Maintaining faster growth rate is the soul of the budget
By AMANULLAH BASHAR
June 13 - 19, 2005
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 merit.
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 investment.
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 the duck.
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 international markets.
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 penetration.
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 projects.
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 shares.
•Capital gains tax exemption granted to insurance companies.
•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 sector.
•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 situation:
•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 momentum.
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% to Rs500.
•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 telecom giant.
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 GLANCE
*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 2500 tractors.
*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 year
*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 Rs1000/-.
*For widows and orphans, HBFC's loan of up to Rs100,000/- has been written-off.
*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 Rs38.7bn.
*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 next year.
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 machinery.
*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 than 1800cc.
*For tires imported for small trucks, duty will be 20% but 10% on construction vehicles.
*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 Rs500/-
*Withdrawal of sales tax on laundry, dry cleaners and marriage halls is proposed.
*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 Rs400, 000/-.
*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 to 1%.
*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 adjustable tax.
*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: