Minister of State for Revenue Hammad Azhar began budget speech with criticism on the economic policies of previous administration vowed not to borrow from the State Bank of Pakistan for deficit financing to deal with the looming challenge of inflation, following heavy taxation measures unveiled for some edible items - sugar, cooking oil and ghee.
The outlay of the federal budget for fiscal year 2019-20 is Rs 7,022 billion, 30% higher against Rs 5,385 billion budget for the outgoing financial year with gross federal revenues estimated at Rs 6,717 billion as compared to Rs 5,661 billion budgeted for outgoing fiscal year, reflecting an increase of 19%. The FBR is expected to generate Rs 5,555 billion, reflecting the tax to GDP ratio of 12.6%.
Out of federal revenue collections, Rs 3,255 billion will be transferred to the provinces as compared to Rs 2,465 billion for the outgoing fiscal year with an increase of over 32% leaving the net revenue with federal government at Rs 3,462 billion during 2019-20 in comparison to the Rs 3,070 billion budgeted in the current year, which indicates an increase of 13%. Provincial surplus is estimated at Rs 423 billion during the financial year 2019-20 to limit the consolidated fiscal deficit estimated at Rs 3,151 billion or 7.1% of the GDP as against 7.2% of the GDP for outgoing fiscal year.
The minister of state said that certainly while making the budget government the object was welfare of the people and major emphasis would be on reducing the current account deficit from $13 billion to $6.5 billion and the government would support in terms of raw material intermediate goods duty structure, while tax refund would improve and free trade agreement would be reviewed to increase the exports. The minimum wage was announced to be increased to Rs 17,500 per month.
The minister said that a challenging target of Rs 5,555 billion for the FBR has been set and reduction in expenditure and civil and military services have shown exemplary gesture in this regard.
He said that tax reforms would be priority in the budget 2019-20 as only 2 million people are filing tax returns, adding 380 companies are paying 80 percent of the total tax.
Pakistan's tax to GDP ratio is 11.6% which is amongst the lowest not only in the region but also in the world whereas the current expenditure layout necessitates a tax to GDP ratio should be 20%. He said that civil administration cost is being reduced from Rs 460 billion to Rs 437 billion with five percent reduction and defence budget would be restricted to Rs 1,150 billion.
The government said it earmarked: (i) Rs 200 billion subsidy for those consuming less than 300 electricity units per month;(ii) Ehsaas Programme will benefit the extreme poor, orphans, widows, the homeless, others; (iii) and new ration-card scheme to provide nutritious food to 1 million deserving; (vi) 80,000 deserving poor to be provided interest free loans each month; (v) 6 million women to get stipends in their saving accounts; (vi) 500 Kifalat Centres to provide online access to free courses to women and children; (vii) BISP stipend will be increased to Rs 5,500 per quarter to 5.7 million poorest families and cash transfer to 3.2 million BISP children beneficiary families in 50 districts will be increased to Rs 1,000 from Rs 750 and programme will be expanded to 100 districts.
The Sehat Sahulat Card Programme will cover 15 million poor in all districts of Pakistan as well as low housing, addressing climate change through Billion Tree Tsunami and Clean and Green Pakistan are also government's priorities. The minister said that the government's medium-term inflation target will be in the range of 5 - 7%. The combined allocation of development spending is Rs 1,863 billion with Rs 951 billion with policy priorities are for water management, building a knowledge economy, fixing electricity transmission and distribution, low-cost hydel power generation, China-Pakistan Economic Corridor, investing in human and social development and public private partnership in eligible sectors such as highways.
An amount of Rs 70 billion has been allocated for water resources including Rs 20 billion for land acquisition for Diamer-Bhasha Dam and Rs 15 billion for Mohmand Dam hydel power project. Around Rs 200 billion are allocated for road / rail networks, Rs 80 billion are allocated for energy sector, Rs 58 billion for human development / knowledge economy, Rs 12 billion for agriculture, while Quetta development package will get Rs 10.4 billion and 9 projects of Karachi Development Package costing Rs 45.5 billion would also be undertaken.
The Prime Minister's scheme of 5 million houses will benefit 28 industries. Projects for 25,000 housing units at Rawalpindi / Islamabad and 110,000 units in Balochistan have been inaugurated and for self-employment for youth, Rs 100 billion are allocated for low-cost loans for entrepreneurs to set up/expand businesses.
To boost job creation, the government is providing a series of subsidies and incentives to industrial sector which included; (i) Rs 40 billion subsidies to industry for electricity and gas; (ii) Rs 40 billion for export development package; (iii) and the government will continue to provide long-term trade financing.
