KEY MEASURES 

Compared with last year, the budget speech this year was strewn with a positive undercurrent, the optimism perhaps fostered by inauguration of Islamabad Metro Bus, the developments on the China Pakistan Economic Corridor (CPEC), and money in the bank, enhanced foreign exchange reserves.

On the other hand, historically, budget speeches have always highlighted the accomplishments of the incumbents in the previous year and proposed initiatives designed to alleviate the country’s economic distress within a year, with some gains accruing over three years. 

The plan for next year is to keep fiscal deficit at 4.3% through increased revenue generation and curtailment of expenditure; increase capital investment to 15.6%; bring public debt to 60% of GDP maintaining inflation in single digit; and target GDP growth at 5.5%. 

While the budget speech is silent on significant gains to the economy from collapsing international oil prices in 2014-15, the belief that oil prices will not increase in 2015-16 is seemingly implicit in the budget strategy. 

The Government appears to be keen to continue pursuing Keynesian economics during next year with a 65% increase in budget for building highways. The PSDP has been allocated a total of Rs 700 billion which includes a welcome appropriation for Diamer-Basha Dam, a gift of Green Line Bus Transit System for Karachi, spending on energy projects, on Gawadar and on railways. The budget proposals additionally include steps to bring down taxes on construction machinery, financing and raw inputs. 

The Government has once again reiterated its commitment to provide funds necessary for CPEC. 

The proposed increase in education spending is admirable, however considering the minimal current spending, a growing population and its importance in tackling unemployment, there is definitely a need to enhance education spending by multiples. Aside from economic activity generated during construction period, gains from infrastructure remain uncertain and accrue over a limited time; the benefits of investing in education on the other hand are certain and infinite. Education needs to be the top priority for Pakistan. 

EXIM Bank of Pakistan is proposed to be established in 2015-16. Additionally, and as expected, mark-up rates on ERF and LTTF have been reduced with a promise to remove anti-export bias in imports. The textile sector has been offered further incentives to increase exports and benefits have been announced to boost livestock exports. It is also proposed to have tax holidays for certain industry and plans to set up industrial zones. Whether all these steps will actually result in expanding exports, which have stagnated for the last 3 to 4 years, remains to be seen. 

On the other hand slashing maximum tariffs (Custom duty) down to 20%, excluding vehicles and their spare parts, is likely to increase the import bill. A more than comparable increase in the latter will hardly curtail the trade deficit consequently forcing the government to borrow more in the international markets. There is a definite need to monitor trade, export and import both, with a focused objective of expurgating the trade deficit. 

In the absence of detailed information it is difficult to determine the impact on trade balance in services due to the package proposed for the aviation industry; which includes zero custom duty on import of aircrafts and their parts. Since, passenger and cargo traffic is now mostly handled by foreign airlines it is likely that the effect may be adverse. 

Khyber Pakhtunkhwa has been offered a bunch of concessions that were specifically mentioned at length in the speech; probably Sindh has already started doing homework on its list of demands. 

Finally, the Government increased the salaries and pension of its primary constituency, the public servant. 

Before concluding, two components of the budget speech require special mention. Firstly, the government has admitted that the informal economy is equivalent to the size of the formal economy, and that too on the floor of the parliament; however the strategy to absorb the informal into the formal seems lacking. Secondly, the banking sector seemingly has been singled out to bear the brunt of additional tax collection, with a 35% tax rate on all sources of income and a further 4% super tax on income to be utilized to settle Temporarily Displaced Persons. 

 

INCOME TAX 

•CNIC also to be NTN with effect from tax year 2015 for individuals. This should facilitate in identifying non-filers and enhancing the tax base. 

•Super tax imposed, supposedly for tax year 2015, for rehabilitation of displaced persons. This tax is payable by banking companies at the rate of 4% and by all other taxpayers at the rate of 3% of income; the latter required to pay such tax only if income equals or exceeds Rs. 500 million. For the purposes of this provision, income will be the sum total of all taxable income, imputable income and that computed under the Ordinance including profit on debt, dividend, capital gains, brokerage and commission. 

•Income of banks from all sources, including dividend and capital gains, proposed to be tax at a uniform rate of 35%. Corporate tax rate other than for banking companies proposed to be reduced to 32% for Tax Year 2016. 

• Tax at the rate of 10% on undistributed reserves, reintroduced, effective Tax Year 2015, on companies other than a scheduled bank, modaraba or companies where 50% shares are owned by the Government. A Company, which earns profit in the tax year and do not pay cash dividend or its reserves exceed 100% of its paid up capital after distributing a dividend, will attract this proposed tax. 

