Finance Minister Asad Umar presented amendments to federal budget 2018-19 in National Assembly session. He announced that contrary to media reports, the government is not burdening the tax payers or low income class and the increase in income tax will only affect the upper class.
SALIENT FEATURES
- Non-filers, overseas Pakistanis can buy properties and cars
- Withdrawal of increase in petroleum development levy
- 10 percent increase in pensions
- Increase of taxation on tobacco products
- No decrease in budget allocated for CPEC projects.
- Development projects worth Rs50billion in Karachi through public-private partnership
- No tax on annual income till Rs1,200, 000
- End of tax rebate on allowances for PM and Ministers
- Federal development program cut by almost Rs250 billion to Rs725 billion
- Budget deficit to be brought down to 5.1 per cent
- Increased federal excise duty on imports of luxury vehicles and duties on ‘expensive’ cell phones
- Tax relief revoked from salaried persons earning more than Rs200,000 per month
- Tax rate in highest income tax slab raised from 15pc to 30pc
- Customs duty increased on more than 5,000 ‘luxury’ items. Regulatory duty increased on import of more than 900 items
- Rate of withholding tax on banking transactions for non-tax filers also increased to 0.6pc
- Issuance of Insaf Sehat Cards approved for Fata and Islamabad Capital Territory
Dire straits
Starting his speech with an invitation to opposition lawmakers, the finance minister acknowledged their experience and said he was open to suggestions for amendments to the proposals he was about to present.
“Whatever suggestions you give, we will listen and accommodate if possible. We want to take parliament with us. We do not possess divine wisdom and do not believe only we can be right. Suggestions are welcome,” he said.
Moving on to an assessment of the country’s economic situation, Umar noted that the budget deficit had expanded to 6.6 per cent at the end of the last fiscal year from the 4.1pc that had been budgeted by the government for FY2017-18.
“When the PML-N government took over, the budget deficit had been 8.2pc of which the PML-N had said 1.2pc would go towards financing the circular debt. Five years later, we are at that same position,” Umar said. “We all remember the difficult decisions that the PML-N had to make to grapple with that situation. It is part of history now.”
The monetary value of the budget deficit Rs2293 billion, also does not reflect “what is happening off the books”, the finance minister said.
“The power sector alone faced a shortfall of Rs450bn over the last year, even after all the subsidies they received in the budget. This number is not included in the deficit. Similarly, there was a Rs100bn shortfall in the gas sector,” he explained.
“The most dangerous situation is that if we continue as we have, the budget deficit will expand to 7.2 per cent (Rs2900bn) by the end of the ongoing year. This is the assessment of the finance ministry as well as economic experts, including past finance ministers and governors of the State Bank,” Umar said.
“The external situation is worse.”
“The current account deficit had been $2.5bn in 2012-13, when Raja Pervaiz Ashraf [of the PPP] was prime minister. In the fiscal year that just ended, the deficit had reached $18.1bn: more than 7.5 times higher.”
“As a result our external debt, which was $60bn, reached $95bn by the end of the previous government’s tenure,” the finance minister warned.
Warning that the country’s foreign exchange reserves had depleted to only two months of import cover, and drawing attention to the fall in the rupee’s value against the dollar, the finance minister said that difficult decisions had to be made or inflationary pressures would build up to the point that they would become unbearable for the average consumer.
“The warnings came long ago: we are now at the precipice of a crisis,” he said.
“If our reserves fall any further, we can imagine what the impact on the common man will be,” he warned.
“We need to decide not the government alone, but this house as well if we want to continue like this,” he said.
“In the last budget, the government overestimated the federation’s revenues by Rs350 billion and understated expenditures by Rs250bn. Furthermore, the projected provincial surplus of Rs286bn is unlikely to be realized if we realize that the provinces actually ran a deficit of Rs18bn,” he continued.
“In total, there is Rs890bn difference in the expected and the budgeted figures for the deficit which we have to contain. If we do not take measures, the budget deficit is expected to increase to Rs2700bn,” he warned.
“These are difficult times, and they call for difficult measures. It does not take an economist to figure that out,” Umar said.
“But we also need to make sure the burden [of our economic measures fall] on those who can bear it. The poor are already resource stressed, and we cannot burden them further. Sure, we can seek bailouts from the IMF and employ stabilization measures, but that is not the solution: Pakistan’s economy can only grow when our economy grows, our exports grow, our industries grow and our agricultural economy grows.”
Relief measures
“For farmers, we are ensuring the provision of urea by boosting local production and by importing 100,000 tons from abroad. Rs6-7 billion subsidy has already been approved on urea for the Rabi season.”
“We will also provide Rs540000 per family in Fata and Islamabad in the form of the Sehat Insaf Card to cover doctors’ fees and medicines on an immediate basis. The prime minister has also asked the Punjab government to introduce the facility in that province as well.”
“We have also directed the release of Rs4.5bn for the completion of a housing scheme for laborers on priority basis. As soon as these are built, we will start work on 10,000 more.”
