Pre-budget 2016/17 Enabling Background Document
Highlights
· Federal budget 2016-17 proposal was approved by the cabinet during a meeting which was presided over by Prime Minister Nawaz Sharif via video link from the Pakistan High Commission in London.
· The federal cabinet approved a deficit budget of Rs4.42 trillion which, like proposals in previous years, lacks major policy initiatives to put the country on the path to sustainable economic growth.
· The proposals appear to strike a balance between fiscal consolidation, imposed by the International Monetary Fund, and some incentives for the industrial sector.
· Despite revising them downwards each year, the government continues to set impractical targets for itself in the next budget, higher than – and as unachievable as – the previous ones.
· The government expects tax revenues to climb to Rs3.635 trillion, a new historical level, thanks to heavy indirect taxation.
· To boost earnings for next year, the budget proposes Rs170 billion in new taxes which will largely overburden existing taxpayers.
· The government is proposing to increase defense spending by over one-tenth to Rs860 billion, up by Rs79 billion from last year.
· The federal cabinet has also approved measures to further limit tax-free cash withdrawals from banks by linking the Rs50,000 limit to one identity card against the current practice of unlimited banks accounts.
· Other measures approved will see tax hikes on a string of consumer items. The super tax has also been extended for another year.
· Tax reliefs, albeit for select sectors, include lower rates for Pakistan Cricket Board. Tax benefits will also be extended for industrialists.
· Budgetary proposal for abolishing sales tax on pesticides has been approved.
· After the federal cabinet’s approval, Finance Minister Ishaq Dar will present the budget in the National Assembly on Friday.
Rs4.42tr deficit budget 2016-17[1]
The federal cabinet approved a deficit budget of Rs4.42 trillion which, like proposals in previous years, lacks major policy initiatives to put the country on the path to sustainable economic growth.
This includes Rs1.354tr for debt servicing, Rs860bn for defence, Rs245bn for pensions and Rs169bn for subsidies. The next year’s fiscal deficit target was set at 3.8pc or about Rs1.26tr and the FBR revenue target at Rs3.62tr.
The proposals appear to strike a balance between fiscal consolidation, imposed by the International Monetary Fund and some incentives for the industrial sector.
Budgeted Revenue Streams
The government expects tax revenues to climb to Rs3.635 trillion, a new historical level, thanks to heavy indirect taxation.
Rs170 billion in new taxes which will largely overburden existing taxpayers.
The government is proposing to increase defence spending by over one-tenth to Rs860 billion, up by Rs79 billion from last year.
The federal cabinet has also approved measures to further limit tax-free cash withdrawals from banks by linking the Rs50,000 limit to one identity card against the current practice of unlimited banks accounts.
Other measures approved will see tax hikes on a string of consumer items.
The super tax has also been extended for another year.
Tax reliefs, albeit for select sectors, include lower rates for Pakistan Cricket Board.
Tax benefits will also be extended for industrialists.
While Nawaz specially asked for a special package for farmers including substantial subsidy on urea, budgetary proposal for abolishing sales tax on pesticides has been approved.
Number fudging: ‘Highest ever borrowings in a single fiscal year’[2]
While the government will borrow roughly $10 billion in foreign loans in the next financial year, the budget documents to be presented in National Assembly on Friday only mention $6 billion in borrowings, apparently to deflect criticism against the growing debt pile.
The finalised foreign borrowings plan for 2016-17 excludes all publicly guaranteed loans, borrowings obtained previously to inflate forex reserves and foreign short-term commercial loans.
These exclusions will understate the country’s external debt pile by as much as $4 billion in a single year.
By including these borrowings into the total foreign economic estimates of next fiscal, the accumulated loans would be close to $10 billion – the highest ever borrowings in a single financial year.
Expenditure
The total estimated size of federal expenditures is over Rs4.42 trillion, around 8% higher than last year’s budget of Rs4.1 trillion.
The government will borrow Rs1.6 trillion, 4.8% of Pakistan’s gross domestic product (GDP), to run the country.
Despite the large deficit, the four provinces are expected to save about Rs335 billion or 1% of GDP from their incomes. This will bring down the national budget gap to Rs1.28 trillion or 3.8% of GDP.
This is in line with targets set by the IMF for fiscal year 2016-17, including a special waiver of 0.3% due to one-off spending of Rs100 billion on Temporarily Displaced Persons (TDPs).
