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BUDGET 18-19

BUDGET 18-19

It’s quite enigmatic

On April 27th, the outgoing PML-N government unveiled its sixth and the last budget which is characterized by relief measures in taxes, higher spending on subsides and increase in salaries for government employees. In his budget speech, the federal finance minister Miftah Ismail announced an expenditure of Rs5.246 trillion for the next fiscal year – 8 percent higher over Rs4.857 trillion for the fiscal year 2017-18 – with total revenue forecast at Rs 5.661 trillion and growth target of Rs 6.25 percent. In the budget, the share of the provincial governments is projected at Rs2590 billion for the next fiscal year as opposed to Rs2316 billion for the outgoing fiscal year, higher by 11.8 percent, which leaves net revenue of the federal government after provincial transfer at Rs3.070 billion as compared to revised estimates of Rs2676 billion for the outgoing fiscal year.

Following are some salient features of the budget 2018-19 followed by an analysis on the same:

Salient Features

The budget 2018-19 has the following salient features:

(a) The total outlay of budget 2018-19 is Rs 5,932.5 billion. This size is 16.2% higher than the size of budget estimates 2017-18.
(b) The resource availability during 2018-19 has been estimated at Rs 4,917.2 billion against Rs 4,713.7 billion in the budget estimates of 2017-18.
(c) The net revenue receipts for 2018-19 have been estimated at Rs 3,070.4 billion indicating an increase of 4.9% over the budget estimates of 2017-18.
(d) The provincial share in federal taxes is estimated at Rs 2,590.1 billion during 2018-19, which is 8.6% higher than the budget estimates for 2017-18.
(e) The net capital receipts for 2018-19 have been estimated at Rs 443.1 billion against the budget estimates of Rs 552.5 billion in 2017-18 i.e. a decrease of 19.8%.
(f) The external receipts in 2018-19 are estimated at Rs 1,118 billion. This shows an increase of 33.4% over the budget estimates for 2017-18.
(g) The overall expenditure during 2018-19 has been estimated at Rs 5,932.5 billion, out of which the current expenditure is Rs 4,780.4 billion and development expenditure is Rs 1,152.1 billion. (h) The share of current and development expenditure respectively in total budgetary outlay for 2018-19 is 80.6% and 19.4%.
(i) The expenditure on General Public Services is estimated at Rs 3,340.4 billion, which is 69.9% of the current expenditure.
(j) The development expenditure outside PSDP has been estimated at Rs 180.2 billion in the budget 2018-19, which is higher by 18.4% than budget estimates 2017-18.
(k) The size of Public Sector Development Programme (PSDP) for 2018-19 is Rs 1,650 billion. Out of this, Rs 850 billion has been allocated to provinces. Federal PSDP has been estimated at Rs 800 billion, out of which Rs 420.4 billion for Federal Ministries/Divisions, Rs 246.1 billion for Corporations, Rs 5 billion for Pakistan Sustainable Development Goals (SDGs) and Community Development Programme, Rs 8.5 billion for Earthquake Reconstruction and Rehabilitation Authority (ERRA), Rs 5 billion for Special Provision for Completion of CPEC Projects, Rs 10 billion for FATA 10-year Plan, Rs 45 billion for Relief and Rehabilitation of IDPs, Rs 45 billion for Security Enhancement, Rs 10 billion for Prime Minister’s Youth Programme and Rs 5 billion for Gas Infrastructure Development Cess.
(l) To meet expenditure, bank borrowing has been estimated for 2018-19 at Rs 1,015.3 billion, which is significantly higher than revised estimates for 2017-18.

Analysis

BUDGET 18-19The presentation of the federal budget is normally the most important policy statement that a government makes prior to the commencement of new fiscal year because apart from the receipt and expenditure accounting, it lays the direction of the government’s priorities in the economic realm. In its fifth and final year, the PML(N) government has availed the opportunity to present the budget for fiscal 2019, the sixth budget of its five-year term that Miftah Ismail, who was sworn in as its finance minister hours before the presentation of the budget, laid before the National Assembly. As expected, the budget speech, like the Economic Survey, highlighted the achievements of the government and success of its policies with plenty of tax relief spread all round to reflect fully that it is an election year’s budget.

