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Budget FY 2019-20 in the backdrop of a complex economic situation

The present government unveiled its first full budget with total outlay of Rs. 7.022 trillion for FY 2019-2020. Following is the backdrop in which the budget was announced:

  1. High fiscal deficit @ 6.5% of GDP.
  2. Current account deficit highest in recent history @ 6.3% of GDP.
  3. Significant budget spent on debt servicing.
  4. Depleted forex reserves; insufficient for 2 months of imports.
  5. Economic growth rate @ 3.3%.
  6. Inflation @ 8.8%.
  7. SBP policy rate @ 12.25%.
  8. Weakest currency in Asia.

According to government, the budget is based on the following guiding principles:

  1. Managing the external deficit.
  2. Reduction of fiscal deficit.
  3. Enhanced collection of taxes.
  4. Austerity.
  5. Protection of vulnerable segments through subsidy to low electricity consumers, Ehsaas, Sehat Sahulat, and low cost housing.
  6. Fighting inflation.

Out of the Rs. 7.022 trillion, Rs. 1,100 billion has been earmarked for defense. Rs. 24 billion have been earmarked for an atomic energy commission, Rs. 16 billion for railways ministry, Rs. 300 million for the nuclear regulatory authority, Rs. 36 billion for finance division, Rs. 10 billion for PM’s youth program, Rs. 10 billion for development programs in merged districts. The government plans to spend Rs. 925 billion on development projects. Funds worth Rs. 371 billion have been kept for infrastructure facilities, Rs. 70 billion for water projects, Rs. 20 billion for health and population, Rs. 32 billion for education programs, and Rs. 8 billion to improve the climate. Funds worth more than Rs. 200 billion have been earmarked for motorways and transport. The government has kept Rs. 177 billion for the constructions of new roads and motorways, while Rs. 48 billion will be spent on the new projects of the National Highway Authority.

 

Some of the salient features and highlights of the budget are mentioned below:

  • Sales tax of 17% restored for five export-oriented sectors.
  • Minimum monthly salary set at PKR 17,500.
  • GST maintained at 17%.
  • 3% VAT reduction on mobile phone imports.
  • Tax on immovable property decreased from 2% to 1%.
  • Non-filers can now purchase property.
  • PKR 200 billion subsidy on electricity for consumers that use less than 300 units of electricity per month.
  • 10% decrease in salaries of cabinet.
  • 5% duty imposed on LNG.
  • 10% tax will be imposed on milk, cream, and flavored milk items.
  • Corporate tax rate fixed at 29% for the next two years.
  • 2.5% excise duty imposed on 1000cc cars and above.
  • Food items supplied to bakeries and restaurants will be taxed at 4.5%.
  • Depreciation and brought forward losses excluded for calculation of super tax of banking, insurance, oil, and mineral exploration companies.
  • Sales tax on sugar increased from 8% to 17%.
  • 3% duty waived on 19 basic medical products.
  • FED on cigarettes increased to PKR 5,200/1000 sticks for the upper slab and to PKR 1,650/1000 sticks for the lower slab.
  • Tax on cold drinks increased from 11.25% to 14%.
  • 17% federal excise duty imposed on branded cooking oil.

The federal budget 2019-20 has been presented in the backdrop of a complex economic situation. This budget is unique as it has been prepared by the new government to reflect economic crisis by tightening of fiscal and monetary policies in response to try to culminate economic pressures as well as the bailout conditions set by the IMF. The salient features of this budget reflected austerity measures taken by the government to expand revenue by increasing the tax net through imposing direct and indirect taxes. Salaried and non-salaried classes’ income tax slabs have been revised.

There was an impact of Rs. 80 billion shortfall when the last government slashed these taxes. It is expected that this new tax will increase revenue especially in the time of economic emergency. Another feature of the budget FY2019-20 is that duties were slashed. The government defended this decision by highlighting that this will increase trade openness. With a ballooning current account deficit and a dire need to increase revenue, this decision was remarkable, yet understandable in the context of the recent IMF facility. All in all, with the bleak macroeconomic and fiscal indicators, there is heavy reliance on the various reform efforts being introduced by the government to make sure that these tough times and ambitious revenue targets may be achieved.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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