People of Pakistan still in freezer
Finance Minister Assad Umar has delivered his second budget speech on 23rd January 2019 in the National Assembly Withdrawing critical taxes on capital market and ban on purchase of vehicles by non-filers of income tax returns and facilitating industry, agriculture and small and medium enterprises (SMEs). It is the second supplementary budget in almost four months with overall net revenue loss of Rs 6.8 billion.
The government has announced a set of incentives for business community that is aimed at getting the wheels of the economy moving. It seems the measures laid down in the supplementary finance bill are trying to encourage investment and discourage the import of luxury items.
However in all three budgets announced for FY 2018/19, one by PML N and two by PTI, the element of relief for common people are almost missing. They have been treated by both the governments and even all previous governments by putting them as a chicken in a freezer.
There is a story that a person received a parrot as a gift. The parrot was fully grown with an attitude of arguing and demanding too much. The person tried to change the bird’s attitude by constantly saying polite words and playing soft music, anything he could think of. Nothing worked. He yelled at the bird and the bird got worse. Finally, in a moment of desperation, he put the parrot in the freezer to get a minute of peace. For a few moments he heard the bird swearing, squawking, kicking and screaming. Then, suddenly, there was absolute quiet. Person got frightened that he might have actually hurt the bird and quickly opened the freezer door. The parrot calmly stepped out on to man’s extended arm. Perfectly calm, the parrot said, “I am very sorry that I offended you with my language and actions. Now I ask for your forgiveness.” Person was astounded at the changes in the bird’s attitude and was about to ask what had changed him, when the parrot continued, “May I ask what the chicken lying in the freezer did to you?”
In Pakistan everybody knows that with immense poverty its population is lying like a chicken in the freezer and the person like their governments have always threatened their opponents treating them like a parrot to put them in to the freezer.
Anyhow now we take a glance what government has announced on 23rd January 2019.
Reduction in tax on inter-corporate dividends or elimination of the super tax on non-banking corporate would become effective after July 1. Further government has clarified that “there is no change in FBR’s target and in overall fiscal deficit” during the year. The Federal Board of Revenue target would remain unchanged at Rs 4.398 trillion.
To encourage small and medium-sized enterprises (SMEs) across the country, most notably, the 49 per cent tax on SMEs has been reduced to 20 per cent, making it easier to open and conduct business in the country. SMEs will also be exempt from filing withholding tax returns every month and will only need to submit them twice every year. The additional financing will be worked out on the basis of average advances to these sectors in calendar year 2018 and the facility would remain in place from tax years 2020 to 2023.
In addition, the budget intends to bring some much needed relief to Pakistan’s farming community. Interest on agriculture loans has been reduced from 49 per cent to 29 per cent. Also, duty on diesel engines for agricultural procedures has been set at five per cent from its current 17 per cent. Gas Infrastructure Development Cess will also be removed from fertilizer production.
The budget would also reduce the Rs20, 000 fixed tax on marriage halls to Rs5, 000. The one per cent per annum reduction in corporate income tax is also set to continue, and the super tax on non banking companies is to be abolished. The ban on the purchase of vehicles for non-filers will be lifted for cars up till 1300CC capacity, but higher taxes will apply. In addition, taxes on cars with an engine capacity of 1800CC and above is also set to be increased. Taxes on mobiles have also been amended, with taxes for the budget segments to be reduced, while high end luxury sets will become more expensive. Withholding tax on bank transactions will be waived off for tax filers.
However there is a curious insertion of 1A in the finance act related to an amendment to section 123 of the income tax ordinance. This has attracted a great deal of attention. The insertion says that “[w]here an offshore asset of any person, not declared earlier, is discovered by the Commissioner…the Commissioner may at any time before issuing any assessment order…issue to the person a provisional assessment order…for the last completed tax year of the person taking into account the offshore asset discovered.” This may help out a lot of people with Imran Khan’s sister to get out of charges framed against them.