The total outlay of the budget is estimated at 5932.5 billion rupees, representing an increase of 16.2 percent over the budget estimates of the current fiscal year with net revenue receipts at Rs 3070.4 billion. The resource availability is estimated at Rs 4917.2 billion with the provinces’ share in federal taxes estimated at 2590 billion rupees. There is an unusually high reliance on borrowing from the banks in the budget document of rupees 1015 billion which is almost twice the size of borrowing from the banks in the current fiscal. The provinces would be required to generate a surplus of 286.6 billion rupees to curtail the budget deficit and once again, there are no receipts expected from privatization. In other words, it has been left to the next elected government to decide on this issue in accordance with its manifesto and priorities. The overall expenditure during the next fiscal has been estimated at rupees 5932.5 billion, out of which the current expenditure is rupees 4780.4 billion and development expenditure is 1152.1 billion rupees.

BUDGET 18-19The finance minister in his speech identified the key targets on the budget strategy that seek to achieve real GDP growth rate of 6.2 percent, keep inflation under 6 percent, obtain tax-to-GDP ratio of 13.8 percent, contain budget deficit at 4.9 percent of GDP, build up forex reserves to 15 billion dollars and continuation of social protection programmes. To achieve these goals, the FBR tax revenue target has been fixed at 4435 billion rupees. The budget also proposes to leave the business of subsidies to the agriculture sector to the provincial governments while the federal government will focus on research and development in this sector and bringing about improvements in management, labour practices and technology.

For the first time in decades, Karachi, the country’s commercial, financial and business hub and also its largest metropolis finds mention in the federal budget document separately. The budget visualizes a new scheme of seawater desalination to mitigate the severe shortage of water in Karachi. The plant is proposed to be built by the private sector in partnership with the federal government. Apart from that, the federal government will also fund a Rs 25 billion development package for Karachi.

Besides a reduction in tax rates of income tax for individuals, firms and companies, the budget also proposes steps that may contribute to the ease of doing business and curtail the discretionary powers of tax collectors. It is a fact that businesses are extremely wary of tax audits as they involve a lot of hassle and cost to the taxpayers and generate a lot of corrupt practices in the process. It is now proposed that there will be only one audit in three years and selection of such audit will be risk-based and composite, i.e., for all the three FBR taxes; federal excise duty, income tax and sales tax. Previously, the grant of stay by the Commissioner (Appeals) was subject to payment of 25 percent tax demand which is proposed to be reduced to 10 percent. There should not be any requirement of payment of any part of the demand to get a stay of demand. In fact, provisions only serve to harass the taxpayer and generate constitutional petitions in the high courts to circumvent the payment of a part of the demand thus unnecessarily contributing to an abnormal increase in litigation in courts.

BUDGET 18-19The four ordinances that have been promulgated by the government with respect to amnesty of foreign and domestic assets are part of the finance bill and, if passed, would pave the way for businesses and individuals to benefit from this one-time offer. There is, however, a catch as regards real estate being declared under the domestic assets amnesty because of the involvement of the provincial governments in the scheme. Unless the provinces agree to the federal government’s scheme, this would be a non-starter as bulk of the undeclared wealth is parked in domestic real estate. Although the tax rate on REIT dividends has been proposed to be reduced from 12.5 percent to 7.5 percent, the government should also consider reducing the rate of tax on dividends from companies from the present rate of 12.5 percent to 10 percent as was previously the case. The progressive reduction in the rate of super tax and on undistributed profit is a welcome move but the reversal of the tax structure for holding companies that should have been made as was legitimately demanded by corporate has not been made. This is indeed a disappointment. The reduction in the value addition tax on LNG import from 3 to 2 percent and sales tax on LNG distribution companies from 17 to 12 percent would bring a sizeable relief to the LNG consumers particularly the businesses that are located in the Punjab, the only gas-deficient province of the country.

The levy on petroleum products is proposed to be doubled from the present maximum of 10 rupees per litre to 20 rupees per litre with the proviso of the maximum being raised to rupees 30 per litre should the need arise. This would lead to a significant increase in the cost of production because of a substantial rise in transportation cost. The reduction in the tax rate of 0.6 percent to 0.4 percent for non-cash bank transactions of non-filers may appear to be surprising when the declared goal is to make life more costly for non-filers. This measure, however, is aimed at providing relief to expatriate Pakistanis who have bank accounts in the country and are subjected to this tax on their transactions.

The proposed reliefs and enhancement in rates of FBR taxes tantamount to net revenue impact of 22.775 billion rupees in customs duties and 21.440 billion rupees in sales tax gain whereas on the income tax side, it would result in a loss of 135.394 billion rupees. The overall hit to the FBR revenue would thus be 91.179 billion rupees. It is, therefore, pretty obvious that this being an election year these budget measures would be significantly revised by the next government in office after the general elections in the first half of fiscal year 2019.

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