As federal finance minister, Ishaq Dar, rose to present the federal budget for FY2014-15 in the National Assembly, he had an arduous task to perform in the backdrop of, by and large, missed targets for FY14. The three key targets; i.e. Tax revenue, Investment and Exports were down; the first by Rs 200 billion and the latter two, by 0.7 and 2.7 per cent of GDP, respectively.
True to form, Dar’s budget speech was full of lament for the inertia and flawed policies of the previous government and a rhetoric for the policies and hard work put in place by the present government. One may disagree with the policies of the PML (N) government but no one can fault it for not trying to correct the direction of the economy or allowing it to drift. A year in office, the PML (N) government may not have succeeded fully in correcting the direction but it surely has begun to turn it towards it.
The main elements of the budget strategy within a three-year timeframe have been stated to be (i) reduction in fiscal deficit, (ii) raising tax revenues, (iii) arresting inflationary pressures, (iv) resolving the energy crisis, (v) increasing exports, (vi) job creation, (vii) promoting investment, (viii) public debt management, (ix) protecting the poor sections of society, (x) strengthening of social safety-net programmes and (xi) development and promotion of information and communication sector. On the face of it, there is indeed an attempt to strengthen, restructure and consolidate, as the case may be, each of these elements.
Gross revenue receipts in the budget are estimated to be Rs 3945 billion, a 9.7 per cent increase over the revised estimates of FY14. Of this, taxes collected by FBR would be Rs 2810 billion. This would result in a 21.7 per cent increase in the provincial share in taxes for FY15 estimated at Rs 1720 billion. The net revenue receipts for the federal government are estimated at Rs 2225 billion while its current expenditure alone exceeds its revenue receipts by Rs 905 billion resulting in a federal deficit of Rs 1711 billion after accounting for a Rs 525 billion federal PSDP, other development expenditure (Rs 162 billion) and net lending (Rs 120 billion). The adverse situation is slightly mitigated by generation of a provincial surplus estimated at Rs 289 billion resulting in an overall fiscal deficit of Rs 1422 billion or 4.9 per cent of the GDP. Evidently this is rather a tight situation given the contingency of unforeseen expenditure because of the ongoing war against terror or any other adverse development. Federal subsidies have been estimated at Rs 23 billion, of which Rs 156 billion will be paid to Wapda/Pepco and Rs 29 billion to K-Electric on account of tariff differential. Based on past experience, this appears to be a gross under-estimation and it can be said with a fair degree of certainty that it is unlikely to hold during FY15. The US dollar 1.5 billion received from Saudi Arabia is parked in the budget documents under ‘Pakistan Development Fund’ for financing other development expenditure outside the FY15 PSDP.
The principles of his taxation proposals, as outlined by the finance minister in his speech are: (a) increase the share of direct taxes in overall taxes, (b) incidence of proposed measures on those outside the tax net and protection to those already in the net, (c) raise in the cost of doing business for non-compliant taxpayers, (d) simplification of tax regime and removal of inequities/distortions created by SROs in a phased manner, (e) improvement in tax-to-GDP ratio, and (f) incentives for foreign investment, agriculture and less developed areas of the country. The die for the budget is already cast by covenants of the IMF loan programme that Pakistan is in, and therefore most of the measures as announced had to be in consonance with its requirements and time-lines.
A genuine attempt has been made to increase the cost of doing business for persons not filing tax returns by imposing higher rates of withholding taxes. The net effect of these measures will be increased revenue for the exchequer but there is no certainty that these non-compliant persons will become compliant and not treat this burden as an indirect levy and pass it on to their counterparty. This in fact has been the sad saga of the all-encompassing withholding tax regime with high rates. However, there is a difference this time as the law discriminates in rates applied on compliant and non-compliant persons.
The much maligned and contested income support levy has been withdrawn and the Finance Ministry must be credited for not having made it a matter of ego as was being claimed by many. The reversal of capacity tax on beverages and cement has been reversed and it will now be charged on ad-valorem basis. Two of the proposals, i.e., the zero-rating of tax instead of exemption to not for profit entities and Alternate Corporate Tax appear to have been borrowed from India where they are in vogue. The FBR estimates that the latter measure would yield Rs 15 billion. The capital gains tax that was to be enhanced from 10 per cent to 17 per cent on shares as announced in the budget last year did not materialize. Under an understanding with the stock market players it has been fixed at 12.5 per cent with increased holding period to two as against one year. Bonus shares have been subjected to withholding tax of 5 per cent by changing the definition of income. It is estimated to yield Rs 15 billion but in all probability is likely to be challenged in courts and may also have a dampening effect on the stock market. This levy also militates against the government’s overt attempt to maintain buoyancy in the stock market keeping in view its intention to off-load shares of quite a few public sector entities on the bourse.
The budget proposes to bring expense allocation for banking companies in line with that allowed to other companies. This is likely to hit the profits of banks in a big way as thus far they have been allocating all their expenses to ‘mark-up’ business that attracts the highest rate of tax. This change in the law is estimated to yield Rs 13 billion. The revamping of exemptions to mutual funds is estimated to yield Rs 10 billion. The withholding tax on advertising agencies has been doubled from 5 to 10 per cent bringing it in conformity with a rate applicable on commission agents. The enforcement of filing of returns in Final Tax Regime cases by discriminating in tax rates is a welcome measure for increasing documentation in the economy and is estimated to yield Rs 13 billion. There had been a lot of talk about the so-called ‘SRO culture’ that bestows extraordinary benefits on its beneficiaries. The IMF too in its negotiations with the government is seized of this issue. The government has undertaken to phase out these SROs by either transposing them to schedules with certain changes or rescinding them altogether in a phased manner so as not to cause substantial dislocation as most of these SROs pertain to industry that also includes the highest export earner, textiles. In the budget proposals, seven SROs have been touched in the first phase. The transposition of SRO 575(I)2006 alone is estimated to yield Rs 14 billion.
The aggregate revenue effect of all the tax proposals is expected to be Rs 246 billion with the lion’s share coming from income tax at Rs 149 billion followed by Sales Tax and Federal Excise at Rs 48 billion and Customs Duties at Rs 34 billion. However, as the saying goes, the devil lies in the details. There is a whole plethora of notifications that form part of the budget documents and need to be analysed for their impact on business and trade and also the common man. Then there is also the consideration of how many of these proposals would steadfastly defend and adhere to once the powerful lobbies, particularly from Lahore and Faisalabad, the stronghold of the PML (N), that it finds very difficult to displease, come into play and start agitating.