BY: |Dr. Ayub Mehar|
In the light of fiscal measures and budgetary targets which were introduced in the Federal Budget 2018-19 a mini budget or revision in budgetary targets was quite expected. The change of government had confirmed the revision in the fiscal measures, though the mini budget does not completely reflect the manifesto and economic plans of the present government.
Despite these facts, it may be considered an Investment oriented budget while some steps have also been taken for ease of doing business. These ease of doing business steps are related with the taxation system. Simplified scheme for small shopkeepers, reducing the submission of withholding statements during a year from 12 to 2, withdrawal of withholding tax for filers on banking transactions, abolishing the advance tax collection by filers on cash withdrawal and sale of banking instruments, permission to non-resident Pakistanis holding international passports for purchase of vehicles and immovable properties without filing requirements and enabling purchase of locally manufactured vehicles up to 1300 CC without filing requirements are included in those steps which will improve the ease of doing business in Pakistan. Another step in this direction is that the advance income tax collected on imports by commercial importers is being made final tax liability instead of being part of the minimum tax regime.
The budgetary measures may induce the investment activities by multiple ways. Currently banks are paying 39 % tax on their income, now they will pay 20 % tax on their income from loans to SMEs, agriculture sector, and low-income housing. This income will also be exempted from super tax. This movement will encourage the inflow of investment in SMEs, agriculture, housing sector and those industries which imports their raw materials. The exemptions from sales tax and custom duties have been granted for five years to industrial undertakings set up for manufacturing of equipment used in generation of renewable energy if such undertaking is set up between 1st March 2019 and 30th June 2023. This is another investment inducing strategy in energy sector.
The policy measures will boost also the corporate sector, stock market, banking and non-banking financial sector. The most important measure in this direction is that the tax on undistributed profits is being abolished. It will lead to promote capital formation by enhancing in internal equities. Though it may create a risk of avoiding from dividend payments by the companies and the small investors may be the looser of this policy measure.
However, in the present fiscal environment when country require the expansion in business activities, this step may provide enhancements in investment and employment opportunities. For companies availing group relief, tax on inter-corporate dividend has been reduced to the extent of percentage of shareholding the recipient of dividend has in the distributing company. Obviously it is another incentive to the corporate sector. The carry forward of losses from securities sustained in a year will be allowed to subsequent three years. The tax on members of stock exchange in lieu of their commission has been abolished. Now their income from commission is to be taxed under normal law. These steps will improve the stock market in Pakistan.
The rates of super tax for banking companies were: four percent, three percent and two percent for tax year 2019, 2020 and 2021, respectively. Now, it has been uniformed at 4 percent till tax year 2021. The non-banking companies shall pay super tax at 2 percent for tax year 2019, however it will be exempted from 2020 onwards. It is notable that super tax will not be imposed on the income of banking companies from loans to SMEs, low-income housing and agriculture. It reflects the policy direction to create fiscal space for these priority sectors, while non-banking companies provide investable funds for housing, consumer durables, vehicles and plants and machineries.
It is a common intuitive that these measures have been taken to synchronize the budgetary targets with the IMF conditionalities. Though it is not clear that how this Mini Budget will increase the revenue collection and reduce the fiscal deficit. The re-imposition of consumption tax on mobile phone services at 30% and increase in duties on the import of luxury cars and the higher taxes on expensive phones will not provide enough space to enhance the revenues and reduce the fiscal deficit. What are the hidden sources to create the required fiscal space? It is difficult to identify those sources at this stage however some steps announced in the salient features provide an idea to create fiscal resources to meet the budgetary targets.
The collection of revenue from undeclared assets or incomes is one of the possible source. Now a provisional assessment may be made in case of an offshore asset not declared earlier if such asset is discovered by the commissioner or any department or agency of the federal or provincial government. The commissioner will be empowered to issue an assessment order of past ten years on discovery of undisclosed offshore assets.
The re-imposition of wealth tax is another step in the same direction, however its economic implications depend on the mechanism and description of wealth for tax purposes. Such policy measures are synchronized with the slogans and manifesto of the ruling party. It was mentioned in the salient features of the amendments that Agricultural tax will be dropped to 20 per cent. It is not understandable that how the federal government will get benefit from this policy. The tax on agriculture income is a provincial subject; the federal government cannot utilize the income from this tax. If the objective of this move is to improve the tax collection of provincial governments, it may be a good incentive, but what will be achieved to the federal government ultimately? It may provide a signal to re-determine the financial needs of federal and provincial governments and sharing in divisible pool.
It is declared that FBR will launch the Bonds for Refundable Taxes for Rs.500 Billion @10 % for 3 years. It seems a public borrowing for medium-term at the lowest rate of interest. Though commercial banks may provide the discounting facility to such bond holders but definitely bank will charge a rate of interest higher than the coupon rate (10 %). It will not solve liquidity problem in the export-oriented industries while cost of funds will increase.
As a part of development planning, the government has introduced a revolving fund of Rs.5 billion for housing industry. The formation of the Special Economic Zones adjacent to CPEC have been reassured. But what will be the source of financing, it was not mentioned. It is the basic requirement to show the sources of financing in the budgetary documents.