BUDGET ANOMALIES-A BOLT FROM THE BLUE
GOVERNMENT TAKES CORRECTIVE MEASURES
June 22 - 28, 2009
The business community after a marathon meeting on 75 anomalies announced in the budget 2010 with Shaukat Tarin, Advisor to PM on Finance has succeeded to get them corrected yet these corrections would have to obtain a formal approval from the floor of the National Assembly.
Sultan Chawala, President FPCCI accompanied by senior business leaders including Mian Zahid, Mancha Churra, Zikarya Usman, and Majyd Aziz while declaring the budget anomalies as a bolt from the blue, told a press conference that after successful negotiations with the finance minister the business community has convinced the government to remove the anomalies at the earliest.
It may be mentioned that a representative trade and industry delegation led by Federation of Pakistan Chambers of Commerce and Industry had a detailed meeting with the finance minister, which was besides all the chambers of commerce and industry from the four provinces, was attended by APTMA, Overseas Chamber of Commerce and Industry and other trade bodies. They discussed the issues perturbing the minds of the business community and according to Sultan Chawala had they implemented these anomalies, it could have added fuel to the fire of the sinking economy in the country.
While pinpointing some of the anomalies, Sultan Chawala said that import of industrial raw material was subject to pay four percent withholding tax instead of two percent taken as full and final discharge of tax liability. The 100 percent increase in WHT on raw material could prove a disaster for the industry already struggling for survival in the face of global recession and death of demand in the international market. The finance minister however agreed to restore the previous status of two percent, however the government was still insisting on increasing WHT on commercial imports specially the luxury items.
Similarly, the tax liability on exporters was one percent as a full and final settlement of the tax liability, which was also subjected to change. It may be mentioned that the government had proposed the withdrawal of tax incentives for exporters and to bring them under the normal corporate tax regime in Budget FY10. Exporters have (since 1992) been liable to pay only 1% of export sales as full and final tax as against 35% tax rate on pre-tax profits for domestic corporate.
The government now targets classifying the 1% export tax as the minimum instead of final tax, implying that if the liability under 35% corporate tax rate works out to be higher then the export tax, corporate tax will be levied instead of minimum tax. However, on the reasoning of the trade and industry that the exporters are confronted with a difficult and abnormal situation in the export market that rendered them uncompetitive and would cost heavily to the national economy. The argument was accepted in principal and agreed to be corrected.
The FPCCI Chief disclosed that alarming rise in the non-performing-loans in the banking system primarily due to the high cost of financing especially the interest rate if not checked immediately would result in huge defaults. The business leaders strongly recommended for moratorium and deferment in payment of loans to the banks enabling the business community to carry on their business instead of facing a financial collapse. The minister while conceding to the plea formed a special committee under his own supervision to look into the higher interest rate issue.
IMPACT ON AUTOMOBILE INDUSTRY
Apparently, the automobile industry must have taken a sigh of relief following withdrawal of 5 percent FED and other budgetary measures including tightening of the import policy, yet there are still some pros and cons to be looked by the policy makers.
In this respect, Pakistan Association of Automotive Parts & Accessories Manufacturers seems dismayed on the measures proposed in Budget 2009-10. These led to colossal rollback in automotive industry by allowing import /supply of tractors, bulldozers and combined harvesters and components, by substituting serial number 69 of Sixth Schedule of Sale Tax Act.1990.
Custom duty was reduced to 5% on Axle Tube without Hub and Drum in Tariff Based Notification SRO. 656 (I)/2006 dated 22.6.2006 for automotive assemblers/manufacturers. Now complete Axle of Trailers (H.S.Code 87.16) has been allowed on reduced custom duty vide SRO 490(I)/2009 dated 13th June 2009.
The vendor industry feels that these measures are very detrimental to local vendor industry because complete Axle assembly also contains Hub and Drum and are tantamount to large-scale rollback in automotive industry. The Managing Committee of Paapam in its meeting strongly protested and requested for reversal of these SROs immediately.
The Committee further elaborated that the automotive vending industry is all-time neglected sector despite the fact that it is playing a key role in localization of vehicle parts and deletion level ranges from 70% to 98% in small cars, tractors, and motorcycles components. Except patronizing through export incentives and industry friendly policies, efforts are made to pulling it down to earth; the latest being the hammer of budget proposals dropped on this industry.
