Focus on a higher growth rate with a benchmark of
maintaining 8 percent plus GDP growth seems to be the agenda for next
fiscal year. To achieve the target, the government has initiated
courageous steps to boost investment, activate manufacturing sector,
and accelerate economic activity by using the Federal Budget 2005-06
as a guideline. The objective is to earn a position in the fastest
growing economy in the region. The current positioning of the country,
according to official quarters, is the third fastest growing country
after China and Singapore while the ambition is for further elevation.
In fact, budgeting of the national resources is an art to keep balance
between income and expenditures besides making sectoral allocations on
Despite making impressive economic growth reflected
in the strong macro economic fundamentals, the primary agenda of good
governance, however, seems to have misplaced somewhere in the crowd.
Actually, people in general do not have any ambition to share in power
or luxurious life style, they have only one and simple desire to let
them live peacefully, respectably in a system ensuring protection to
their life, honor and property, should be the soul of any economic
achievement and success. Acquiring a better position with faster
growth rate certainly gives a sense of achievement, yet to make it
meaningful improving good governance is equally important which needed
more allocations out of the bulky budget.
The agenda of the budget is to encourage and
activate all the economic contributors by offering incentives, duty
cut, exemptions and more flexible tax regime. Apparently, one gets an
impression that the Central Board of Revenue (CBR) may find it hard to
achieve the revenue target of Rs690 billion at the end of the year due
to tax cut and scaling down customs duties, however, the authors of
the budget have taken a well calculated risk to increase revenues by
creating an enabling environment for doing business and boost
The incentives studded budget in fact can be
described as an effective Confidence Building Measure public and the
private sectors partnership.
Actually, the government on its part has rolled out
the ball into the private sector's court by incorporating most of the
private sector's demands in the budget. Hopefully the confidence and
high expectations being attached to the performance of the private
sector will not let the facilitating budget to bead off like water on
In fact, the tariff reform has seen tremendous
progress in this budget. This has consisted of across-the-board slash
in import duties on machinery, raw materials and key inputs.
Development expenditures have also been significantly increased with
sizeable allocations for infrastructure spending. There has also been
some broadening of the tax base with the government also hoping to
recover reasonable amounts from oil and gas levies
Amongst different segments of the economy, the
textile sector is the largest beneficiary of the budgetary
announcements. Budgetary measures consisting of tariff rationalizing
and streamlining procedures targeted towards lowering manufacturing
costs, thereby promoting investment and increasing the competitiveness
of the textile industry in the WTO quota-free regime.
Textile industry, which has assumed the role of a
spearman in economic scenario of Pakistan, has performed exceptionally
well by earning over $11 billion through exports during 2004-05.
Pakistan's booming textile industry is capable now to achieve new high
in export regime on the back of huge investments on import of
machinery and BMR as well as an exceptionally bumper cotton crop with
an assessment of 15 million bales in the current season. The export
target of $15 billion set for 2005-06 seems well within reach in view
of the moral boosting incentives announced by the government in the
budget 2005-06 and of course positive developments in the
In order to provide an irritant free environment,
the government has facilitated with the following business enabling
measures for the textile industry:
•Cut or elimination in import tariffs on various
raw materials and machinery.
•General Sales Tax (GST) zero-rating extended to
the entire chain of the textile sector. Prior to the announcement of
the budget 2005-06, the government had eliminated GST on polyester
related raw materials.
•Duty on presses for ginning industry withdrawn.
Obviously, the above measures aimed at enhancing
the manufacture of value-added products and increase export
In another measure to rationalize the tax
structure, the government has done away with sales tax on the entire
chain of textile inputs. This step would certainly improve the cash
flow position of the textile millers and will bring an end to the
hassles related to delayed payment of the refunds. The reduction in
import duty on raw materials (mainly PSF) will serve to improve the
competitiveness of the textile sector and promote the manufacture of
blended fabrics. Moreover, liberalization of the tariff regime on
import of textile machinery will further encourage BMR and expansion
Commenting on various aspects of the budget, Tanvir
Abid a well placed analyst, currently associated with Live Securities
was of the view that the supporting measures announced in the budget
have significantly improved the textile sector prospects and are
expected to turn the sector's fortunes for the better.
Cotton prices were also substantially lower this
year on the back of the record cotton crop and low international
prices. In site of challenges faced by the textile sector in the post
WTO regime, all seems set to give a kick start to the textile exports
in the days to come.
In the budget 2005-06, the government has slashed
the import duty on PSF to 6.5% from 20% previously. On PSF raw
materials, the import duty on PTA has been maintained at 15%. However,
the importers and local buyers of PTA will be given a refund equal to
15% customs duty on PTA. The effective tariff protection for the
sector remains intact. Moreover, PSF demand may receive an uplift
ensuing from lower prices. Regarding Pakistan PTA, there is no direct
budgetary impact as the government has maintained the 15% tariff
protection on Pure Terephthalic Acid (PTA) that is valid till 2008.
