Ambitious tax target and sops -Pakistan Press Foundation (PPF)

Paksitan Press Foundtion

Ambitious tax target and sops

By Khaleeq Kiani

ISLAMABAD: With Rs300 billion revenue adjustment through reduction in subsidies and withdrawal of tax exemptions, sweetened with relief to government servants and pensioners, Finance Minister Dr Abdul Hafeez Shaikh announced on Friday the PPP-led coalition government’s fourth budget which envisaged a federal expenditure outlay of Rs2.504 trillion and budget deficit of Rs975 billion (4.6 per cent of GDP).

The announced outlay, however, did not match with budget documents that put the federal expenditure at Rs2.767 trillion and was supported by detailed expenditures and revenues. In order to meet an agreement with the International Monetary Fund to revive the $11.3 billion loan programme, the finance minister said the provinces would present a cash surplus of Rs125 billion during next year to contain the overall consolidated deficit at four per cent of GDP, or Rs850 billion.

The federal budget set an ambitious tax revenue target of Rs1.952 trillion, which also involved a sweet-and-sour mix of reduction in general sales tax rate by one per cent, removal of special excise duties and imposition of sales tax on more than 15 major categories through withdrawal of the existing exemptions without calling it RGST.

Dr Hafeez said administrative reforms in the Federal Board of Revenue would be accompanied by structural changes and reforms in taxation for an equitable and fair system. “The reformed GST legislation is pending with parliament for approval. Meanwhile, we propose to continue without structural reforms in this direction”.

Sakib Sherani, a former principal economic adviser to the government, said the tax revenue target of Rs1.952 trillion was unrealistic, withdrawal of subsidies was an overambitious attempt that would be difficult to implement ahead of elections and a four per cent fiscal deficit target was simply not achievable.

He said the reduction in sales tax rate from 17 per cent to 16 per cent would be offset by reduction in subsidies and hence would have no significant impact in reducing inflation. This argument is supported by a government decision to withdraw Rs229 billion in subsidies, mostly given to the power sector, including KESC, for tariff differential. The subsidies which stood at Rs395 billion during the current fiscal year would be contained at Rs166 billion next year. Another Rs70 billion will come through withdrawal of more sales tax exemptions.

It was in this context that the finance minister announced empowering the National Electric Power Regulatory Authority (Nepra) to directly notify monthly fuel adjustments in tariff. He said there were plans to bring the private sector to manage public sector entities. He talked about listing of public sector entities on the stock exchange to improve their performance, but did not set any target to generate revenues from these entities.

Dr Hafeez said the government would continue to provide relief to people on wheat and sugar through provision of strategic reserves to the Utility Stores.

But budget documents suggested that Rs21 billion in subsidies provided to both the Utility Stores Corporation (USC) and Trading Corporation of Pakistan for these two items had been drastically cut to a paltry Rs6 billion.

Total resources for the next year have been estimated at Rs2.767 trillion. This includes Rs2.074 trillion in tax revenue – FBR taxes of Rs1.952 trillion and non-tax revenue of Rs658 billion. Another Rs304 billion is estimated to come from bank borrowings. External receipts have been estimated at Rs414 billion while the provincial share out of federal revenues has been put at Rs1.203 trillion.

Of the total expenditure of Rs2.767 trillion, current expenditure has been put at Rs2.315 trillion and development expenditure at Rs452 billion.

An amount of Rs495 billion has been allocated for defence expenditure and Rs295 billion for grants and transfers mostly to meet unusual security expenditure. Put together, the overall security-related expenditures are estimated at Rs790 billion.

An additional burden of Rs25 billion has been estimated to come from increase in salaries for government employees and their pensions. The existing pensions will eat away about Rs96 billion, of which Rs73 billion will go to retired armed forces personnel.

The resource availability for 2011-12 has been estimated at Rs2.463 trillion — a rise of Rs207 billion over the current year’s budget estimates of Rs2.256 trillion.

The expenditure on general public service (including debt servicing transfer payments and superannuation allowance) is estimated at Rs1.66 trillion, which is about 71 per cent of the current expenditure. The Public Sector Development Programme has been put at Rs730 billion, including a federal chunk of Rs300 billion.

With the slogan of “jobs and growth”, Dr Hafeez emphasised the change in growth strategy from infrastructure development to domestic market developments, better regulatory authorities and improvement in state-run enterprises. He said the government would strengthen stabilisation efforts and reduce inflation to single-digit next year through continued fiscal consolidation.

PAY AND PENSIONS: The finance minister announced a 15 per cent increase in pensions of those government employees who retired on or after July 1, 2002, and 20 per cent for those who retired on or before June 30, 2002. Likewise, a 15 per cent increase in salary of all government employees and armed forces personnel has been allowed with effect from July 1, 2011.

Dr Hafeez announced merger of all ad hoc relief allowances allowed to government employees up to July 2009 into the basic pay scale-2008 to introduce new pay scales. There will also be compulsory monetisation of transport facility to civil servants in grade 20-22 of the federal government.

The conveyance allowance has also been increased by 25 per cent for all employees in BPS 1-15. All civil servants and armed forces personnel have been allowed conveyance allowance at the prescribed rates irrespective of their place of duty. The finance minister passed on the responsibility of increasing revenues to provincial governments, saying their enhanced role after the 18th Amendment must compel them to take the lead in ensuring an equitable tax structure and to effectively being in areas such as agricultural income, services and property in the tax net.

He announced continuation of removal of zero-rating and exemptions form sales tax introduced in March and said the effort would continue to remove distortions by removing more exemptions and zero ratings, without affecting food items, education and health sectors.

INVESTMENT: Dr Hafeez said the objective of tax reforms was to make the system simple and move away from multiple tax regimes to retain just three of them – income tax, sales tax and customs duties. In this regard, all special excise duties have been abolished. Likewise, 15 items out of a list of 46 federal excise items are proposed to be removed from the excise law; 392 regulatory duties out of 397 have been abolished, limiting them to luxury vehicles, cigarettes, arms and ammunition, betel nuts and sanitary ware.

The finance minister said federal excise duty on cement would be phased out in three years, with a reduction of Rs200 per metric ton next year and remaining Rs500 per ton over the next two years. The federal excise on beverages has also been reduced from 12 per cent to six per cent in the same fashion.

He said special initiatives had been taken to promote investment, equity based projects, BMR, expansion of the existing production capacity and capital market growth. The tax rate on interest income from government securities will be 10 per cent with no tax return requirement.

The rate of withholding tax on cash withdrawals from banks has been brought down from 0.3 per cent to 0.2 per cent. Tax credit for a company to enlist on the stock market has been increased to 15 per cent from five per cent, while the limit for adjustment of minimum tax on turnover is being increased from three to five years.

Likewise, tax credit for investment in shares through IPOs and in voluntary pension funds has also been increased to 15 per cent from five per cent.
Source: Dawn