June 4th, 2014
By Khaleeq Kiani
ISLAMABAD(dawn): The PML-N government unveiled its second budget on Tuesday which provided harsh cuts as well as populist measures. As a result, cuts in subsidies and increase in gas rates rubbed shoulders with incentives for the youth and business while the party’s signature infrastructure projects were also present.
Consequently, the government estimates that it will have an additional revenue of Rs405 billion to spend in the next fiscal year (2014-15). It has reached this figure by generating an additional Rs230bn through taxation, saving Rs120bn by reducing subsidies and earning around Rs58bn by increasing the Gas Development Infrastructure Cess (GIDC).
In an unusually long budget speech, Finance Minister Ishaq Dar also made an ambiguous announcement about phasing out concessions in the tax structures, popularly called statutory regulatory orders (SROs), in the next three years. He added that this would start with the “withdrawal of tax exemptions for five major sectors – textiles, leather, carpets, surgical and sports goods – on their domestic sales”.
The budget also envisages increased gas rates for industrial, commercial, fertiliser and captive power plants, which is expected to yield Rs145bn next year. This year, these rates yielded Rs88bn.
In order to achieve this target, the GIDC rates on all gas consumers, except residential ones, were hiked by up to 200 per cent – this was done under a commitment made to the International Monetary Fund.
• Dar unveils Rs4.3tr budget with Rs1.4tr deficit • Gas rates to yield Rs145bn • Subsidies cut by Rs120bn
The GIDC rates were increased from Rs100 per MMBTU to Rs300 for captive power plants, fertiliser, Wapda and independent power plants, commercial consumers including ice factories and industrial consumers. The rates for CNG stations were increased from Rs263 per MMBTU to Rs300.
The government has also reduced subsidies by Rs120bn. This year, it allocated Rs323bn for subsidies. Of the reduced amount, the largest chunk – Rs115bn – will now be paid by power sector consumers of which Rs35bn will be coughed up by K-Electric’s buyers.
Good news for employees
The minister also announced an increase in the minimum labour wage for the private sector and increased by 10 per cent the salaries and pensions of all federal government employees as ad hoc relief, in addition to some increases in medical and conveyance allowances for employees in grade 1-15.
Envisioning the expenses
The overall budget outlay for the next year has been estimated at Rs4.3 trillion, about 7.9pc higher than the current fiscal year, and the overall fiscal deficit has been estimated at 4.9pc of GDP (gross domestic product) or Rs1.422tr with the help of a cash surplus of about Rs289bn.
This includes current expenditure of Rs3.46tr, including repayment of foreign loans and development expenditure of Rs838bn (which is slightly lower than Rs858bn spent in the current year). From this amount, the Public Sector Development Programme (PSDP) has been allocated Rs525bn while in the current year this allocation was Rs540bn.
The finance minister said that next year’s total expenditure had been budgeted at Rs3.937tr compared to the revised estimates of Rs3.844tr during current year, showing an increase of two per cent, which he said was lower than the inflation rate.
With an allocation of Rs700bn, the minister said the budgetary needs of the armed forces had been duly addressed for which he gave himself a pat on the back.
Of the current expenditure estimate of Rs3.13tr, interest payments will consume Rs1.325tr while in the current year Rs1.187tr was used for it.
The total allocation for pensions has been set at Rs215bn of which a major chunk of Rs163bn will be consumed by military pensioners, leaving Rs51bn for retried civilians.
Running the civil administration will consume Rs290bn of which Rs113bn will be spent on expenses other than salaries. The salaries will eat up Rs174bn next year, against Rs148bn spent this year, showing a substantial increase of 17.6pc.
Optimistic revenue estimates
The availability of total resources has been estimated at Rs4.073tr of which it will raise Rs3.2tr internally. Of this amount, Rs289bn will come from provincial surpluses and capital receipts will provide Rs2.225tr.
The government hopes to collect Rs3.129tr from taxes; Federal Board of Revenue has been tasked to collect Rs2.810tr for next year while another Rs319bn will be raised from sources other than the FBR. In addition, the government aims to collect Rs816bn from sources other than taxes.
After transferring Rs1.72tr to the provinces, the federal government’s net revenue receipts have been estimated at Rs2.225tr, leaving a federal fiscal deficit of Rs1.711tr. This will be brought down, the government claims, to Rs1.422tr with provincial assistance of Rs289bn.
However, these measures have not impressed economists.
Dr Ashfaque Hassan Khan said the tax collection target for FBR was grossly unrealistic. “Mark my words. FBR is not going to collect Rs2.810tr in taxes; they will end up collecting between Rs2.6 and 2.65tr.”
He also expressed doubts about the government’s calculations of the revenue they would collect from the various tax measures. “The government had expanded the withholding tax regime, which shows that the tax machinery’s collection capability has failed. They are taxing at source because they cannot collect taxes. Why do they need the 2,500 people who work for FBR?”
Tax relief for the rich?
In a major concession to stock investors and brokers, the government decided to put off increasing capital gain tax from 10 to 17.5pc, which they had promised to impose from January 1, 2014, in the last budget. However, under pressure from the brokers, it has backtracked and imposed 12.5pc capital gain tax for securities held for 12 months and 10pc for up to 24 months.
The finance minister also announced reducing corporate tax rate from 33 to 20pc till June 2017 to encourage investment in construction and housing projects. He also removed customs duty on import of plastic coverings, mulch film, anti-insect nets and shade nets for tunnel forming. The budget also reduced tax on marriage functions from 10 to 5pc. These measures will benefit various businesses.
Promoting business and export
The minister announced setting up Exim Bank of Pakistan with an initial capital of Rs10bn for which a legal framework would be announced later. This measure has been part of past budgets as well but it has never materialised.
The government also announced reducing the mark-up rate on export finance from 9.4 to 7.5pc and reducing the mark-up rate on long-term financing facility for 3-10 years from 11.4 to 9pc, with effect from July 1 to reduce cost for transporters.
Mr Dar also announced that the government would revive the export development fund and establish the Pakistan Land Port Authority to deal with human trafficking and smuggling.
For the textile industry, the government announced conditional refunds if they increased exports.
The minister also announced credit guarantee scheme for small and marginalised farmers under which the State Bank will use Rs30bn to help microfinance banks provide loans up to Rs300,000 to farmers.
In addition, a reimbursement crop and livestock loan insurance scheme will be launched for natural calamities and climatic diseases.
Mr Dar also announced Rs20bn for housing loans.