The best budget so far presented by the Finance Minister
By AMANULLAH BASHAR
June 21 - 27, 2004
Shaukat Aziz, who presented the 5th budget of his career as the Finance Minister, has put in the best he has to make the budget-2004-05, a document, which would be long remembered especially by the business community.
To meet the two ends, our economic and financial experts will be required to economize the receivables estimated to over Rs902.77 billion during 2004-05.
The textile sector, which has assumed the role of spearhead in the economy, was given the lion's shares of the resources in the fiscal management. The textile exports, which crossed the mark of $9 billion at the end of June 30, 2004, are likely to respond positively to the patronization of the government by demonstrating even better in the new financial year.
Exempting ginned cotton from 15 percent sales tax is a step, which has sent a wave of a big relief to the cotton textile sector. Waqar Monnoo, the Chairman APTMA feels that the bold step taken by the finance minister to exempt the ginned cotton from sales tax would bring additional $1-2 billion to the exports regime this year.
Contrary to the known characteristics of the business community for making hue and cry to pressurize the government for more incentives and exemptions, the trade and industry has widely hailed the budget, except a few sections of the business that have their own concerns about budgetary measures.
One of the aggrieved segments of the business community was the capital market, which came out with a sharp reaction over the levy of 0.1 percent Capital Value Tax (CVT).
Market sources said that it is not the amount of the CVT, which is bothering to the capital market; it is the documentation, which is pricking the minds. It is quite natural to the human nature resist the change. It takes time to change the set conventions. Moin Fudda, Managing Director of the Karachi Stock Exchange (KSE) feels that the impact of 0.1 percent CVT on purchase of shares would have immediate impact on the turnover as the step will have direct affect the trade volume. He said it might also bring a negative impact on the share markets because the cost of doing business in stock market would increase. In order to pacify the investors, the government has, however, extended the exemption on capital gains tax.
The government on its part has succeeded in a sense to bring documentation in the stock trade through it has agreed to a drastic cut in CVT from the proposed 0.1 percent to 0.01 percent.
Some bold steps, taken in the budget, are aimed at generating more business and attract investment through drastic cut in taxes and duties.
Despite a voluminous growth in the auto sector, the customers were faced hardships due to excessive delayed deliveries of the vehicles.
According to reports, billions of rupees on account of bookings of the vehicles are held by the auto sector, the prices were shooting up which had created a culture of the premiums in car prices. In order to address the issue, the budget has taken corrective steps by reducing 25 to 50 percent duty on imports of cars.
Duty on import of new cars has been reduced with a hope that the measure would help in lowering down the prices of locally made cars, besides ensuring their availability to the buyers at reasonable rates. The finance minister during his budget speech said that local automobile industry has enjoyed protection for quite sometime. The demand for cars is increasing at a very high rate, which calls for significant increase in supplies. The level of tariff protection so far available to the auto sector was not justified because the manufacturers are reaching to the economy of the scale in the production range. The decision to revise duties on import of cars allows import of Completely Built Unit (CBU) up to 1300cc at 50 percent duty, up to 1600cc cars at 60 percent duty, and up to 1800cc at 70 percent. Duty on higher capacity would be charged at 100 percent.
So far, the duty on all these cars was charged at 75 percent, 100 percent, 125 percent and 150 percent respectively.
Although it is a major step to provide relief to a limited segment of the society, the majority of the people, however, may only watch the imported cars at the cheaper rate of duty from the roadside.
Introduction of the Sales Tax at the flat rate of 15 percent will also go a long way to create a business doing environment in Pakistan. It has decided in the budget document to maintain a single rate of 15 percent sales tax and do away with higher rates of 18, 20 and 23 percent ST levied on different items.
The single rate of sales tax at 15 percent would subsequently help reducing the cash flow problems in the industry.
The Central Board of Revenue (CBR) has also withdrawn 20 percent GST on all items liable to this higher rate of sales tax. About 228 tariff lines were subjected to higher levy of sales tax in the rate of 20 percent which not only increased upfront cost of industries, but also gave rise to refunds in certain essential industries. The CBR has decided to abolish the higher tax rate of 20 percent to provide relief to the customers. The government has done the job to bring down the cost of production as well as general prices index by reducing the tax span considerably, it is now up to the private sector how does it respond to the positive steps taken in the budget and passes on the benefits to the end users. Besides the good decisions taken by the government in the first phase, the second phase of follow up to see whether it is being implemented in letter and spirit is yet another important factor to get better results of the good decisions.
