Baltistan a
nd Fata. Customs duty and sales tax will also be exempted on import of equipment
for these areas.

Negatives of the budget include the following measures:
Current expenditure has been estimated to be higher than the revised estimat
es for 2013-14 by 8.3%, while development expenditure is lower by 2.4%.
PSDP was originally Rs 540 billion for 2013-14. Now, Rs 525 is erroneously b
ut deliberately compared to the revised lower allocation of Rs 425 billion for 2
013-14. Comparing the original allocations, PSDP allocation has actually gone do
wn by Rs 15 billion.
Again defense expenditure and interest payments on debt will eat up almost 8
0% of tax revenues.
Corporate tax rate is now reduced to 20% if the investment is in a new indus
trial undertaking to be set up by 30.06.2017 and at least 50% of the project cos
t including working capital is through FDI in equity. While tax relief is good,
but existing local investors are discouraged this way.
WHT on marriage functions is being reduced by 5% from 10% level.
Advance tax of 1% on the purchase of immoveable property may encourage peopl
e to under report property value further.
No mention of how to control debt to GDP ratio.
Tax to GDP ratio is destined to be brought to 13% without any significant me
asures to increase tax net. There is heavy reliance on WHT. For documentation an
d tax liability computation; FBR is heavily relying on proxies like electricity
bills. But, even in urban and especially in rural areas and small cities, electr
icity theft is easy.
10% FED on locally made motor vehicles exceeding 1800cc has been withdrawn w
hile customs duty on used imported cars has been increased by 10%. Automobile se
ctor had been pampered for decades. While subsidies on basic essentials are redu
ced, but continuing further protection to the uncompetitive sectors defies justi
fication.
KSE earned around 50% returns in last 2 years consecutively. No reason why C
GT be kept low if there are gains of this much magnitude and especially if parti
cipation is dominated by institutional investors.
Rupee appreciation will make exports expensive. Plus, oil import bill will p
ut further pressure on rupee. If rupee has to be kept at the current level, then
poor people must be provided with relief on inflation front. Inflation of 9% is
still very high given just 4% growth.
Finance Minister said introduction of 3G and 4G technology would create jobs
for about 9,00,000 youth in the next four years. It seems very ambitious given
that the increase will be about 5% of total non-agricultural employed individual
s. It is not explained how it will be achieved?
Fiscal deficit which was 8%+ suddenly comes down to 5.8%. This is strange es
pecially when the tax revenue target was also underachieved and expenditures did
not come down.
Investment to GDP ratio was targeted to rise by 20%. That too is not explain
ed clearly especially amidst very lower returns on bank deposits, higher governm
ent domestic borrowing, higher inflation, lower real growth in per capita income
s and security and energy crisis.
Import to GDP ratio has climbed and exports to GDP ratio has declined in las
t few years. That is due to stagnant exports growth, decline in manufactured exp
orts as a ratio of total exports and heavy reliance on imported sources of fuel.
More than housing at the moment, people need to be provided with long term r
elief by resolution of energy crisis. Saving poor from death is important than l
aptop, higher education and even housing at the moment.
For FY15, the government will borrow Rs 914 billion from domestic sources, R
s 508 billion from external sources and Rs 289 billion will be saved by four pro
vinces from their budgets. Pakistan debt to GDP ratio exceeds 60%. But, in Pakis
tan, banking population is just 12%. Banking assets to GDP ratio is lower as com
pared to other developed regions. So, when government finances more than 50% of
its debt from domestic loanable funds market, it leads to higher interest rate m
ore elastically and that crowds out private investment. Private sector financing
to GDP ratio in last 8 years or so substantiates that.
Tax on services is raised from 6% and 7% for corporate and non-corporate tax
payers respectively to 8% and 10%.
FED on cement is levied at 5% on retail price while the cement sector was al
ready paying sales tax, running at 70% capacity and may face decline in export d
emand further in post NATO exit 2014 scenario from Afghanistan.
Education budget allocation in real terms declined by 11%. 75% of it is conc
entrated in higher education where people have better means of securing scholars
hip themselves while primary and secondary education is not given equal attentio
n.
Steel sector tax rate has been enhanced from Rs 4 to Rs 7 per unit of electr
icity. Steel, cement and other LSM sectors usually have procyclical demand, so i
n an effort to take-off the economy towards growth, pre-production incentives sh
all precede more taxation.
Tax concessions are post production incentives. Right now, industries with l
iquidity constraints need pre-production incentives like 1) cheaper financing so
urces from banks and capital markets, 2) improved infrastructure support, 3) pol
itical and policy stability and most importantly, 4) increase in energy supply t
hat can make the industries competitive.