FALLOUTS OF THE MINI BUDGET

FOOD INFLATION AND COSTS OF AGRI AND INDUSTRIAL INPUTS WILL GO UP

AMANULLAH BASHAR
(feedback@pgeconomist.com)
Mar 21 - 27, 20
11

Although the government's recent move to generate revenue to the tune of Rs53 billion would pave the way for smooth negotiations with IMF in the next meeting scheduled in May for continuation of the support program, yet it is bound to have multiplier effect on food prices and costs of agriculture inputs like fertilizer, pesticides and tractors etc.

Despite the fact that the government has already provided a cushion to the prices of agriculture outputs, the cost differential in view of levy of sales tax on agriculture inputs would certainly be passed on to make food prices beyond the reach of average income groups.

It would not be out of place to mention that the revenue generating measures imposed via Ordinance includes a one-time flood surcharge of 15 per cent on income tax payable besides removal of general sales tax (GST) exemptions on a number of items like farm inputs including fertilizers and increase in special excise duty to 2.5 per cent from one per cent currently. The corporate bottom lines would be impacted while a 15 per cent flood surcharge would mean an effective tax rate of 40.25 per cent for companies that are currently subject to 35 per cent tax rate, however the period of applicability needs clarification.

The implementation of the revenue measures through a Presidential Ordinance could be an indicator of the political opposition faced by the government from both coalition and opposition parties. In addition, if the taxes are applied with retrospective effect, it could also lead to heighten political noise.

AGRICULTURE

If the surcharge is only applicable for the period between now and June 30th, 2011, the bottom line impact would be 2.3 per cent for companies currently subject to 35 per cent tax, while removal of ST exemption on fertilizer, pesticides & tractors would hurt farm income.

The removal of sales tax exemptions on a number of products including key farmer inputs should result in 17 per cent increase in DAP and 13.5 per cent increase in spot urea prices. These steps could lead to demand pressures, lower disposable farm income; despite the higher output prices are considered as a cushion.

Analysts feel that the government's decision to levy GST on key agriculture inputs could push up farm costs by 5-6 per cent in the backdrop of skyrocketed output prices during current fiscal 2011.

As far as impact of the new measures was concerned on agriculture income, it is expected that post-GST rise in prices of agr-inputs might not have negative implications because of higher farm output prices.

It may be recalled that the issue of withdrawal of GST from agriculture inputs was hotly debated earlier, but remained inconclusive. There is a possibility of further delays owing to administrative delays this time round.

CAR PRICES UP ACROSS THE BOARD

Meanwhile, the impact of increase in Federal Excise Duty (FED) by 1.5 percent will result in upward revision of prices of different cars being produced in the country. For example, it will have impact on Indus Motors Corporation (IMC).

The recent increase in FED will overburden the consumer while the industry is already facing serious threats due to the government's decision of relaxation in age limit of used cars.

The revised rates of FED would bring Rs20,000 to Rs25,000 increment on the prices of XLI, GLI and Altis models of Toyota Corolla, Rs10,000 on Cuore variants and Rs20,000- 30,000 on Hilux variants.

The industry had been absorbing the ever-increasing input costs for many months but it is difficult to bear the extra burden of FED, which IMC had to pass on to customers. The local car sales have already been dwindling for past two or more years and now the recent decision by the government will have an adverse effect on sales of local car manufacturers' products.

FED

The FED has been imposed from 16th March. The customers taking delivery of their units from today will have to pay the additional cost even if they booked their vehicles before the decision. Principally, whenever Indus Motors increases car prices, it charges only from booking of vehicle but since the excise duty is to be charged on every sale, IMC is bound to charge the same on every delivery.

In wake of increase in input costs and appreciation of foreign exchange, prices of various car models including Daihatsu Cuore have been raised by Rs35,000-55,000 while prices of Hilux 4X2 and Hilux 4X4 have been raised by Rs20,000 and Rs25,000 respectively.

EXPORTS

The withdrawal of zero rated export facility under revenue generating measures introduced by the government has created a stir among the export oriented industries.

Perturbed by the government steps, the value-added textile sector has vehemently rejected the withdrawal of zero-rating of export sector by the government.

According to Chairman Towel Manufacturers Association of Pakistan (TMA) South Zone, Syed Usman Ali the new measures taken by the government would open up a floodgate of corruption to the government officials and trade.

The menace of flying invoices will flourish in the country once again and open up various avenues to the non-genuine traders to claim fake refunds of GST while genuine exporters' huge capital will remain stuck up with the FBR.

Though, government did not impose GST on exports directly, but as it brought ginners under GST regime besides unregistered suppliers and at import stage imposition of GST would massively affect the exporters resulting in blocking of their capital.

Under the Presidential Ordinance the upward revision of SFED (Special Federal Excise Duty), too has been increased to 2.5 per cent from one per cent which would massively increase overheads of exporters as SFED is imposed on all banking instruments.

It may be mentioned that the zero-rated textile exports are facing hardships due to high prices of cotton and cotton yarn, frequent load shedding of gas and electricity, liquidity crunch and serious law and order situation. Moreover, there are chances of unscrupulous elements coming into the game like under-invoicing, mis-declaration and deliveries without invoicing. All these factors would strengthen the parallel regime and would weaken the government's goal of documenting the sector. It is feared that large manufacturers would suffer more and many questions would be raised with regard to audit queries by auditors due to this cumbersome amendment, which might result in high number of litigation.