RELIEF MEASURES AT A GLANCE
•Zero-rating on imports and supply of plants, machinery, equipment and ginned cotton to registered persons.
•Relief to agriculture by exempting imports of tractors, bulldozers, combined harvesters and agriculture implements to as well as fixing deemed price of DAP fertilizer and phosphoric acid.
•Abolishing Further Tax and higher rate of sales tax at 20percent
•Simplified tax regime for registered retailers and steel melters.
•Reducing carry forward period to six months.
•Reduction in activation charge in respect of cellular phones.
•Allowing benefit of input tax on all certain items with certain exclusions.
•Excluding certain types of Islamic banking and financing
* transactions from the purview of sales tax.
•To promote SMEs, the turnover tax scheme has been abolished and exemption threshold has been raised at Rs 5 million for both manufacturers and retailers.
The revenue collection target for the year 2004-05 has been fixed at Rs580 billion in the budget, which is Rs70 billion higher as compared to the target of Rs510, billion sets for the previous year.
Out of the target of Rs580 billion, around Rs181 billion would received through direct taxation while the share of indirect taxes has been project at Rs398 billion which shows Rs50 billion rise from Rs384 billion. The government has estimated collection target of Rs174 billion from income tax. The tax collectors have been given the task of generating Rs20 billion more during the current financial year. The break up of the revenues reveals that the projected receipts from customs duty estimated at Rs103 billion, sales tax Rs249 billion. The share of the central excise duty has been fixed at Rs45 billion against the original target of Rs47 billion.
Out of the total direct taxes target of Rs181 billion, the target of capital value tax (CV) has been project at Rs650 million against last year's estimates of Rs600 million. This estimate for collective of the CVT might be revised again because of the reported reduction of the CVT from 0.1 percent to 0.01 percent.
The exemption limit for income tax has been increased to Rs100,000 from the year 2004-05 while the rate of withholding tax has also been reduced on three agriculture products, and the technical education has been also exempted from the tax. The finance bill has also suggested extending exemption period for capital gains for another two years. The withholding tax has also been rationalized on four items and allows house rent exemption of Rs270,000 for high salaried class.
Relief measures have also been taken for the benefit of the government employees and the pensioners, which is a good step especially for the employees of those government departments where bribe culture does not prevail due to nature of the organization. The employees of the government departments and organizations known for corruption, however, do not bother about such incentives.
The relief measures for the government employees and the pensioners however include a 15 percent dearness allowance and 8 to 16 percent raise for the pensioners.
The government has also decided to set up a new pay and pension committee, which will submit its report within six months for further relief to the government employees and the pensioners. In order to provide relief to pensioners and widows, a special saving scheme has also been initiated. The current limit of rupees one million on investment in the scheme has been raised to Rs2 million. The condition of depositing the amount in one tranche has also been dispensed with and investment can be made as desired by the investors in the scheme.
Borrowers from low-income groups generally utilize loans from the House Building Finance Corporation. To give relief to this group, it has been decided to freeze the amount owed as on July 1, 2004, for those whose time for repayment has expired, the outstanding frozen amount will now be payable in 36 equal monthly installments through post-dated cheques. This would certainly alleviate the hardship of 38,000 borrowers who are mostly widows, retired persons and people from extremely low income brackets.
For the remaining outstanding cases where repayment time has not expired, borrowers will be allowed to repay the amount in equal installments in the remaining period of the loan through post-dated cheques. For such loans, the real charge will be reduced from 18 percent to 10 percent from July 1, 2004. This concession will provide relief to another 125,000 borrowers of HBFC.
