Wednesday May 22, 2024

Budget 2017-18: Carrot and stick side by side

By Israr Khan & Mehtab Haider
May 27, 2017

Prices of fertilisers, chicken, smart phones, mobile calls to come down; cement, imported cloth, steel bar, cigarettes, cosmetics, perfumes electronics get expensive; revenue target set at 4.33tr; budget deficit estimated at Rs1.479tr; mark-up on agri loans decreased; textile, other sectors get relief; IT services export exempted from tax; Super Tax extended for one more year; corporate tax reduced by 1pc; concessionary duty on hybrid vehicles to continue; package for relief in duty on all-electric cars will be announced within three months; tax regime on builders withdrawn; govt to pay loan of widows up to Rs500,000

ISLAMABAD: Finance Minister Ishaq Dar on Friday handed down the federal government’s fifth budget, a year before the elections. The steps, he announced, will help create more jobs and further stimulate the economic growth.

Salaries and pensions of government employees have been increased and tax rates for non-filers also enhanced, aimed at bringing more people into the tax net. The government raised the ad hoc allowance for employees of civil and armed forces by 10 percent after merging two allowances of 2008 and 2010 in basic salaries. The pension was also jacked up by 10 percent.

Minimum wage has been increased from 14,000 to Rs15,000/month. Dar said, “We have been able to put Pakistan back on growth trajectory. Now we need to further strengthen our economy in order to take the economy on the path of higher, sustainable and inclusive economic growth.”

The government has fixed the GDP growth target of 6 percent and to contain inflation below 6 percent in 2017/18. According to ‘budget in brief’ tabled before parliament by Minister for Finance Ishaq Dar, the government presented the budget outlay of Rs4.752 trillion for the fiscal year 2017/18 with total tax revenues of Rs4.33 trillion, including FBR’s tax target of Rs4.013 trillion and non-tax revenue target of Rs980 billion. The provinces will get share of Rs2.135 trillion in the next fiscal.

On the expenditure side, the current budget will consume Rs3.477 trillion out of which the interest payment will be the biggest expenditure item by consuming Rs1.363 trillion, defence Rs920.2 billion, running of civil government Rs376.8 billion while development would get Rs1.275 billion.

The budget deficit was estimated at Rs1.479 trillion or 4.1 percent of the GDP while the provinces will throw surplus of Rs347.3 billion or 1 percent of GDP so as to contain the fiscal deficit.

Dar said that in the last four years, we have achieved economic stability and now we are going towards growth, with major thrust on agriculture, industry, energy and infrastructure development while focusing on the well being of the common man.

The budget deficit (income-expenditure gape) would be financed through borrowing from local and external sources and provinces’ savings by not spending on development from local and external sources and provinces’ savings by not spending on development schemes, what the Centre has encouraging them to save one percent of GDP by curtailing spending on development schemes and get financial benefits from the Center.

Aimed at giving more incentives to agriculture sector, the government announced reduction in markup rate on agriculture loans from present 14 to 15 percent to 9.9 percent through ZTBL and National Bank of Pakistan for small farmers who have up to 12.5 acres.

The volume of agriculture credit is being enhanced to Rs1,000 billion from the last year’s target of Rs700 billion. This is exactly the same amount what has been allocated for development projects (PSDP). The government also reduced GST on DAP from Rs400 to Rs100 per bag. In this head, the government would provide Rs13.8 billion as subsidy on this product. After reducing tax rates, price of urea would be maintained at Rs1,400/bag which will have a subsidy impact of Rs11.6 billion.

The government will continue provision of subsidised electricity to agriculture tube wells at Rs5.35 per unit in FY 2017/18. And the government will provide subsidy of Rs27 billion from its own exchequer. 

The government will pay off the pending loans that amount up to Rs500,000 on the behalf of widows, the finance minister said.

The government slapped Rs120 billion taxes by enhancing Regulatory Duty (RD) on import of 565 luxury items, jacking up withholding tax rates for non-filers including for petrol pumps, raising taxes on cement, cigarettes and steel in order to achieve ambitious tax collection target of Rs4,013 billion for 2017-18.

In order to fetch additional revenues for the national kitty, the government enhanced rates of withholding tax on non-filers, revised capital gains tax (CGT) on securities, imposition of regulatory duty on 565 luxury items, extension in Super Tax for another year, withdrawal of fixed tax regime on builders, revised zero-rating regime for five export sectors and increase in Federal Excise Duty (FED) on cement/cigarettes and 6 percent sales tax on commercial imports of fabrics as major revenue spinners for achieving a challenging tax collection target.

“We have strengthened the envisaged reform agenda pursued by the government by providing relief to growth oriented sectors and increasing cost of doing business for non compliant sectors. We have provided facilities to agriculture sector,” Chairman FBR Dr Mohammad Irshad told reporters in technical briefing arranged here at FBR’s headquarters on Friday night after the budget speech by Finance Minister Ishaq Dar.