Subsidies
Listing expenditures at Rs3.4 trillion, the federal cabinet has decided to maintain subsidies for the incoming fiscal year at Rs169 billion.
Budget for running the govt increased
With local government elections being held late last year, the cabinet has increased the budget of running the government by 6.8% to Rs348 billion.
Pension and military procurement funds
The government has set aside Rs245 billion to pay pensions, to military and civilians.
However, a major chunk worth Rs542 billion has been allocated as ‘grants’, which usually is provided to the military for defense procurements.
Increased Taxation Measures
The government has proposed to remove limitations on taxing unexplained assets of non-filers while transactions up to year 2002 can be investigated.
The cabinet approved advance tax on Alternate Corporate Tax. It also approved a proposal to levy 1% minimum tax on companies that are declaring gross losses.
It approved to increase dividend income tax rate to 20% for non-filers of income tax returns against the existing rates of 17.5%.
It also approved 3% withholding tax on cars leased by banks and such companies.
Raising taxes on consumer items, the government is proposing to increase federal excise duty on cigarettes from Rs3,030 per thousand sticks to Rs4,500 for cigarettes with printed sales price of over Rs3,350. Those with sales price below Rs3,350, federal excise duty rates have been raised from Rs1,320 to Rs2,000.
The cabinet has approved 10% sales tax on meat, poultry. The poultry and animal feed to be charged 5% sales tax. A 17% tax is approved on soya bean meal, sunflower seed.
Withholding Tax for Non-Filers Increased[3]
The government is set to increase the rate of around 30 withholding taxes (WHT) for those who do not file their income tax returns. The existing WHT rates will be further increased and, second, the concept of higher rates will be extended to a maximum number of sectors.
Higher withholding tax rates apply for non-filers in 18 sectors, including tax on dividend; banking transactions other than through cash; purchase of immovable property; sales to retailers; sales to distributors, dealers and wholesale; immoveable property; tax on motor vehicle; brokerage and commission; tax on private motor vehicles; cash withdrawal from a bank; petroleum products; transport services; payment for goods and services; profit on debt; and dividend income.
There are certain imports on which the government has introduced the higher rates for non-filers.
According to the FBR document, the higher rates of withholding taxes for non-filers are expected to be introduced for transactions by the Pakistan Mercantile Exchange Limited (minimum tax); education-related expenses remitted aboard; payment to resident for use of machinery and equipment; bonus shares issued by companies not quoted on stock exchange; bonus shares issued by companies quoted on stock exchange; tax on purchase of international air ticket/domestic ticket; tax on dealers, commission agents and arhtis; and collection of advance tax by educational institution.
Higher WHT for non-filers is also likely on advance tax on cable operators and other electronics; tax on foreign produced TV plays and serials; tax on function and gathering; sale by auction; telephone; tax on steel melters, re-rollers etc; electricity bill of domestic consumers; electricity bill of commercial and industrial consumers; CNG gas station bill; collection of tax by stock exchange; withdrawal of balance under pension fund; prizes and winnings; and income from property.
In the 1990s, withholding taxes were introduced to identify tax evaders. However, this concept of taxation has been eroded over time. Instead, it has become an easy tool for tax collection. If anything, heavy reliance on withholding taxes is making the income tax department irrelevant.
Rs1.67 trillion Development Budget[4]
The government approved a budget of Rs1.675 trillion for public-sector investment in the next fiscal year while setting the economic growth target at 5.7% on the basis of a 3.5pc growth in the agriculture sector, 7.7pc in industry and 5.7pc in the services sector.
GDP: The investment to Gross Domestic Product (GDP) target was set at 17.7% while national savings were targeted to be increased to 16.2% of the total size of the economy.
Inflation: The inflation target was set at 6% for new fiscal year.
Infrastructure: As much as 71.2% of the actual federal development allocation would go to infrastructure projects. Only 13.8% have been earmarked for the social sector. The federal government approved Rs467 billion for infrastructure projects – 14.4% higher than this year.
Within infrastructure, Rs157 billion have been proposed for the power sector; Rs260 billion for transport and communications; Rs32 billion for water; and Rs18 billion for physical planning and housing.
Previous Development Budget Under-utilized
Of the Rs1.514 trillion development budget approved for the outgoing fiscal, the actual spending would stand at Rs1.401 trillion by the year-end.