He said that measures have been taken to improve agriculture sector for increase in yields of wheat, rice, sugarcane and cotton and Rs 44.8 billion shall be provided for this purpose. For harnessing untapped potential in fisheries through shrimp farming, cold water trout farming etc, Rs 9.3 billion shall be spent. For undertaking livestock initiatives for small and medium farmers, Rs 5.6 billion will be provided for backyard poultry and Save the Buffalo Calf Programme while subsidy to agriculture sector would continue and Rs 2.5 billion have been proposed for crop loan insurance for small farmers. He said that a detailed plan will be unveiled for PSEs, however, two LNG power plants are being privatised for expected proceeds of $2 billion.
He said that Rs 1.6 trillion circular debt has been a major challenge and gas sector faces the similar situation where circular debt is of Rs 150 billion. An aggressive campaign was launched against theft and over Rs 80 billion were recovered in the last six months, while circular debt was reduced from Rs 38 billion per month to Rs 24 billion per month.
The federal government will allocate Rs 152 billion for development of districts that were previously part of FATA. He said China-Pakistan Economic Corridor continues to be the priority of the present government and allocation has also been made for the ML-1 railway project for revamping the railway sector.
On the issue of anti-money laundering, the minister stated that money laundering is a menace and source of bad publicity for the country with serious economic cost and the government will introduce a completely new regime to curb the practice of trade-based money laundering. The greater autonomy is being awarded to State Bank of Pakistan in determination of monetary policy which is used for controlling inflation and a treasury single account has been created disallowing government money to be parked in commercial bank accounts.
The government also announced ad hoc relief allowance @10% on running basic pay of BPS 2017 to civil government employees from pay scale 1 to 16 and @ 5 percent for grade 17-20 while there would be no increase in salary for BPS-21 and BPS-22 officials. The increase in net pension @10% was announced for all civil and armed forces pensioners of the federal government and special conveyance allowance for disabled employees will be enhanced from Rs 1,000 per month to Rs 2,000 per month. Special pay admissible to SPS/PS/APS to ministers, ministers of state, parliamentary secretaries, additional secretaries, and joint secretaries will be enhanced by 25%.
The minister for state and revenue termed the tax policies introduced by the previous governments as faulty as they provided excessive tax relief and at present out of a population of 220 million people, only 1.9 million are filers of income tax return, and out of these only 183,000 paid tax with their annual returns.
The minister said that standard rate of 17% GST on brick kilns was decreased to a fixed rate based on location; (ii) reduced rate of Sales Tax on food supplied by restaurants and bakeries to 7.5%; (iii) reduction of rate of Sales Tax on concentrated milk (powder) sweetened at 10%; (iv) zero-rating on export of PVC and PMC to Afghanistan and Central Asian Republics; (v) extended exemption from tax on import of industrial raw materials and plant and machinery also in FATA; (vi) withdrew 3% value addition on import of mobile phones and all commercial imports; (vii) special procedures/ rules are being abolished and made part of the Sales Tax Act. All redundant SROs are also being rescinded, he added.
The government also rescinded SRO 1125(1)/2011 that provides for zero-rate of sales tax on inputs and products of five export-oriented sectors i.e. textile, leather, carpets, sports goods and surgical goods.
The reduced rates SRO No 1125 be rescinded, thus restoring standard rate of 17%. The rate of sales tax on local supplies of finished articles of textile and leather and finished fabric may be raised to 15% and 17%, respectively, zero-rating of utilities be withdrawn, refund of sales tax to these sectors be automated and sent to SBP for payment, while ginned cotton which is presently exempt is proposed to be subjected to reduced rate of 10% GST.
The government also restored normal tax regime for steel sector and the special procedure has been scrapped and increased fixed value of gas supplied to CNG dealers. The government also increased sales tax on sugar from 8% to 17 %.
The minister said that the government has imposed reduced rate of sales tax on gold, silver, diamond and jewellery and announced to remove 3 percent value addition tax on petroleum products.
The FED on aerated waters has increased from 11.5% to 14%, and the government restored normal procedure for increase in FED on ghee/cooking oil, vegetable ghee and cooking oil. The FED on packaged non-aerated was introduce at rate of 10% of retail price and FED increased to Rs 2 per kg from Rs 1.50 per kg. The FED on import of LNG has been changed from Rs 17.18 per 100 cubic meter to Rs 10 per MMBTU as for local gas. The FED slabs are introduced as cars from 0 to 1000cc at 2.5%, cars from 1001cc to 2000cc, 5%, and cars from 2001cc and above at 7.5 %. The FED on cigarettes has been increased that would mobilise Rs 147 billion revenue compared to estimated Rs 114 billion for 2018-19.
The government also withdrew restriction on purchase of property of above Rs 5 million, and introduced tax credit for persons employing fresh graduates.
The revenue measures included increase in tax rates for salaried and non-salaried persons at threshold at Rs 600, 000 for salaried persons and Rs 400,000 for non-salaried persons. In the case of salaried individuals deriving income exceeding Rs 600,000, it is proposed to introduce eleven taxable slabs with progressive tax rates ranging from 5% to 35%. For non-salaried persons deriving income exceeding Rs 400, 000, it is proposed to introduce eight taxable slabs of income with tax rates ranging from 5% to 35%.
