Budgetary highs and lows

The comments about Pakistan’s Federal Budget 2017-18 have so far been conflicting. The opposition has termed it a “drone attack on the masses”, while other stakeholders have adjudged it to be a mix of relief and burdens.

However, one aspect that has been readily conceded is that tax revenues have increased by 81% and the budget deficit reduced to 4.2% percent of the GDP; both of which are big pluses.

Out of a total outlay of Rs 4,752 billion, a substantial allocation of Rs 1,001 billion has been made for Public Sector Development Programmes (PSDP) compared to Rs 715 billion for last year – representing an increase of 40%. There has been a mention of creating a Pakistan Development Fund and a Pakistan Infrastructure Bank to increase access to financing for public and private sector projects as an effort to address the lack of funding that has restricted development until now.

The China-Pakistan Economic Corridor (CPEC) remains an integral part of the government’s PSDP agenda and close to Rs 180 billion have been allocated to it in the budget. The money will mostly be spent on energy and infrastructure projects and Beijing is expected to provide loans of Rs 168.3 billion; this includes a Rs.1.3 billion grant to build an international airport at Gwadar as well as a vocational centre. This makes sense given that this is the last budget before the elections next year; therefore, it is meant to garner political mileage by focusing on infrastructure projects. The planned construction of the Karachi-Hyderabad motorway and upgrading of the railway network, which includes the purchase of approximately 75 new engines, are prime examples.

In line with the government’s policy of maximising macro-economic stability, new taxes to the tune of Rs 122 billion have been imposed and a number of concessions have been made to different industries to boost production.

The strategy of increased taxation and incentives for the industrial sector has worked well in the past for the government. According to estimates, Pakistan’s economy grew by almost 5.28% last year; to put this figure in context, this is the highest growth rate achieved in the last decade.

The automobile industry in particular has been the recipient of major incentives as the aim of the government is to attract major foreign players in order to increase quality standards as well as production levels. Audi, Kia, Hyundai and Renault have already entered the market and there are talks of Volkswagen coming as well. With these developments, some industry experts believe that the total automobile production volume will hit the half million mark (in terms of units), doubling from existing levels. From the customer’s perspective, the measures likely to have a positive impact include reduction in the withholding tax (WHT) on the registration of a motor vehicle for income tax filers; exemption from collection of advance tax on vehicles leased under the Prime Minister’s Youth Loan Scheme; a 25% concession on total duty and taxes on vehicles with an engine capacity between 1801 to 2400cc; and a reduction in sales tax on the supply of hybrid electric vehicles at the import stage to encourage the use of efficient motor vehicles.

The strategy of increased taxation and incentives for the industrial sector has worked well in the past for the government. According to estimates, Pakistan’s economy grew by almost 5.28% last year; to put this figure in context, this is the highest growth rate achieved in the last decade.

A flourishing entrepreneurial culture in Pakistan has played a significant role in this regard. As of 2017, it was estimated that the SME sector contributes 30% to the total GDP, and accounts for more than 25% of the cumulative earnings from exports. Not only that, the sector is responsible for employing almost 70% of the non-agricultural labour force. Keeping this in view, incentivising the creation of more start-ups is clearly seen as an important policy goal for the coming year. This is why a three-year tax exemption on any profits earned has been allowed. In addition, exemption from minimum tax as well as WHT has been extended. SMEs will be provided with easy-to-access loans through a risk mitigation facility secured with Rs 3.5 billion from the State Bank of Pakistan (SBP). Microfinance institutions will be providing close to eight billion rupees to low net worth individuals in yet another effort to reduce unemployment and stimulate activity in the SME sector.

In addition to infrastructural developments, the other area of focus has been on boosting the digital and information communications technology (ICT) sector. The much needed Digital Pakistan Policy 2017 was introduced a few months ago and the Government has made allocations to establish an IT park in collaboration with South Korea; IT companies have been exempted from tax for three years and there will be no sales tax on IT exports.

With the realisation that broadening the base of mobile phone users is one of the key factors that will help ICT and boost the economy, WHT on mobiles has been reduced from 14.5 to 12%, sales tax from 18 to 17% and customs duty from Rs 1,000 to 650. These taxation relaxations are likely to bring down the prices of phones even further, thereby significantly increasing mobile penetration. The Government is also expected to establish a state-of-the-art e-gateway system at the SBP, at a cost of Rs 200 million to facilitate mobile transactions. Furthermore, exemption from WHT on cash withdrawals by branchless banking agents has been welcomed as an imaginative and much-needed step for optimising the scope of e-commerce and achieving the objectives set forth in the National Financial Inclusion Strategy.

The much needed Digital Pakistan Policy 2017 was introduced a few months ago and the Government has made allocations to establish an IT park in collaboration with South Korea; IT companies have been exempted from tax for three years and there will be no sales tax on IT exports.

As for real estate, the impact of the budget, contrary to the apprehensions of some industry stakeholders, will be positive. Construction taxes imposed last year have been withdrawn and this will provide a boost to the sector, and the nominal increase in the federal excise duty on cement and steel will not discourage construction activity. Although increases in capital gains tax are viewed as a debilitating factor in the property market, this was necessary to encourage non-filers to join the tax-paying club. The impact of the increase in federal excise duty and capital gains tax will be offset by huge investments that will flow in real estate as a result of the decision to authorise the Securities and Exchange Commission of Pakistan (SECP) to monitor the real estate sector and make it obligatory for developers and builders to seek approval of the SECP before collecting money from investors. These measures are likely to encourage investment in the property market. Real estate will also benefit from the implementation of a host of real estate and infrastructure development projects under CPEC. Analysts are of the view that these policy changes are likely to offset the losses experienced by the sector between 2015 and 2017, when taxes and ownership documentation regulations were introduced for the first time.

To sum up, despite the growth in the economy, relief measures for the public remained almost non-existent. Spending on education remains a low priority. The health sector seems to be suffering a similar fate; the average healthcare budget has ranged between 0.5 and 0.8% of the GDP in the last 10 years, compared to the six percent recommended target by WHO to enable the government to provide basic life-saving treatments to its citizens. While overall inflation (4.09%) was lower than the anticipated six percent in the last fiscal year, the upward trend of global petroleum prices is likely to trigger an across-the-board increase in prices as well.

Malik Muhammad Ashraf is an academic and a freelance journalist.
ashpak10@gmail.com