In doing so, the federal Public Sector Development Programme (PSDP) was cut by Rs31bn to Rs669bn for the ongoing fiscal year against an allocation of Rs700bn. The provincial PSDPs were also cut by Rs82bn to Rs732bn as opposed to the originally planned Rs814bn.
ISSUES WITH PSDP ALLOCATIONS
Federal PSDP: Rs 657 billion (stated – Rs 800 billion)
Out of the Rs800 billion, the actual federal development spending will be Rs657 billion while the rest of the amount would go to the security establishment (Rs100 billion) and PM’s youth package. (Another Rs875 billion for the provincial development programmes.)
The federal PSDP for 2016-17 is Rs 800 billion – Rs75 billion (or 13%) higher than the outgoing year’s development budget of Rs580 billion.
Sindh allocated meagre Rs 12.05b in federal PSDP[5]
Sindh government has expressed dismay over what it said meagre allocation of Rs 12.05 billion for Sindh in the proposed Public Sector Development Programme (PSDP) of Rs 800 billion by the federal government.
Only 25 schemes with an allocation of Rs 12.05 billion being executed by Sindh government have been included in the proposed PSDP.
Rehabilitation of Guddu Barrage and starting Motorway from Hyderabad to Sukkur remain just an announcement by the PM
11 new schemes for Sindh in next PSDP
The federal government had included 180 new schemes in its next PSDP, out of them only 11 were Sindh-based for which Rs 120.77 billion have been earmarked which constitutes 6 percent of the amount.
Province-wise break-up
Punjab has been given 26 new schemes worth over Rs140 billion against which Rs16.59 billion have been allocated.
Balochistan has been given 28 schemes worth Rs43.43 billion with an allocation of Rs28.3 billion.
Sindh has been given 11 schemes worth Rs13 billion with an allocation of Rs6.5 billion.
Khyber-Pakhtunkhwa has been given 18 schemes worth Rs11.59 billion with an allocation of Rs2.72 billion.
Gilgit-Baltistan has been given seven schemes worth Rs15.39 billion with an allocation of Rs1.1 billion.
Azad Jammu and Kashmir has got two schemes worth Rs3.73 billion against which Rs765 million have been allocated.
Islamabad has been given 88 schemes worth Rs195 billion with an allocation of Rs64.6 billion.
Proposed new schemes demanded by CM Sindh
Sindh demanded six new schemes with an adequate allocation be included in the next PSDP. They are Indus Highway-Jamshoro Sehwan Dual Carriageway; Sukkur Barrage rehabilitation Project, Un-gradation of flood infrastructure, short term mitigation & preparedness measures to counter sea intrusion; planting of 25 million trees to combat climate change effect in Sindh, Lining of KB Feeder Upper Canal for water supply to Karachi city.
The federal government has allocated only Rs 500 million for K-IV which may be increased to Rs 5.3 billion so that it could be completed within two years. This is a Rs 25.551 billion scheme in which federal and provincial government have to share 50: 50 cost.
Sindh chief minister said that Makhi Farash Link Canal project (Phase-II) is meant to supply water to Thar Coal to meet the requirement of Thar coal project. The total cost of the project is Rs 10.61 billion with equal cost sharing by federal and provincial governments. “I would urge the federal government to enhance its proposed allocation of Rs 50 million to Rs 2 billion,” he said.
Additional Chief Secretary Mohammad Wassem said that the federal government had proposed only Rs 10 million for Lining of Distributaries & Minors it should be enhanced to Rs 3 billion.
He said that a meager amount of Rs 1 billion has been kept as Normal Annual Development Programme (emergent flood scheme), PSDP 992 for the whole country, whereas Sindh has submitted many important schemes costing more than Rs 16 billion. The chief minister said that this allocation has been kept for whole of Pakistan and it should be enhanced to Rs 10 billion.
“I had discussed this requirement with the prime minister but I don’t know why meager amount has been proposed,” he recalled. The chief minister said that Sindh government has provided Rs 1.922 billion as bridge financing for vertical programmes of health department for which “I would urge the federal government to reimburse. Moreover, the federal government has to reimburse Rs 842.590 million of Hyderabad package.”
Financing TORs
Wapda, PEPCO and NTDC will spend Rs253 billion from their own resources, which is apart from the Rs1.675 trillion budget.
International lenders will provide Rs229.3 billion in fresh loans to finance Pakistan’s national development budget, which is about 14% of the approved outlay.
