Investment occupies pivotal position in the growth equation. Governments employ combination of fiscal and monetary policies to optimize investment activity so as to create jobs and achieve higher economic growth — the two major macroeconomic goals. In the federal budget for 2015-16, the government of Pakistan has adopted several tax measures as fiscal instruments to encourage investment activity in the country.
As tax exemptions and concessions are considered against the principle of equity and fair play, the Government of Pakistan has decided to withdraw discriminatory tax exemptions and concessions to provide level playing field to all sectors of economy where they have equal chances of competing and growing. It is worth mentioning that several tax exemptions on account of income tax (Rs.83.6 billion), sales tax (Rs.478.4 billion) and customs duty (Rs.103 billion) have caused revenue losses to the tune of Rs.665 billion during 2014-15. The major beneficiaries of income tax exemptions were independent power producers (IPPs) as they enjoyed tax exemptions of Rs.51.5 billion out of total income tax exemptions of Rs.83.6 billion.
To attract investments in agriculture sector, which contributes around 21pc of GDP and employs more than 45pc of workforce, several measures have been announced in the budget.
The companies that will set halal meat production plants and obtain halal meat certification by December 31, 2016 will enjoy tax exemption for four years. It is expected that this measure will attract huge investment in the halal meat industry and will help in boosting halal meat exports.
It is not out of place to mention here that halal meat market caters to 1.8 billion Muslims all over the world. Pakistan’s total halal meat exports hovered around $230 million in 2014. The size of global halal market is expected to swell to $2 trillion by 2030 from currently $635 billion. Amazingly only 20pc halal market producers are Muslim countries and the remaining 80pc are non-Muslim ones such as Australia, Brazil, India, etc. Pakistan ranks 5th in world in cattle and buffalo population but 18th in halal meat exports — with only 0.26pc share in global market.
Pakistan can easily increase its share in global halal meat exports. It’s a Muslim country where animal feed is 100pc organic. Almost 60pc of its rural population is associated with farming. It has vast rangelands and abundant labour resources. Its location too offers it large halal meat market. Above all, meat produced in the country is better in quality than that of other halal-meat-exporting countries such as Brazil and Australia, due to less-fat contents.
However, there is a need to overcome supply side constraints in order to boost halal meat exports. Raw material in halal meat industry is animals. But, the shortage of animals has been posing serious problems in ensuring consistent supply in terms of number and quality due to export and illegal trade of live animals.
To increase investment activity in the agriculture sector, others measures adopted include:
(a) Income tax holiday for 3 years for new industrial undertakings engaged in setting up and operating cold chain facilities, and setting up and operating warehousing facilities for storage of agriculture produce. Increasing storage capacity for agriculture produce is essential for preserving excess supply in case of bumper crops and to stabilize the market by ensuring smooth supply.
(b) Exemption from minimum tax for the tax year 2015 to rice mills suffering from low global demand. This year, there was considerably low price for paddy due to low demand and the farmers and businesses were adversely affected.
(c) Exemption from withholding tax on supply of agricultural produce extended to supply of fish.
(d) In order to promote farm mechanization and enhance productivity non-adjustable sales tax at reduced rate of 7pc, instead of existing rate of 17pc has been imposed. Remembering, mechanized farming is required to increase per hectare yield and to avert any incidence of food insecurity.
(e) Interest-free loans of up to Rs.1 million for setting up new solar tube wells or replacing the existing ones with solar shall be provided in order to facilitate the small growers and to reduce heavy expenditure incurred on diesel- and electricity-run tube wells.
Manufacturing — large and small scale — is an important sector of growth. A number of incentives have been offered to manufacturers in the budget.
(a) If a company, being a manufacturer, is set up during next three years and it employs more than 50 employees duly registered with Social Security and Employees’ Old-Age Benefits Institution, an employment tax credit equal to 1pc of the income tax payable for every 50 employees shall be provided to the company, subject to a maximum of 10pc. On demand of various investors and business community, this exemption is being extended up to 30th June, 2017.
(b) Exemption from income tax for 5 years is being granted to industrial undertaking engaged in the manufacturing of equipment, plant and items required to produce solar and wind energy.
Construction sector has a ripple effect and impacts other sectors of economy. Measures adopted in the budget to boost construction activity include:
(a) Mark-up on housing loans obtained by individuals from banks and other institutional lenders for construction or buying a house to be allowed as a deduction against income up to 50pc of taxable income or Rs.1 million.
(b) Similarly, the minimum tax on builders leviable for the business of construction and sale of residential and other buildings is being suspended for a period of three years.
(c) Furthermore, capital gains of any person who sells a property to a real estate investment trust (REIT) development scheme formed for the development of housing sector will be exempt from Income Tax up to 30.6.2018. Supply of bricks and crushed stone will be exempted from Sales Tax for three years up to 30.6.2018.
(d) Last but not least, on import of construction machinery in used condition by the Construction Companies registered with Pakistan Engineering Council and SECP, the customs duty is reduced to 10pc.