Vendor industry sought relief in the following issues:
- Withdrawal of 2% increase in WHT on import stage and treating it as final tax for commercial sector
- 5% IDP Tax on individuals and AOPs,
The domestic passenger car sales have declined massively by 50% to 67,187 units. The government with the intention of helping local car assemblers sketched a positive budget for the industry.
In order to provide vehicles at lower rates, the government in FY10 budget has decided to remove FED of 5% on vehicles with engine capacity of all sizes. However, the WHT on vehicles registration would remain in place. The local assemblers have completely passed on the benefit of FED reduction. As a result, the car prices has reduced by 4.6 ˝ 4.7% of vehicles that were applicable for FED imposition previously. Importantly, average car prices still stand 20-25% higher from the previous year's level. It may be recalled that, in the previous budget FY09, the government had imposed 5% FED on vehicles of engine capacity 850cc and above and also re-imposed fixed amount of withholding tax (WHT) on registration of vehicles.
The imposition of these levies had also played a role in rising car prices and dwindling consumers purchasing power. Decline in car prices bodes favorable for the industry and is likely to support the depressed car sales. However, margins are likely to remain intact, as assemblers have only passed on the impact of FED reduction.
With a view to restrict the import of high-end used cars, the government has restricted the value of vehicle to Rs1.5million for the purpose of depreciation assessment. Previously, the depreciation was calculated on the entire assessed value of the vehicle, and the duties were then applied on the net value. After this decision, the assessed value of the vehicle will be fixed at Rs1.5million incase the assessed value exceeds the prescribed value limit for the calculation of admissible depreciation. This would result in increased imported car prices, thereby reducing attractiveness in the local car market. This measure would not have a significant impact on the local car market as it is mainly skewed towards 1600cc and below segment.
Meanwhile the textile industry has also expressed dismay over the budget 2009-10 and termed it as one of the most unfriendly budgets for the industry in the recent history.
The textile tycoons criticized the proposed budgetary measures and observed that the Finance Bill totally contradicts the claims by the government to stabilize the economy. This bundle of contradictions will nullify the entire efforts of the industry to sustain employment and exports. APTMA strove to find evidence of the claims of the government that this bill would lead to the "year of the industry". On the contrary, these measures would lead to destruction of the industry.
The spinning and grey fabric-weaving segment has been discriminated again. The industrialists accused that the policy was being dictated by misplaced clich╚s and unsubstantiated economic theories. The Advisor to the Prime Minister on Finance, Shaukat Tarin has at several occasions questioned the viability of spinning mills below 28000 spindles. No analysis or evidence is available behind this assertion, which is influencing policy. APTMA strongly recommends a policy based on facts and figures. Spinning is an extension of the agricultural economy of cotton. A misguided policy will result in unemployment not only for the industrial but also for the agricultural sector.
POWER AND BANKING
Talks between government, World Bank and the Asian Development Bank are currently underway for clearance of the remaining circular debt of the energy sector. Informed sources told this correspondent that clearance of circular debt would result in retirement of public sector advance. Thus, in the wake of slowdown in economy and retirement of circular debt, a muted advances growth of 3-4% is expected in 2009.
There were no major surprises for the banking sector in the announced budget. The levy of FED on banking services increased from 10% to 16% with a view to bring Sales Tax and Federal Excise Laws in conformity.
Replacement of PDL with carbon surcharge was a key highlight for the oil chain yet it is not clear what the POL consumers would gain out of this change of tax name.
Since the government has withdrawn its decision of levying carbon surcharge on Compressed Natural Gas (CNG) by deleting the word "carbon" from the head of the levy. Now "surcharge" will be used for taxing petroleum products from the next financial year after severe drubbing from different quarters. There is again confusion what benefit will be for the CNG consumers. Malik Khuda Bux, Chairman CNG Station owners Association told PAGE that earlier the impact of carbon tax was Rs6 per KG this means that the withdrawal should bring a relief of Rs6 per KG however it is yet to be made clear by the government regarding this.
The government has taken this decision of withdrawal of carbon tax on CNG after members of the Senate body on finance strongly criticized carbon surcharge saying it was to be imposed for friendly environment but use of CNG had no chance of polluting environment.
PAKISTAN'S LIQUID FOREIGN RESERVES POSITION
The total liquid foreign reserves held by the country stood at $ 11,643.4 million on 13th June, 2009. The break-up of the foreign reserves position is as under:-