The Budget


WEB DESK: As expected the budget for fiscal 2016-2017 was different from the previous three budgets that the PML (N) government had presented insofar as its focus on growth and consolidation of the macroeconomic fundamentals rather than meeting targets agreed with the IMF was concerned.

Since the last tranche from the IMF is due in September this year, it would not be unreasonable to expect that once it is received the government may announce some more populist measures.

The budget for FY17 sets an ambitious target for gross revenue receipts, proposes a larger flow of resources to the provinces and makes an effort to contain current expenditure of the government to the minimum. Gross revenue receipts at rupees 4915 billion during 2016-17 would be higher by 13.5 percent than last year’s. The provincial share out of these receipts will be rupees 2136 billion compared to rupees 1852 billion in 2015-16, showing an increase of 15.3 percent while net resources left with the federal government will be rupees 2781 billion compared to the revised estimates of rupees 2481 billion for 2015-16. Total expenditures for FY17 on the other hand have been budgeted at rupees 4395 billion compared to rupees 4095 billion for 2015-16, showing an increase of 7.3 percent. Current expenditures are estimated to show an increase of only 3.6 percent to reach rupees 3400 billion while estimates for PSDP at rupees 800 billion are projected to show a much larger increase of 21 percent. Keeping in view security challenges the defence budget has been increased by 11 percent from rupees 776 billion last year to rupees 860 billion for FY17. Overall, the government has targeted to reduce the budget deficit from 4.3 percent of GDP in FY16 to 3.8 percent during FY17.

The findings of the Economic Survey released a day before the budget announcement had set the tone of the needed emphasis to address the setbacks to the national economy. The GDP growth target could not be met primarily because of the poor performance of agriculture below par performance of manufacturing sectors. Another area of a lacklustre performance was exports. The budget did address these and proposed measures that were being demanded by these sectors.

The salient features of budget have been stated to be: (i) least burden on the poor and middle class, (ii) withdrawal of exemptions to further eliminate discriminatory tax exemptions and concessions, (iii) expansion in the scheme of differential taxation for filers and non-filers with a view to penalising the non-filers, (iv) rationalisation of customs tariff and reduction in the number of slabs, (v) broadening of tax base and documentation in the economy, and (vi) increased share of direct taxes.

It may be recalled that the government had announced a package of incentives for agriculture in September 2015 valuing rupees 341 billion, but as is obvious from the results, it did not address the malaise that this sector suffers from such as non-availability of quality seeds, pesticides and fertiliser at affordable price. Another package of incentives for agriculture, that the finance minister termed the highest-ever in the history of the country, has been announced in the budget that includes lowering of prices of fertiliser, electricity tariff for tube wells and availability of credit at reduced rates, withdrawal or reduction of all customs duties and sales tax. Once again the total cost of these incentives has been proposed to be shared equally between the federal and provincial governments. It is hoped that this time round the federal government has obtained the consent of the provincial governments unlike the last time or else the fate of this package will be no different from the earlier.

To forestall the fall in exports and provide for accelerated growth the demands of the five major export earners, namely: textiles, leather, carpets, sports and surgical goods, has been accepted in almost totality. They have been offered the zero-rated regime of sales tax and an undertaking that all their stuck tax refunds as of 30th April 2016 shall be paid by 31st August this year. Tariff slabs in customs duty have been reduced from five to four by merging the 2 and 5 percent slabs into one slab at 3 percent and substituting the 10 and 15 percent slabs with slabs of 11 and 16 percent. Customs duty on dairy, livestock and poultry sectors has been reduced from 5 to 2 percent. Similarly, rates of duties have also been reduced on fish farming, fish feed machines. Taking cognisance of the survey funded by an international agency that showed that an alarming number of children suffer from malnutrition and as a consequence of that their physical and mental growth is stunted, premixes of vitamins and supplements that were previously subject to customs duty from 5 to 20 percent have been exempted from this levy.

With a view to accelerating industrial investment in the country, the budget proposes concessions in the form of ‘tax credits’. Various rates of tax credits have been proposed for enhancing employment generation, making sales to registered persons, for balancing, modernisation and replacement (BMR) of plant machinery and equipment establishing new industrial units and expansion of existing plants or new projects. However, with the introduction of “Alternate Corporate Tax” in the finance act 2015 that taxes corporate earning net of all credits at 17 percent, the offering of tax credits will have a very limited effect and may not yield the desired results.

The declared objective to penalise the non-filers of tax returns monetarily through higher rates of withholding taxes without a concomitant effort to hunt them down and prosecute them is most disturbing and conveys a disturbing message, ie, one can pay one’s way through non-compliance if you have the money and can afford to. This is akin to some other laws, such as the building code, where one can violate the law and not follow the building plan and thereafter pay the penalty and regularise it. In our view, it is therefore essential that paying a higher rate of withholding tax should not suffice and the FBR should proactively pursue them to widen the tax net.

Despite a 3 percent inflation rate the government has thought it fit to generously increase salaries and benefits of its employees and this would oblige the provincial governments to follow suit. It has also increased the minimum wage from rupees 13000 to 14000. This is indeed a populist measure necessitated more by the internal political environment than any sound economic logic.

Among the notable omissions is a total silence on the privatisation of state-owned enterprises to stem the haemorrhaging from the budget and an expected scheme for declaration of overseas assets of resident citizens. As regards privatisation one can safely assume that most likely it is not going to happen during the present term of the PML (N) government. As is now apparent, the government is in a populist mode for various reasons not the least being the uproar on the Panama Papers and the coming elections.