On import of up to five-year old combined harvesters’ machinery, Customs duty and sales tax has been abolished. Sales tax rate on certain imported machinery/ equipments for poultry has been reduced from 17 percent to 7 percent. Sales tax on imported and local supply of agricultural diesel engines between 3 to 36 Horse Powers for tube-wells has been exempted from sales tax.

In textiles sector, mark-up rate on long-term financing facility has been reduced from 11.4 pc to five percent. The import of duty-free textiles machinery is allowed. Custom duty on raw-hides and skins has been reduced to zero; stamping foil used in producing high value-added finished leather is exempted from Customs duty. Rice exporters have been allowed establishment of warehouses outside Pakistan.

Punitive measures have been announced for the tobacco industry so as to discourage the injurious habit of smoking in the country.  Dar reminded the Pakistan Tobacco Board that a 5 pc withholding tax was reinstated on cigarettes, which would mean an immediate hike in cigarette prices.

Enhancement of rates of Federal Excise Duty on cigarettes, since 2014, FED is being charged on cigarettes on the basis of specific rates for two tiers. In order to arrest the declining revenue trends and to curb the menace of illicit low priced cigarettes of inferior quality, a new tier is being introduced and the proposed duty structure for the three tiers.

Moreover, he told the parliament that duty tax on the import of all kinds of medical equipments was removed, along with a 17 pc reduction in Customs duty tax on the import of pharmaceutical and bio-tech products.

Establishment of IT software park in Islamabad at cost of Rs6 billion will be established with the help of Korean government.

The start-up software houses have been exempted from Income Tax for the first three years. Export of IT services from Islamabad and other federal territories have been exempted from sales tax.

Withholding income tax on cell phone call has been reduced from 14 percent to 12.5 percent and federal excise duty from 18.5 pc to 17 pc.  Customs duty on smart/ android phones has been reduced from Rs1,000/piece to Rs650.

CPEC projects would enter into their third year of implementation during 2017-18. Funds to the tune of Rs180 billion have been proposed for CPEC and its supporting projects during the next financial year.

To recognise the brave sacrifices of brave military personals operating against terrorists, a 10 percent increase has been announced on the pay of all officers and Jawans as special allowance. 

Corporate tax will be 30 pc as against 31 pc this year.

For compliant taxpayers, withholding tax on registration of motor vehicles is reduced from Rs10,000 to Rs7,500 for engine capacity up to 850 CC, from Rs20,000 to Rs15,000 for 851 CC to 1,000 CC and from Rs30,000 to Rs25,000 for engine capacity between 1,001 CC to 1,300 CC. The rates for non-filers will remain unchanged. 

In order to facilitate the generation of employment opportunities among the unemployed youth and to mitigate their hardship, exemption from collection of advance tax is being accorded to vehicles leased under the Prime Minister’s Youth Loan Scheme.

Tax rate on dividend has been increased from flat rate of 12.5 percent to 15 percent. Rates for dividend paid by mutual funds are also enhanced from existing 10pc to 12.5pc in line with the increase on general dividend.

The current three-tier structure of capital gains tax on securities has been replaced with a single rate of 15pc for filers and 20pc for non-filers.

The Super Tax has been extended for one more year. This is a tax on the income of the affluent and rich individuals, association of persons and companies earning income above Rs500 million at a rate of 4pc of income for banking companies and 3pc of income for all others was levied.

The rate of minimum tax on turnover has been increased from 1 pc to 1.25 pc. This will encourage the organised and compliant sector in whose case the rate will be reduced from 31 pc to 30 pc and to create disincentive for entities not declaring their actual profits.

NGO’s which do not spend more than 75% of their income on charitable and welfare activities, they lose the status of non-profit-organisation and their entire income is taxed at 30 pc. But now, their unspent amount will be taxed by 10pc and their status will remain intact.  

The government has withdrawn extra tax of two pc on lubricating oils supplied by oil marketing companies (OMCs). Rate of Sales Tax on Multimedia Projector have been reduced from 17pc to 10pc. 

Federal excise duty on cement has been increased from Rs1/ kg to Rs1.25/ kg. Sales tax on commercial import of fabrics has been increased from zero percent to 10 pc to provide competitive edge to the local producers of fabrics.

In order to rationalise the rate of sales tax on steel sector, the existing rate of Rs9/unit of electricity is being enhanced to Rs10.5/unit and corresponding increase shall be made in ship breaking and other allied industry. So the steel products will get expensive. Aluminium waste scrap, regulatory duty has been reduced from 10pc to five percent.

In auto sector, current concessionary rate of Customs duty and taxes, which is 50 pc of the total applicable duty and taxes, will continue on the import of Hybrid Electric Vehicles (HEVs) up to 1,800 CC and 25pc concession on total duty and taxes will be available for vehicles with engine capacity between 1,801 and 2,500 CC. Auto Development Policy 2016-17 provides for incentivizing fully electric vehicles to promote fuel conservation and arrest environmental degradation. A package for relief in duty on these vehicles will be announced within three months.