According to Tanvir Abid, the budget 2005-06
brought a sigh of relief to the depressed stock market. Contrary to
general apprehensions, no change or increase has been made in the
Capital Value Tax (CVT) rate on investment in shares. The budget's
emphasis on tariff rationalizing and promoting investment would serve
to enhance industry competitiveness, particularly of the textiles.
Indeed, almost all the demands made by the textile sector have been
met. The insurance industry stands to gain enormously following the
government's decision to restore capital gains tax exemption to the
sector (that had expired in June 2000). As anticipated, the banking
sector's profitability is to be punctuated on the 3pps incremental
reduction in the statutory tax rate. Fertilizer scrips are also to
benefit in the wake of adjustment in import duties. On the other hand,
the auto sector is likely to be battered, as tariff protection is
lowered. For the rest of the market, including the heavily index
weighted, fuel and energy sector, the specific budgetary implications
are limited. The overall budgetary impact on the stock market is
likely to be positive given that the market has remained under severe
pressure in recent times on account of CVT related concerns and
considering the positive budgetary effects on the textile, insurance,
banking and the fertilizer sectors.
CAPITAL MARKET MEASURES
•No change in the CVT rate on investment in
•Capital gains tax exemption granted to insurance
•Corporate tax on listing on stock exchange will
be reduced by 1%.
•One time exemption proposed on corporatization
of individual stock exchange membership. The financial bill provides
exemption to the income of a member of a stock exchange in Pakistan
arising from transfer of member's rights of shares of a stock exchange
in Pakistan on corporatization, during July 2005 to June 2006.
•Withholding tax on profits on TFCs will be
exempted up to Rs150,000.
•Tax credit investment in IPOs increased from
Rs100,000 to Rs150,000.
Tremendous comfort for the investors and stock
market community a long-standing demand met, thereby providing the
industry a level-playing field to fuel the profitability of several
insurance companies. Encouraging new listings was yet another possible
outcome of the budget incentives. A positive move is to encourage
individual investment in Term Finance Certificates especially as
interest rates have rebounded.
VOLUNTARY PENSION SYSTEM
Despite having revolutionary effects on the social
and economic life of the retired people in the society, the Voluntary
Pension System (VPS) introduced in the budget could not attract due
attention in the crowd of other conventional budgetary proposals.
The Chief Executive of Arif Habib Investments told Pakistan
& Gulf Economist that the almost neglected initiative taken by
the government in the budget to ensure a respectable life to the
elderly people after retirement will bring revolutionary affects on
the social and economic life of the senior citizens with economic
safeguards provided by the voluntary pension scheme. This scheme would
also broaden the financial strength of the mutual funds management
companies in view of expected cash flows at a massive scale into the
mutual fund portfolios. This project is more important because the
spirit behind the project is to provide safeguards to the retiring
segment of the population the voluntary pension would enable them to
be an earning member of the family even after their retirement.
The finance bills have proposed an increase in the
threshold from Rs300,000 to Rs400,000. Actually, a senior citizen of
Pakistan, being a taxpayer aged 65 years or more on the first day of
the relevant tax year, is allowed a rebate of 50 percent of the tax
payable should his taxable income in that tax year is less than
Rs300,000. Now this threshold has been increased up to Rs400,000.
Certainly a welcome move initiated by the budget makers.
AT A GLANCE
A quick look at different sectors indicates that
for the insurance sector—
•Capital gains tax exemption has been restored,
thereby meeting a lingering demand of the insurance industry. This not
only brings the sector at par with other market participants,
nonetheless, at the same time provides an incentive for the insurance
companies to enhance stock market activities.
IN THE BANKING SECTOR
•The incremental 3pps reduction in the tax rate
to 38% to boost the sector's profitability.
•Withholding tax at 0.1% to be deducted on cash
withdrawals from banks of amounts exceeding Rs25,000.
With a view to enable the agriculture sector which
is the base of our economy the government has allowed:
•5% custom duty on urea withdrawn.
•To bolster fertilizer demand, though limited
impact expected on the manufacturers' margins.
Automobile has emerged as the most vibrant sector
in the recent years. A quantum leap in demand growth rendered the
domestic manufacturers to bridge the gap between demand and supply. In
order to ease the situation:
•Further reduction in custom duties on import of
cars in CBU condition to reduce the protection available to the
•Withholding tax of 6% on purchase of new cars.
•Objective seems to discourage speculative buying
in autos and reduce premium and delivery time.