Minimum pension has been increased by 10pc for EOBI pensioners who qualify for the lowest category of pensioners, the finance minister said.
“The past government had projected that it would increase the petroleum levy from Rs189bn to Rs300bn, but we feel that this is highly unfair on the underprivileged customer. We want to provide relief in this area and will absorb that impact.”
“The previous government had imposed regulatory duties on some goods, which we support as they have provided some relief on imports. However, we have decided to relieve duties on 82 tariff lines concerned with raw materials and inputs for export oriented sectors. This will translate into a Rs5bn relief.”
“The bigger decision that we made yesterday concerns the five zero-rated sectors. The textile industry in Sindh was already receiving gas at subsidized rates, but the industry in Punjab had to pay higher rates, which resulted in an imbalance in their competitiveness.
“Nearly 500,000 workers were jobless in Faisalabad and machinery was being sold at scrap rates. We wanted to revive it. We have therefore provided a Rs44bn benefit for the textile industry in Punjab so that they can retain their competitiveness among regional countries. We will also work to ensure more benefits for zero-rated sectors in our electricity policy.”
“We have only two priorities: protect the poor, and protect the exporter because they bring in the dollars,” the minister explained.
Revenue measures
“We will raise Rs183bn in additional revenue. Half of this, Rs92bn, will be raised merely through better administrative procedures that utilise technology to plug tax evasion and leakages in the system. The Federal Board of Revenue has accepted this challenge.”
To encourage taxpayers who are not filers to enter the tax net, the finance minister said the government was increasing the rate of WHT on banking transactions — not withdrawals — for non-filers back to 0.6pc.
The government would also remove the bar on non-filers from buying property in Pakistan because a lot of Pakistanis living abroad had complained saying the measure prevented them from buying property in Pakistan even though they were not even obligated to file taxes in the country.
“Please note that there are no additional taxes on tax filers,” the finance minister said.
“We have also decided to increase taxes on cigarettes. This is something that is close to my heart, as my own brother passed away a few months ago from lung cancer.”
“We have also increased some taxes on the rich. We have doubled the federal excise duty on cars of 1800cc engine capacity or more from 10pc to 20pc. We have also decided to increase the duty on several imported luxury products. Likewise, the duty will be increased on expensive phones.”
“Last thing: we’ve deliberated this in detail. The last government had given sweeping tax relief to all kinds of people, including the most rich. The final decision we’ve taken is that we’ll maintain the Rs1,200,000 limit on exemption. We are also maintaining the tax rate for those earning between Rs100,000 to Rs200,000 per month.
“For all categories above that, we are increasing the tax rate that was applicable in May, but still keeping it lower than what it was last year. We hope that the people who have the means will not oppose us on this.”
The maximum tax rate will be 25pc for salaried persons and 30pc for non-salaried persons, the finance minister elaborated.
“And, since we’re asking the privileged to sacrifice for the sake of Pakistan, we have also decided to withdraw tax exemptions on three services from ministers,” he added.
Development sector
“Rs661bn was spent on development last year, and we will spend Rs725bn this year. Out of this, we will be spending Rs50bn on development in Karachi. This is a joint venture between the federal and Sindh governments.”
“We have also identified infrastructure priorities for the National Highway Authority, on which we will spend Rs100bn. We will spend another Rs500bn on PSDP.”
‘A lot of potential in this nation’
Saying that he was sure past governments had done whatever they believed was necessary for the benefit of the country, Umar said the nation collectively needed to acknowledge that those measures had not worked.
Promising that he would uphold and continue with the projects introduced by past governments — especially the China Pakistan Economic Corridor and dams on which work is ongoing — the finance minister stressed that the economy’s success meant parliament’s success.
Referring to his tweaks to the budget, Umar said: “These are immediate fiscal measures, not reforms. The economy is in the ICU [Intensive Care Unit] and we want to get it out of the emergency situation. We have taken emergency measures; we will now move to reforms.”
Wrapping up his speech, the finance minister said: “This nation was given to us by God. There is so much potential in this country, and we will, God-willing, take it to new heights.”
Pre-adjustment speculation
Media reports had suggested that the government was looking at a fiscal adjustment of 1.5 to 2pc of gross domestic product (GDP), or Rs600-750 billion, through amendments to the federal budget 2018-19.
The government is aiming at a massive cut in development expenditure to the extent of over one per cent of GDP and through the withdrawal of tax and duty exemptions.
Consultative sessions continued until the last moment to deliberate completely banning the import of some 130-150 unnecessary items such as second-hand cars, while increasing duty rates on others including luxury items such as expensive phones, jewellery and food items. These trade measures are estimated to have an impact of over $1 billion on the current account deficit.
The current cumulative cost of tax and duty exemptions is estimated to be to the tune of Rs550bn which the government aims to bring down to around Rs200bn, thus transferring an impact of almost Rs350bn back to the people.