• Profit on debt is proposed to be taxed as a separate block of income @ 12.5% and 15% where such income exceeds Rs 25 million and Rs 50 million respectively. For profit under Rs 25 million, the rate will continue to be 10%. The withholding tax rate for filers will continue to be 10%, while for non-filers, where income exceeds Rs 500,000, withholding tax at 17.5% would apply. 

•Threshold for investment in newly issued shares and for insurance premium, increased to Rs. 1.5 million, for purposes of tax credit. 

•Tax credit for house loans substituted by deductible allowance of upto Rs 1 million or 50% of taxable income whichever is less. 

•In order to increase employment, the finance bill proposes a 10 year tax credit of 1% for every 50 employees registered under labor laws upto a maximum tax credit of 10%. This exemption will be available to new manufacturing units set up between 01 July 2015 and 30 June 2018. This provision could be extended to expansion projects of existing companies as it targets job creation. 

•The minimum tax rate for land developers is proposed at 2% of the value of land notified by the relevant authority. 

•It is proposed to provide exporters the option to be assessed under the normal tax regime, as opposed to final tax regime. Considering that tax on exports will in such cases be deemed as minimum tax, the possibility of anyone opting under this provision seems unlikely. 

•Rate of additional tax is proposed to be reduced from 18% to 12%, which is a welcome change pursuant to the decrease in State Bank of Pakistan interest rate. In addition, tax on delayed payments by FBR has been changed to KIBOR plus 0.5%. 

 

Withholding Taxes

o14% proposed for internet services 

o0.6% on banking transactions by non-filers in excess of Rs 50,000 per day. 

o10% for resident persons on royalty on use of industrial, commercial or scientific equipment or rent of machinery 

o5% on remittance of education expenses abroad 

oTax on commission enhanced for non-filers to 15%. 

•It is proposed to increase tax rate on dividend from 10% to 12.5% and for non-filers such rate is however proposed at 17.5%. Certain exceptions to this general rule include REIT, Stock Funds, and Power projects. 

•Capital gains tax on sale of listed securities increased by 2.5% on existing slabs and proposed to be levied at the rate of 7.5% where holding period exceeds 24 months but less than 4 years. 

•Following industrial undertakings proposed to be exempted from tax: 

oManufacturers of equipment for generation of renewable energy set up by 30 December 2016- for 5 years effective 01 July 2015 

oWarehouse and cold chain facilities set up by 30 June 2016- for 3 years 

oHalal meat operations set up by 31 December 2016- for 4 years 

oManufacturing units set up by 30 June 2018 in KPK- for 5 years 

oTransmission line projects set up by 30 June 2018. 

oLNG terminal operators and owners from start of commercial operations- for 5 years 

 

SALES TAX 

•The bill introduces the concept of whistleblower, both in Sales tax and FED Acts, and empowers FBR to sanction rewards for identification of concealment, fraud, evasion, corruption and misconduct. The underlying procedure is however to be prescribed. 

•The further tax of 1% chargeable on supplies by non-registered persons is proposed to be increased to 2%. Considering the Government’s admission on the size of the informal economy, this may have an inflationary effect. But due to depressed international oil prices, inflation may not be a concern for the moment. 

•The Federal government has been authorized to enter into agreements with Provincial governments and governments of foreign countries for sharing of information on sales tax and FED matters. A positive step towards capturing black money trail. 

•The services sector, within the federal capital, has been brought into the ambit of sales tax, in line with the tax regime followed by provinces. 

•Electronic monitoring system is envisaged for cigarettes, beverages, cement, fertilizer, sugar and restaurants, with intent perhaps to reconcile taxes, sales tax and FED, with production. The efficiency of the monitoring system will be critical for the success of this proposal. 

•Dairy products (other than milk) moved from zero rating regime to exemption regime. Whereas, dairy products (other than milk) sold under retail packing made chargeable sales tax @ 10%. 

•Diagnostic kits and equipment; aircrafts and specified goods related to aviation sector exempted from sales tax. 

•Consequent to withdrawal of regularity duty, sales tax slabs on import and registration of cell phones are proposed to be doubled. 

 

FEDERAL EXCISE DUTY (FED) 

•Average rate of duty on locally produced cigarettes increased from 58% to 63%. 

•The rate of duty on aerated waters is proposed to be increased from 9% to 12%. Cigarettes and Beverages remain the biggest revenue earners under FED, and the strategy to squeeze these twin sectors continues; but for how long?