The use of Polyester Staple Fiber in our textile
industry has grown tremendously in the world over where the ratio is
said to be 60:40 between PSF and cotton yarn. Though consumption of
man-made fiber was around 25-30 percent in Pakistan yet it can
increase provided it is available at competitive prices. The
protection so far given to the PSF sector was the major concern of the
textile sector. The budget 2005-6, however, tried to handle the
•The import duty on PSF has been slashed. On PSF
raw materials, the import duty on PTA has been maintained at 15% while
it has been reduced by 5pps to 5% on MEG. However, importers and local
buyers of PTA will be given a refund equal to 15% customs duty on PTA.
Robust growth in this sector both at local and
export fronts have provided reasons to operate at 100 percent capacity
utilization. The demand of cement has increased owing to:
•35% overall increase in the Public Sector
Development Program (PSDP).
•Higher allocations for infrastructure, water and
construction-related projects to sustain the cement demand growth
The policy of the government to privatize public
sector entities for the people is truly reflected in the telecom
sector. This is, probably, the only sector where a healthy competition
amidst different companies has brought real benefit to the people. In
order to make it more active, the government has allowed:
•Mobile phone activation charges reduced by 50%
•Existing excise duty of 15% to be charged on
actual transaction value of payphone cards and prepaid calling cards.
This is aimed at rationalizing of the tax regime.
•The government has budgeted Rs25 billion
dividend receipt from PTCL during 2005-06 as against Rs31.48 billion
received during 2004-05. However, it is not clear whether the
government has taken into account its potential reduced stake in the
Petroleum prices are the grey area of the economy.
The unabated international oil prices on one hand helped increasing
trade deficit during previous year but opened the floodgate for price
inflation in the country. The government on its part has, however,
taken initiatives to offset the harsh effects:
•The government's budgeted amounts for Petroleum
Development Levy (PDL) and Gas Development Surcharge (GDS) indicating
a sustained level of oil and gas prices.
•For FY2005-06, the government has budgeted
Rs720m (Rs16.44 per share) dividend receipt from PSO, identical to the
2004-05 revised estimate. This seems to be an understatement as during
2004-05, PSO has disbursed Rs23.5 per share cash dividend.
BUDGET AT A
*Government granted a subsidy of Rs3.8bn to the
farmers in various forms.
*Farming community's income increased by Rs147bn.
*In 2004-05 Rs100bn loans were provided to the farming sector.
*We manufactured 41,653 tractors, now allowing duty free import of
*Development budget for irrigation system has been increased by 64%.
*For agriculture and food budgetary allocation has been increased from
Rs7bn to Rs9.1bn.
*For WAPDA resource projects Rs21bn were spent in 2004-05 this has
been increased to Rs43bn.
*Number of mobile phone users increased by 125%.
*According to an estimate investment in telecom sector has reached up
to $3bn. In telecom sector alone, government revenues has increased
from Rs3.7bn to Rs15.6bn.
*Phone activation charges are being reduced from Rs2000 to Rs500 for
the benefit of people.
*Service sector accounts for 52% of country's
economy. During the year banking and insurance sector have registered
growth rate of 21.76%.
*In the service sector wholesale and retail trade have registered a
growth of 12%.
*Under Khushal Pakistan Program Rs7.5bn shall be spent in the next
*Under the pay & pension committee, the government has announced
the following relief for the government employees: 15% increase in pay
scale, 10% increase in pensions, total increase of 23% to 29%. New
scales will be enforced from July 2005.
*The minimum wage has been increased from Rs2500/- to Rs3000/-
similarly the lowest pension limit has been increased from Rs700/- to
*For widows and orphans, HBFC's loan of up to Rs100,000/- has been
*Rs12.4bn will be spent on health sector next year.
*Pakistan Railways will be provided Rs9.8bn to
complete 12 development projects.
*In the annual development program NHA has been allocated Rs20bn.
*The construction sector has improved by 6.2%.
*Government is providing subsidy on diesel Rs7.74
per liter, on kerosene oil Rs8.24 per liter.
*To maintain oil prices at minimum possible level, government has
suffered loss of revenue by Rs52bn.
*During the year, government has provided 250,000 new gas connections
to domestic users, whereas gas has been provided to additional 270
towns and villages.
*In the annual development plan, Rs15.58bn have been allocated for
water related projects. We will generate 700 megawatts energy through
alternate resources by the year 2010.
*Infrastructure will consume Rs92.2bn., Social Sector 73.1bn, IT,
Science & Technology, Tourism, Environment, Judiciary and Law, etc
*Expenditure on defense will be curtailed to 3.1% of GNP.
