The budget, according to the finance minister, seeks to reduce the fiscal deficit to 4.3 percent, raise revenue and investment to GDP ratio, address the energy deficit and promote exports besides consolidating and streamlining a host of other activities such as public debt management and the Benazir Income Support Programme. It is worth mentioning that a notable omission in the stated objectives is the stress on widening of the tax net as the basic instrument of raising the tax revenues rather than the tax rates. The reliance on an all encompassing tax withholding regime to collect revenue persists and the discriminatory rates of withholding for tax filers and non-filers, that has been further accentuated in the budget proposals for FY16, is expected to force non-filers to become compliant in order to reduce their high cost of doing business. The finance minister is of the view that this has yielded good results which it has. The revenue has increased but not the number of filers; and this is likely to be the case in the coming year because in the absence of a blanket amnesty for tax evaders to become compliant would be next to impossible.
At the time of the first budget that Dar presented in 2013, he had enunciated three objectives to fight off the immediate- and short-term challenges, viz: (a) avoiding a default by the country in 2014; (b) achieving macroeconomic stability by June 2015; and (c) embarking on economic growth for tackling unemployment and generate resources to alleviate poverty. During the tenure of the caretaker government in 2013 there was a move, that had the support of PML (N), to enter into an IMF programme for the obvious reason that it would have made life easy for the incoming government given the tough front loaded conditions of such a programme but that was promptly vetoed by the then President, Asif Ali Zardari. It therefore fell to the lot of Nawaz Sharif government to sign up with the IMF. It goes to the credit of the Sharif government, particularly the stewardship of Dar, that after two years of walking the tight rope, per capita income has increased, inflation, helped greatly by the fall in international prices of oil, has come down, FBR revenue has increased, fiscal deficit is curtailed to below 5 percent and forex reserves are substantially higher having risen from dollars 6 billion (of which $2 billion were because of swap that was payable in August $3.2 billion payable to the IMF during the year) to $17 billion. The build-up of these reserves is essentially a result of borrowing through international Sukuk and the IMF tranches but it cannot be denied that the Pakistan's credit rating by international agencies has improved largely because of the fiscal discipline and deft handling of the economy by the ministry of finance.
The revenue measures of the budget relate to mostly increasing rates of existing taxes and in some instances reducing the rate of certain taxes. Notable among these proposals is one time tax of 4 percent of income for banking companies and 3 percent for the rest, if the income is rupees 500 million or more. The proceeds from this tax are slated to be utilised for temporary displaced persons and are expected to be around rupees 24 billion. In order to coerce public companies except modarabas and banks to declare cash dividends, their reserves in excess of 100 percent of their paid up shall be taxed at 10 percent. The tax rate for companies has been reduced from 33 to 32 percent in compliance with the stated goal of reducing the tax rate by 1 percent every year till it reaches 30 percent. Tax credit has been allowed for enlistment on the bourse and investment in IPOs. This would also make privatisation of state assets more attractive. Salaried class, in the lowest bracket, has been provided a much needed relief and, on representation by the provinces the rates of withholding tax on transfer of vehicles and their tokens has been proposed. The rate of capital gain tax and holding period have been amended with an increase of 2.5 percent in each category and the holding period for a tax-free sale enhanced from 2 to 4 years. Banks would be subject to a 35 percent rate of tax on all incomes; however, contrary to the finance minister's expectation it will not result in compelling banks to lend to the private sector. Their first preference would remain the zero risk sovereign bonds. Advance income tax has been imposed on all banking instruments and modes of transfers for non-filers. Tax on dividend income has been increased by 2.5 percent to 12.5 percent.
Although inflation has come down substantially, yet the government feels that the compensation level for all government employees and its pensioners is low. To mitigate their hardship a 7.5 percent ad hoc relief allowance on running basic pay has been proposed for all federal government employees as against the recommendation of 5 percent increase by the committee formed for this purpose; and ad hoc increases given 2011 and 2012 merged in the pay scales. This too would create pressure for the provinces and loss-making PSEs to accord a similar increase to their employees. Minimum wage for Islamabad, Azad Kashmir Gilgit-Baltistan and Fata has been raised to rupees 13000 per month and this is bound to have an effect in the provinces and the private businesses that would follow suit.
The net revenue impact of taxation measures would be rupees 41.950 billion in Customs Duties, rupees 54 billion in Sales Tax and Federal Excise Duties and rupees 142.250 in Income tax. The proposed budgetary changes would therefore yield rupees 238.220 billion while the government proposes to raise rupees 15 billion through unspecified administrative measures, making a grand total of rupees 253.200 billion. A hallmark of this budget is the acceptance of nearly all proposals that the PTI government in KPK had suggested to spur economic activity in the province that has borne the brunt of the war on terror. We are pleased to see that the PML (N) government has heeded to the request. The five-year tax holiday proposed for industries that are set up in KPK, if handled deftly and prudently by PTI, and investors are offered a one-window operation, may well result in a beeline of investors and prove to be a game-changer for the province. Insofar as an 11.4 percent raise in Defence budget is concerned, this increase has been warranted by country's extraordinary security situation.
The budget was expected to focus on three major areas to correct the infirmities and vulnerabilities of economy to the next level. These included widening of the tax net of which there is not much to show for. None of the under-taxed sectors such as wholesalers and retailers have been targeted. The second is the energy sector reforms that the government has been found wanting on thus far. These basically involve privatising at least the profit-making Discos of which there are three, namely: Lesco, Iesco and Fesco. And finally, improving the business climate that would entail a drastic reduction in red tape, reducing harassment of taxpayers by FBR through spurious and baseless tax demands and improvement in law and order. Given the economic indicators it was expected that the budget would be more focused on growth than it is, but it appears that the finance minister has opted to move with caution.