• Excise duty on cars of 1800cc and above doubled
• Ban on car, property purchases by non-filers withdrawn
• Banking transactions of non-filers to be taxed at 0.6pc
• Regulatory duties on additional 312 items
• CPEC spending protected
ISLAMABAD: Partially reversing income tax relaxations and reducing the development budget, the PTI government announced a supplementary budget on Tuesday with a total fiscal adjustment equal to 2.1 per cent of GDP (roughly Rs805 billion), including Rs183bn worth of revenue measures.
Finance Minister Asad Umar delivered his inaugural budget speech for the PTI government in an unusually calm environment — a rare opportunity — as the opposition PPP and PML-N listened to him in silence. The minister reciprocated by conceding that the economic crisis was 15-30 years in the making and not the specific fault of any one political party.
A key reversal on the revenue side was elimination of the restriction on non-tax filers on purchase of real estate and automobiles. In the last budget of the PML-N government, a ban had been imposed on non-filers of tax returns to purchase new cars and property. The car manufacturers and real estate developers were up in arms against the decision that had plummeted car and property sales by up to 50pc.
The finance minister claimed that the ban was being removed because it was interfering in the ability of overseas Pakistanis to do business and invest in Pakistan.
Even with such a massive fiscal adjustment described by the minister as a ‘bypass surgery’, the target for fiscal deficit for the financial year 2018-19 was put at 5.1pc instead of 4.9pc set in the budget passed by parliament in May this year. Reforms will follow in about a month or so to put the economy on the road to recovery, he said.
Mr Umar said the supplementary budget for the current year had become inevitable because of severe economic crisis and necessitated by the “unrealistic” budget announced by former finance minister Miftah Ismail.
In that budget, he added, revenue collection was overstated by Rs350bn and expenditures were understated by Rs250bn and Rs286bn projected as cash surplus from the provinces was also unlikely to materialise when they jointly posted a Rs18bn deficit last year despite similar anticipated surpluses.
He said the combined Rs890bn impact of these three unrealistic targets would actually take the fiscal deficit to Rs2.78 trillion at the end of the year, or 7.2pc of GDP, instead of Rs1.89tr reflected in the budget books.
For his own part, the finance minister provided no budget books for a record or future reference. The public is left to piece together the numbers from the budget speech and a brief press conference immediately following it, after which the minister departed with Prime Minister Imran Khan for Saudi Arabia.
The revenue target has been revised downward by Rs45bn to Rs4.39tr. The minister said the development programme had been capped at Rs725bn (down from Rs1030bn in original budget), compared to actual expenditure of Rs661bn last year. Of this the core development to be financed out of budget would be Rs575bn, while Rs100bn infrastructure funding needs of the National Highway Authority would be met through what he called “innovative financing” the details of which would be discussed in the parliamentary committee.
In doing development restructuring, Mr Umar said the major initiatives under the China-Pakistan Economic Corridor launched by the previous government would be fully protected. Likewise, Rs23bn allocated for large dams will also not be reduced but supplemented with donations on the calls of the prime minister and the chief justice of Pakistan to reduce their completion time from 8-9 years to 6-7 years. The funding to the Higher Education Commission is also unchanged.
On top of that, Rs50bn will be provided through public-private partnership to the Karachi Infrastructure Development Company on the instructions of the prime minister.
Giving background, the finance minister said the target for last fiscal deficit was set at 4.1pc of GDP, but it reached 6.6pc (Rs2.293tr) that was in reality 8.2pc when taken into account the impact of circular debt kept outside the budget — exactly where it was when the PML-N took over from the PPP in 2013.
The external situation was even worse, he said, adding that the current account deficit had climbed to $18.1bn last year from $2.5bn at the end of 2012-13. External debt touched $95bn last year instead of $60bn five years ago and yet foreign exchange reserves were falling rapidly and were enough to cover just 6-7 months of imports.
“The alarm bells have been ringing for quite some time,” Mr Umar said, adding: “The crisis is almost on our doorsteps now, unless tough decisions are taken to arrest and then reverse the situation.”
Talking about the Rs183bn revenue measures, the minister said that about Rs92bn would be recovered through the use of “modern technology” and without increasing tax rates on individuals — a pointer towards administrative measures used by all governments in the past when undertaking a stabilisation effort. The remaining Rs91bn would be additional revenue “to come from the rich”, non-filers and enhanced duties on expensive mobile phones, import of luxury food items and luxury cars and SUVs.
For example, he said the non-filers would now be able to buy property and vehicles of 1800cc and above but at a higher registration rate. The federal excise duty on 1800cc cars and above has been increased from 10pc to 20pc.
The minister said the ratio of income tax on all those below annual income of Rs2.4 million (Rs200,000 per month) had been kept unchanged, but income beyond Rs2.4m would be subjected to a maximum of 29pc tax rate on non-salaried and 25pc on salaried, instead of up to 35pc last year.
In a political move, the finance minister announced withdrawal of tax exemption on housing allowance, conveyance and sumptuary allowances of the prime minister, ministers and governors. When asked whether such exemptions would also be withdrawn from judges and generals, Mr Umar said no and added that they were government servants and not interested in ruling the nation.
He said a projection for Rs300bn collection as petroleum development levy was also unrealistic and had been capped at the last year’s collection of Rs189bn. The tax on all bank transactions by non-filers that was set at 0.6pc by the PML-N government two years ago and then brought down to 0.4pc has also been reversed to 0.6pc.
He said the pension for EOBI employees would be increased by 10pc. Likewise, Rs4.5bn would be released immediately for 8,276 houses to be built out of welfare funds that have been stopped by the previous government. He said the prime minister had also approved construction of 10,000 houses in the next phase.
The minister said regulatory duty had been imposed on import of 312 tariff lines and increased on another 295 high-end luxury items with additional impact of Rs12-13bn.
Published in Dawn, September 19th, 2018