As major revenue spinner ticket, with increased RD on 565 items, the government will collect Rs10 billion additional, Rs 8.5 billion by raising Withholding Tax (WHT) on non compliant for various transactions made to residents and non residents personas for sales/ services/ contracts, payment for prize bonds/ lottery, sale by auction, commission/discount to petrol pump operation etc. 

The government also introduced universal tax regime for capital gain tax and imposed tax rate of 15 percent for all slabs. 

The additional Regulatory Duty (RD) in the range of 5 to 15 percent imposed on 565 luxury items on imported perfumes, cosmetics, shoes, refrigerators, chocolates, yogurt, cheese, curd, frozen mangoes, natural honey, mineral waters, aerated waters, perfumes, face powder, talcum powder, face and skin creams and lotions, hair lacquers, cream for hair, dyes for hair, waste and scrap of auto parts in pressed bundle condition, remelting scrap ingots, cooking ranges, for gas fuel or for both gas and other fuels, freezers of the chest type, not exceeding 800 litre capacity, Other furniture (chests, cabinets, display counters, show cases and the like) for storage and display, incorporating refrigerating or freezing equipment, water dispenser, electric oven, reception apparatus for receiving satellite signals of a kind used with TV (satellite dish receivers), reception apparatus for receiving satellite signals of a kind used with TV (satellite dish receivers), wooden beds, wooden cabinets, electric table, desk, bedside or floor standing lamps, powder puffs and pads for the application of cosmetics or toilet preparations, scent sprays and similar toilet sprays, and mounts and heads therefore and vacuum flasks and many others.

Through Finance Bill 2017-18, the government took additional revenue measures of Rs120 billion and provided relief of Rs 32 billion so net addition in FBR’s revenue has been projected at Rs 87.530 billion in 2017-18.

The FBR will continue heavily relying upon indirect taxes for achieving the overall fixed target of Rs4,013 billion as the FBR will collect Rs1,594.9 billion through direct taxes and Rs2,148 billion in shape of indirect taxes.

In order to protect local industry, the government imposed 5 percent RD on import of synthetic filament yarn (of polyesters), increased CD on aluminium beverage cans from 11% to 20%, CD reduced on uncoated polyester film and aluminum wire from 20% to 11% for manufacturers of metalized yarn and CD reduced from 20% to 16% and from 16% to 11%, on raw materials for manufacturers of Baby Diapers.

The CD rate on Bituminous coal and other coal equalized @ 5%. However, for the Power Projects in IPPs Mode, CD on import of both types of coal reduced to 3 percent. Separate PCT code for compressors of vehicle @ 35% CD created and separate PCT code for classification of electric cigarettes created at 20% CD. The government levied  RD @ 10% on animal protein meals.

Taxation of Dividend: The present rate of tax of 12.5 % on dividend income is on the lower side as compared to most other countries in the region. It is proposed that the rate be increase to 15%. Furthermore, rate of tax on dividend received from mutual funds is being rationalized and enhanced from existing 10% to 12.5%.

After failing to achieve the desired results through placing fixed taxation regime in last budget, it is proposed that the normal tax regime be reintroduced for land developers and builders.

Tax neutrality in Islamic Banking viz-a-viz conventional banking: In order to promote and incentivize Islamic Banking, special provisions have been introduced whereby tax neutrality has been accorded in the case of Musharika financing by extending the benefit of depreciation on assets owned in the case of a Musharika arrangement.

Fixed tax by Haj Group Operators: At present Haj Group operators are paying Rs5,000/- per Haji in respect of income from Haj operations. In order to facilitate Haj Group operators the fixed tax of Rs5,000/- per Haji is being extended for the Tax Year 2017.

Exemption to income of political parties: At present there is no specific exemption in the law in respect of income of political parties. As a relief measure, exemption is now being proposed on income of all political parties registered with the Election Commission of Pakistan under the Political Parties Order, 2002.

For fixation of minimum sales tax on supply of locally produced coal, the minimum sales tax @ Rs. 425 per metric tonne is proposed to be provided for locally produced coal.

At present an individual is obliged to pay advance tax if his latest assessed taxable income is Rs500,000 or more. In order to provide relief and to facilitate small taxpayers, the threshold for payment of advance tax on the basis of latest assessed taxable income is being enhanced from Rs500,000/- to Rs1,000,000/-

A present interest free loan exceeding Rs0.5 million provided by an employer to an employee is treated as a perquisite and is subjected to tax in the hands of the employee. In order to provide relief to such employees it is proposed to enhance this limit of interest free loans from the existing 0.5 million to 1 million. To further improve the performance of the Stock Exchange it is being subjected to reduced rate of minimum tax @ 2% on its services.