The government has announced to freeze tax rates for companies at 29% and proposed that receipt of gift may be included in the definition of income from other sources. However, certain exclusions are also proposed to facilitate genuine gift transactions which are not meant to evade income tax and as such gifts from relatives are proposed to be excluded.
The government also announced that tax credit facility for companies may be allowed to those companies which purchase and install plant & machinery up to 30th June, 2019. Further for the tax year 2019, the government stated that tax credit may be reduced from 10% to 5% of the purchase value of machinery and in order to provide a level playing field it is proposed that withholding tax at the rate of 15% of the gross amount of royalty may be deducted from resident persons.
The income from capital gains on open plots is proposed to be taxed at 100% where the open plot is sold within one year and for period up to ten years by reducing gain on the basis of net present value. Income from capital gains on constructed property is also proposed to be taxed on similar lines but with a difference of holding period.
The FBR rates of immovable properties would be taken closer to or about 85% of actual market value. As the increase in FBR values of immovable property is going to increase the incidence of tax on genuine buyers and sellers, it is proposed that rate of withholding tax on purchase of immovable property may be reduced from 2% to 1%.
The government in order to stop the misuse of this threshold, the withholding tax on purchase is proposed to be collected irrespective of the value of property. It is proposed that withholding tax on sale of property be collected irrespective of the holding period to bring it in line with the proposed treatment of capital gains.
At present, final tax regime is available for commercial importers, exporters, commercial suppliers of goods, contractors, persons earning income from prizes and winnings, sellers of petroleum products, persons deriving brokerage or commission income and persons earning income from CNG stations. In order to tap the actual tax potential, the tax collected or deducted from these transactions is proposed to be treated as minimum tax except for exporters, prizes and winnings and sellers of petroleum products. This is a step towards gradual phasing out of Final Tax Regime.
Further, tax rate of dividend is proposed at 25% for companies which enjoy exemption of tax on income or where no tax is payable due to availability of tax credits or due to brought forward business or depreciation losses. The initial depreciation allowance on buildings may be withdrawn being in consistent with the total life of buildings.
The rate of withholding on profit on debt is also proposed to be enhanced from 10% to 15%. Further, the separate rates mentioned above would be applicable for profit on debt up to Rs 36 million and for amounts exceeding Rs 36 million the profit on debt will be made part of the total income and taxed at normal rates.
The government has, therefore, proposed that any amount of commission paid in excess of 0.2 percent of the gross amount of supplies shall be disallowed unless the dealer is registered under the Sales Tax Act, 1990. The government has proposed that the threshold may be reduced from Rs l0 million to Rs 5 million for explaining the source of investment through foreign remittance.
It is observed that banks generally do not offer for taxation the provisions which were previously allowed but later on reversed. It is therefore proposed that reversal of provisions already allowed be made taxable by inserting an explanation in the Seventh Schedule.
Presently, banks are allowed to claim deduction in respect of provisions classified as "doubtful" and "loss". It is now proposed that deductions in respect of provisions classified as "loss" may be allowed.
The customs duty on more than 1600 tariff lines, being raw materials and intermediaries in principle, is being exempted in this budget. This measure will cause a revenue loss of around Rs 20 billion but much higher gains are expected in return from industrial growth. To support the textile sector, there is exemption of duty on various accessories and parts of textile machinery.
Similarly, duty on elastomeric yarn and non-woven fabric is to be reduced, basic raw material for paper production i.e. wood pulp and paper scrap, may be exempted from customs duty and duty on different types of paper may be reduced from 20% to 16%. To promote non-traditional exports, duty on some of the inputs of wooden furniture and razor manufacturing may also be reduced, from 3% to 0% on wood and from 11% to 3% on wooden veneering panels, to save local forests and to encourage furniture manufacturers.
The duties on solar assemblers and chemical industry, duties on their inputs like parts/components of home appliance, aluminum plates, metal surface agents and ascetic acid may also be reduced.
The minister further stated that in order to encourage investment in large scale manufacturing, exemption of duty is also being proposed on import of plant & machinery for setting up hydrocracker plants for oil refining. To reduce cost of medicines for general public, 19 items of raw materials and essential items of medicinal use are being proposed to be exempted from 3% import duties and to promote exports different export facilitation schemes are being simplified. It is being proposed that the rate of additional customs duty may be enhanced from existing rate of 2% to 4% and 7% on tariff slabs of 16% and 20%, respectively, which in principle are finished products, including luxury items. Presently, LNG is exempted from customs duty. Since LNG has replaced furnace oil which was subjected to 7% customs duty, it is being proposed to levy 5% customs duty on the import of LNG.