The Finance minister also announced steps for the newspaper industry, small shopkeepers and owners of marriage halls in the form of reduction in tax rates. Also included in the reduced duty rates or removal of regulatory duty are import of raw material/inputs for 135 tariff lines meant for plastic, footwear, tanning, leather, home appliances, diapers and chemical sectors. Most of these steps would come into force on March 31. Regulatory duty was also announced for removal of input materials of around 200 tariff lines for manufacturing of automobile parts by local vendors.
On top of that, the minister said that adequate foreign financing from bilateral, multilaterals (IMF), launch of Pakistan, Banao Certificates, Panda Bonds, Sukuk and Eurobond and commercial financing would keep flowing to help build foreign exchange reserves to a comfortable level of import in the medium-term.
In this regard Pakistan received its last installment of $1 billion from Saudi Arabia’s bailout package on 21st January. Last year in November 19, the country had received its first installment from the kingdom of $6 billion package including a one-year deferred payment facility for import of oil. Pakistan has now received $1 billion from UAE as balance of payment support. UAE had pledged an amount of $3 billion. The remaining $2 billion is due in the coming weeks.
The assistance being received from UAE is like what Saudi Arabia is extending to Pakistan. However, the ministry is silent on the condition/terms of such loans. In case of the previous assistance of $1.5 billion to Pakistan from Saudi Arabia in the previous government of PML-N, the same was paid back with interests by Pakistan later on.
On June 2017 Pakistan government total debt was Rs 20,768 billion. In June 2018 it became Rs 24212 billion and now in January 2019 it has gone to Rs 30,876 billion showing an increase of 16.58% from June 2017 to June 2018 (i.e. within 12 months) and 27.52% from July 2018 to Dec 2018 (i.e. within 6 months) . Hence if new government arrives today than they would also come up with the same argument that they have got immense debt from the previous government of PTI. It is well said for Pakistani politicians that to change a light bulb, one is required to change it and another one to change it back again.
On macro side, according to IMF estimates, Pakistan’s economic growth is expected to slow this year to four per cent, from the 5.8 per cent witnessed in 2018, and its fiscal deficit is set to hit 6.9 per cent of gross domestic product.
The reasons for such situation are very simple if one looks in to Federal Budget 2018/19 figures. The total outlay of budget was Rs 5.9 trillion, resource availability was RS 4.9 trillion, net revenue was Rs 3.0 trillion, and provincial share in taxes was Rs 2.5 trillion. The total expenditure was Rs 5.9 trillion with current expenditure as Rs 4.7 trillion. On expenditure two main heads were debt repayment with interest payments as Rs 1.620 trillion and on defense as Rs 1.1 trillion with pension as Rs 342 billion (Rs 260 for military pensioner and Rs 82 billion for civil pensioners). Hence with debt repayment amount + Defense expenditure+ Provincial share whole budget is consumed and there remains no option but to borrow again for other expenses. This would further increase inflation and effect poor class of the country that are already under pressure due to immense increase of prices in the last six months.
Now on current account deficit, it was $ 19 billion for FY 2018. In FY 2019 it would remain almost same or slightly low mainly due to PKR depreciation. Export cannot go above $ 25 billion due to poor growth of cotton and non availability of gas and electricity. With such ground realities we cannot run the country though some aid from gulf and China. This requires new game plan like focusing on tourism industry. For such we have to build some infrastructure with better law and order situation. Secondly we have to send our young generation to foreign countries especially gulf to generate additional remittance. We also need to focus on software development programs for other countries as India is doing.
However for doing so Imran Khan and his team is required to change their Life, their Choices, their Mistakes, and their Lessons. If they have to find, who can change their life than they must look in to the mirror.
Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), former Head of FSCD SBP, former Head of Research Arif Habib Investments and Member IFSB Task Force for development of Islamic Money Market, former Member of Access to Justice Fund Supreme Court of Pakistan.