Allocation to NHA for CPEC road projects
The National Highway Authority will get a share of Rs188 billion, mainly to complete the road projects of the CPEC. The allocation, however, remains far below the requirements, officials say.
FATA forum
For the Federally Administered Tribal Areas (Fata), the NEC approved setting up a special forum under the Peshawar corps commander, who will be allowed to endorse development schemes worth up to Rs1.5 billion, buy land for them and monitor their execution.
Priority projects[6]
Top priority was given to the power sector with a total investment plan of Rs410bn, including Rs157bn from the budget and Rs253bn to be provided by Wapda, the National Transmission and Dispatch Company and generation companies. Second on the priority list was the transport and communications sector, with an allocation of Rs260bn, including Rs190bn for national highways and Rs41bn for railways.
The NEC also decided that 1pc of the cost of all CPEC projects should be earmarked for security arrangements due to special requirements.
A summary of the government’s performance[7]
This year’s provisional numbers will be firmed up and reported as ‘revised’ next year, while they will be finalised (and reported as ‘final’) the year after, ie in 2017-18.
Growth
Economic growth in 2015-16 has been officially recorded at 4.7pc, against a target of 5.5pc.
Agriculture sector
Value addition in the agriculture sector contracted by 0.2pc for the year, mainly on the back of a catastrophic decline of 28pc in cotton output (a drop of over four million bales).
Real GDP growth
Real GDP growth for the previous year (2014-15) was revised down to 4pc, from the earlier-recorded 4.2pc. However, experts estimate economic growth at between 3pc to 4pc, with risks skewed to the lower side.
Historically, each decline of one million bales was estimated to translate into a reduction of 0.5pc in the headline GDP growth rate. Over time, this relationship has weakened somewhat. Nonetheless, a decline of four million bales in cotton output would still translate, in my estimate, to at least a one percentage point reduction in headline GDP growth. Based on this estimate alone, the official GDP growth rate implies that, adjusted for the failure of the cotton crop, the rest of the economy generated a growth rate of 5.7pc. This is highly implausible given the rest of the reported parameters, including the investment and savings data.
Investment
Total fixed investment in the economy decreased to 13.6pc of GDP, with private investment surprising with a weaker-than-expected outturn of 9.8pc of GDP, against a target of 12.2pc.
Revenue
A key source of satisfaction for the government is its interpretation of its fiscal performance. Under challenging (and questionable) stipulations of the IMF programme, the government is on course to recording a nearly 20pc increase in FBR tax collection for 2015-16, one of the highest annual rates of growth in the recent past. Cumulatively, government revenue has increased around 56pc in the past three years.
Restrain on tax reforms due to IMF
Despite 20pc increase in FBR tax collection for 2015-16, government efforts at reform of the tax system have been piecemeal and random, and have fallen far short of a serious, credible, well-thought-out and wide-ranging reform required. There has been little or no thinking about the fundamental redesigning of the tax system, a meaningful restructuring of FBR, or a simplification of the tax code.
Serious tax reform has been constrained rather than facilitated by the design of the IMF programme, which has laid primacy on increasing revenues upfront rather than through a fundamental revamp of the tax system.
Strain on existing tax payers due to IMF
As a result, the bulk of the revenue increase touted by the government as an outstanding success has come from an increase in tax rates of existing taxpayers, an increase in the standard sales tax rate, newer withholding taxes, an across-the-board increase in import duties including on basic food items and essential goods, non-payment of refunds to industry, and anti-growth and anti-business measures such as increasing the sales tax on diesel to around 50pc while imposing the Gas Infrastructure Development Cess.
In short, the overall increase in revenue is impressive — but it has come at a punishing cost to industry and exports.
[1] Cabinet green-lights Rs4.42tr deficit budget, ET: May 31, 2016
[2] Budget books fudge foreign loan figures, Shahbaz Rana, Express Tribune, June 1, 2016
[3] Govt to increase WHT rates for non-filers of tax, Dawn: 31st May 2016
[4] Rs1.67 trillion development budget approved, ET: May 31, 2016
[5] Sindh dismayed by ‘meagre’ allocation in federal PSDP: BR, May 31, 2016
[6] Budget, uplift plans get PM’s virtual nod, Dawn: 31st May 2016
[7] Behind the numbers ,Dawn: MAY 27, 2016