*Federal grants to provinces go up from Rs239bn to Rs284bn. (up 19%)
*Poverty alleviation allocation will go up from Rs278bn to Rs324bn
PROPOSAL FOR CUSTOM
*5% duty is proposed to be abolished on urea.
*Duty on tractors is reduced to 15% from 20%.
*Duty on cotton ginning machinery to be abolished.
*Duty also to be abolished on bulldozers, levelers, graders etc.
*Inputs of the poultry industry to be duty free, similarly poultry
feed and wheat processing machinery to be duty free.
*55 items of plastic industries are proposed for reduction in duty.
*Raw material used for textile, pharmaceuticals are being exempted
from duty or will get substantial relief.
*Components and sub-components of home appliances like TVs,
refrigerator etc, will enjoy duty reduction.
*Spares and components used for replacement, modernization, and
balancing of machinery not produced within the country, will be
subject to 5% duty while investment in plant manufacturing sector will
enjoy substantial cut in duty.
*Similarly lead and chromium raw material will be duty free.
*Tourism & hotel industry will pay only 5% duty on machinery and
equipment used by them but aviation sector will pay no duty on the
*For imported cars duty will be paid in three slabs: 50% on cars up to
1500cc, 65% on cars of 1501cc up to 1800cc and 75% on cars of more
*For tires imported for small trucks, duty will be 20% but 10% on
*Duty on cycle parts is being reduced.
*Penalty/additional tax will not be changed provided the overdue
principal amount of sales tax is paid. The import & supply of CNG
buses, Euro 2 buses will be exempted from sales tax.
*Tax on mobile connection presently at Rs2,000/- shall be reduced to
*Withdrawal of sales tax on laundry, dry cleaners and marriage halls
*Services provided by banks and leasing companies will be subjected to
7.5% excise duty.
*The lease related services such as lease management fees,
documentation fees, processing fees paid at the time of lease
agreement shall be subject to 7.5% excise duty. However the lease
amount and mark-up will be exempted from this levy.
*The annual retail sale of clothes and garment, carpets, sport goods
in excess of Rs5 million will be subjected to 3% tax inclusive of 1%
income tax. and it will be considered as final tax.
*It is proposed to levy 15% excise duty on the sale of pay phone and
pre-paid calling cards.
*It is proposed to levy 15% excise duty on Wireless Local Loop.
*Excise duty is proposed to be increased by 7% to 8% on cigarettes.
*CNG Dispensers: Duty reduced to 10%.
*The government is introducing the new federal excise act replacing
existing Central Excise Act, 1944.
PROPOSAL ON INCOME TAX
*Revised rates shall range from 3.5% to 30%.
Instead of 7.5% to 35%.
*Tax reduction allowed to teachers and researchers presently available
at 50% is proposed to be increased to 75%.
*50% tax rebate is available to senior citizens whose income does not
exceed Rs300,000/-. Now this limit is proposed to be increased to
*For the purpose of tax credit the limit of contribution in approved
pension fund is proposed to increase from Rs200,000 to Rs500,000.
*Donation made to approve institutions is proposed to be deductible
directly from income.
*Donation made to approve institutions is proposed to be deductible
directly from income.
*Tax rates in cases of corporate sector is reduced for the year 2006
as: Banking Company 38%, Public Company 35%, Private Company 37%.
*Capital gain of insurance companies are proposed to be exempted.
*Tax on listing on stock exchange will be reduced by 1%.
*Tax rate for SMEs if converted into companies will be reduced to 20%
and they will not be required to pay minimum tax.
*The WHT on shipping industry presently @ 3% is proposed to be reduced
*Withdrawal from banks of amount exceeding Rs25,000 will be subject to
WHT @ 0.1% which will be adjustable.
*WHT @ 6% on the purchase of locally manufactured vehicles will be an
*The entire textile, carpets, leather, surgical instruments, and the
components used in manufacture/production of sports goods, tax on
export will be enhanced by 0.25%.
Khushal Pakistan Programme-I :
Khushal Pakistan Programme-II:
Kushal Pakistan Fund:
Less Developed Areas:
UNDER THE FEDERAL PROGRAMME
Pakistan Nuclear Regulatory Authority:
Ministry of Port and Shipping:
Culture, Sports and Youth Affairs Division:
Higher Education Commission:
Food, Agriculture and Livestock Division:
Industries and Production:
Information and Broadcasting:
Information Technology and Telecom Divison:
Labour, Manpower and Overseas Pakistani Division:
Law Justice and Human Rights:
Local Government and Rural Development:
Petroleum and Natural Resources:
Planning and Development Division:
Population Welfare Division:
Science and Technology:
Water and Power:
Women Development Division:
Social Welfare and Special education:
Housing and Works: