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June 12, 2021

A positive ‘Make-in-Pakistan’budget

The foremost concerns of the average Pakistani today are availability and affordability of food essentials and opportunities for livelihood in a Covid-impacted economy. The country needs to meet two further objectives: balance the external account and raise funds to invest in socio-economic development. The Finance Minister addressed all these issues in his speech today.

This is a “Make-in-Pakistan” budget. “Make-in-Pakistan,” which the Pakistan Business Council has been advocating, is not just about manufacturing. It covers maximizing agriculture yields, now more relevant for food security and affordability. We are a net importer of food items today and commodity prices are rising, hence self-sufficiency is critical. “Make-in-Pakistan” is also about deploying our large population in exportable services, with special focus on IT.

The budget speech addressed these important facets. First, recognizing that there is already a disproportionate burden of taxes on industry, the budget proposes no new taxes on it. It is also framed to trigger growth of business from which higher taxes will flow. That is a win-win for industry and government. The remainder of the tax revenue target will come from the use of technology and tougher enforcement in retail and wholesale and from measures to stem smuggling and illicit trade. That will help broaden the tax base and level the playing field for the formal sector. Minimum tax on turnover (which is fundamentally flawed) and withholding taxes (which require a manual to understand) will be rationalized, albeit, in phases. SEZ enterprises, entitled to tax holiday, will now also be exempt from minimum tax, which they should have been in the first place. Reduction in withholding taxes on logistics and warehousing will bring down the cost of supply chain. Exemption from withholding tax on electronic collateral receipts for agriculture produce will help reduce the role of middlemen and improve farm incomes. Cascading tariffs and duty reduction on inputs for 16 different industries, including the high export and import substitution potential sectors, such as pharmaceuticals, food processing, chemicals, steel, tourism, electronics and value-added textiles is positive move. The auto industry will benefit from relief for small cars. The 1% final tax regime for IT industry, in common with that for export of goods, should allay the concerns that existed for income tax credit. Also, FBR’s powers to issue show cause notices and commence enquiries are being curtailed, tax returns simplified, self-assessment revived and independent audits to be introduced. These are important confidence building measures. The threshold for SME taxation is being raised to support their growth. Of course, improved supply is pointless if demand remains soft. Fortunately, the increase in minimum wages, higher pay of government employees and higher PSDP spend will help create demand for goods and services. This should have a positive multiplier effect.

No budget is perfect, and no single budget can cure all the ills of the past. This budget is no exception. For a country with investment level half that of its neighbours, the tax credit on investment in plant and machinery has not been restored. Surprisingly also, despite the Finance Minister’s agreement that formation of groups needs to be encouraged to widen shareholding and investment, the protection previously provided to prevent double taxation of inter-corporate dividends has not been restored. Most developed and developing countries provide this protection, FBR is aware of it, as should IMF. FATA and PATA have been exempt from levy of FED, ostensibly to encourage investment. We have a history of misuse of such exemptions. FED has been imposed on use of internet at a time when Covid has forced many to use it for education and business and when the country desires to promote the IT industry. This is a classic case of revenue-seeking knee-jerk reaction that will have negative long-term consequences. We should be making internet more affordable, not less.

Industry will also be disappointed that most of the recently withdrawn tax exemptions, reportedly at the behest of IMF, were not reversed in the budget. Some of these had just a few years to run, and others were conceptually aimed at promoting scale and consolidation, wider shareholding through listing, and resultant improvement in governance and formalization of the economy. The surest was to infuse investor confidence is to provide consistent policies. However, industry will be pleased that honest consumers of utilities, already suffering regionally uncompetitive rates, will not be further burdened with the cost of inefficiencies and theft.

Overall, this is a positive budget. The litmus test of its success, however, is the speed with which jobs and disposable incomes rise and how quickly the cost of essentials decline. For industry too, inflation remains a threat that could result in higher borrowing cost. For the external account, the only way to sustain balance is through growth of exports and reduced reliance on imports i.e. “Make-in-Pakistan.”