TV LICENSE FEE
The government has adopted a novel way to collect the annual license fee of Rs 300 from the television viewers. The TV fee would now be collected in 12 installments along with the electricity bills. The consumers having consumption of more than 100 units of electricity would be liable to pay Rs25 per month on account of TV fee with monthly electricity bills. This would give a tremendous growth in revenue of the PTV if the fee goes into the account Pakistan Television Corporation. As a matter of fact, there was no culture of paying TV license fee in the country. The collection of the fee through electricity bills means a sudden jump in the revenue under this head. This initiative would expand the net of the TV fee; it will be highly desirable that the amount of the fee should be reduced from Rs25 per month to Rs10 so that it does affect the low-income group.
A relief of 10 paisa per unit has been allowed to the domestic consumers while the industrial consumers have been given a relief of paisa 58 per unit, and a relief of 25 paisa for the commercial consumers.
The electricity consumers hailing from low income groups had attached high hopes with the budget for getting relief in electricity bills which really gives mental as well as financial shocks to the genuine consumers who pay the electricity bills honestly every month. The public statements of the Prime Minister, the Federal Minister for Water and Power and other high ups stating that the budget will be giving relief in electricity charges had raised hopes of the common man for getting considerable relief in the electricity charges. Contrary to the expectation a 10 paisa relief seems to be a joke with the consumers. The relief can be given to the poor in the real sense if at least one of the levies was withdrawn from the electricity consumption if the authorities are really sincere to provide relief to the people. Although the government had provided over Rs130 billion in subsidies to WPDA and KESC during the last three years to offset any price rise to the consumers. However, the ground realities does not indicate an effective relief to the consumers despite the huge subsidy given to the utility companies. This year too, the budget allocates a sum of Rs46 billion as subsidy to both WAPDA and KESC to cope with their financial difficulties. The situation calls for a transparent system for utilization of the huge subsidies given to the utility companies in Pakistan. It may give a much better look to the operations of WAPDA and the KESC if the details of the utilizations are regularly indicated on a website of the two utility companies especially for the sake of the consumers' satisfaction.
The finance minister has termed the budget as growth, investment and relieforiented aimed at generating opportunities. He foresees that the positive impact of the measures taken will be far reaching as its philosophy had changed from incremental increases to quantum jumps owing to an improvement in the macroeconomic situation. The readjustment of taxes and duties would have a negative revenue impact of Rs7.5 billion. The ad hoc increase in salaries and pension would also cost the exchequer about Rs15 billion. The loss would, however, be covered and the projected revenue target would be met through a 6.6 percent growth in the GDP and reforms.
The five initiatives taken in the budget include conversion of the national Saving Scheme into a corporation, establishment of a technical and vocational training authority, rural development program, urban renewal and development of cottage industry. The government owned mutual funds; Pakistan Investment bonds, treasury bills and WAPDA bonds etc would be included in the Pakistan Savings.
An amount of Rs202 billion has been earmarked by the government for development projects aimed at generating employment and reduction in poverty level in the country. Again this is an area, which calls for special care to ensure that the funds allocated for the development projects are used productively. There is a need for development of a website with the purpose to highlight the details of the development projects which include the progress and areas where the funds are being spent by the relevant people. This would not only help an effective follow up of the projects but would provide an effective check over the expenditures, creation of new jobs and the placements on merits.
The budgetary allocations for the Education Sector have been doubled from Rs4.477 billion of the last year to Rs9.104 billion which indicates that the present government was giving importance to the human resource development through more spending on the education sector in Pakistan. The allocation includes Rs5.221 billion for ongoing and Rs3.883 billion for initiating new projects.
The financial constraints faced by this country over the decades never allowed the economic managers to pay a serious attention on human resource development in Pakistan. The quality education, better training for improving skill was beyond the reach of the common man. A particular segment of the society had the access to the quality education. This small segment was unable to deliver the required level of services needed for education based on economic development in this country.
Today, the sustainable economic growth comes through knowledge-based growth elsewhere in the development economies.
Our youngsters are second to none, give them quality education and training, they will pay back so handsomely that no area of investment could match to its rate of return. The present government deserves all marks for its endeavors for the growth of education in Pakistan. If the corrective economic measures produced the desired results, hopefully the government would uphold the trend of doubling the resource allocation especially for education, which is the real wealth of a civilized society.
BUDGET AT A GLANCE
Running of Federal and Provincial Governments
Rs 193.5 billion
Grants of subsidies