The federal Budget (2004-05) is indeed a manifestation of the availability of fiscal space, stemming from 6.4 per cent GDP growth, led by spectacular rise in industrial production , caused by strong upsurge in domestic investment and a significant decline in country's debt burden.
During the fiscal year 2003-04, all macro-economic indicators depicted marked improvement, barring, of causes, the lacklustre performance of the agriculture sector, which grew by 2.6 per cent, far short of its 4.2 per cent target.
The general perception in case of Pakistan is that it is the agriculture sector which serves as pace-setter for overall economic growth. This time, however, this notion has been belied, as the economy has gained greater momentum without notable contribution of the agriculture sector.
The marked improvement in economy and acceleration in resources has enabled the finance minister to earmark a record outlay of Rs202 billion for development programme by making a balanced resource-allocation among all segments of economy.
Meanwhile, a series of far-reaching, incentives and facilities have been envisaged for the two large sectors of the economy i.e. agriculture and industry. The development of both the sectors is inter-dependent and interwoven with each other, which ultimately help spur the over-all economic growth.
The industrial sector has taken full advantage of the wide-ranging structural reforms, prudent macro-economic policies, adopted during the last few years and a consistency and continuity in policy, as could be evidenced from its impressive growth of 17 per cent in the large manufacturing sector.
It is indeed the landmark of economic progress. The country is also closer to the attainment of export target of $12.1 billion. The main contributors to this outstanding performance are the automobile group, the food, beverages and tobacco group and the textile and apparel group.
The government policies have started injecting confidence in the private sector. During the last four years an investment of about $4 billion has been made in he textile sector, out of which over 60 per cent emanates from the resources of textile magnates themselves.
This is a new phenomenon in the industrial financing and must be appreciated and admired. During the year investment moved to18.1 per cent of GDP, as against 16.7 per cent last yea.
Export performance for the period July-April 2003-04 stood at around $10 billion as against $8.8 billion during the same period last year. The business and industrial community, therefore, have welcomed the budget and described it as investment-based growth oriented.
A new package of tax-reliefs and incentives (a brief resume given below) will add to the buoyancy and dynamism of private sector and particularly the manufacturing sector, which would come forward with a greater enthusiasm to maintain the ongoing growth momentum.
These fiscal incentives, combined with the cut in power tariff would certainly curtail the cost of doing business in Pakistan, which is considered to be the highest in the region and thus improve the cost effectiveness of our products- so badly needed to face the emerging challenges of WTO free trade regime.
The sales tax which is primarily a tax on consumption, had emerged to be the largest mobilizer of tax-revenue with its high and multiple rates of 15, 18, 20 and 23 per cent.
This, coupled with the mechanism of its imposition, recovery and refund rendered it to be a most controversial tax. In all the pre-budget proposals that were submitted by the trade bodies and other sections of taxpayers, a common and unanimous demand was made that the rates of sales tax be reduced and merged into a uniform tax.
At the same time, the procedure of its imposition and refund be drastically streamlined. The budget-makers took the timely cognizance of the genuine demand of the business community.
The budget has envisaged a multitude of measures to improve the impact of sales tax. The multiple tax rates have been integrated into a single tax of 15 per cent, although the business community's demand was for 10 per cent.
Further tax at 3 per cent has been abolished, which was the fountainhead of corruption. The turnover tax scheme has been abolished and the exemption threshold has been raised to Rs5 million.
This will have a stabilizing effect on retail trade, bringing a large number of retailers out of tax purview. Similarly, many items including plant, machinery, equipments, etc, will be subjected to zero rating tax.
Relief to agriculture sector by exempting imports of tractors, etc, is quite substantial. The infamous section 73 has been substituted and simplified refund rules are being evolved. The sales tax reform will remove many distortions in the system, minimize the cost of both input as well as output, thus leading to the generation of economic activities.
Another redeeming feature of the budget is the rationalization of custom tariff. Reduction of custom duty to 5 per cent on import of plant, machinery and equipments (not manufactured in Pakistan) is a welcome measure.
It is noteworthy that the maximum rate of duty on all imported items is not more than 25 per cent, excepting, of course, a few items including cars. Generally, the rate of duty on various kinds of machinery is only 5 per cent.
The demand of trade and industry was that the import of machinery must bear a zero-rated duty, as it is a tax on investment. Nevertheless, even this relief would prove worthwhile in the wake of removal of withholding tax and sales tax.
At the same time, elimination of certification condition for installation of duty free plant and machinery would be an added advantage. Likewise the duty rationalization on import of as many as 469 items of raw material, and smuggling prone items, along with items, relating to auto and agriculture sector, will help boost the growth of both trade and industry.
It is pertinent to mention here that the custom duty as a source of revenue-generation is fast losing its importance in an era of ongoing process of globalization and liberalization of trade.
Pakistan, being a signatory to the WTO and SAFTA is bound to curtail its tariff generally on all imports to nil or negligible, except those items which could be declared as "sensitive".
The enhanced valuation through rejected data base mechanism must not be made a basis for revenue mobilization to offset the loss, caused by reduction in duties. Although Pakistan has adopted GATT Code of Valuation, but still recourse is being found in determining value of imported goods through data-base.
Meanwhile, the parameters of new strategy to check under-invoicing and over-invoicing be determined through consultation with the representatives of trade and industry.
It was committed by the finance minister in his one of the earlier budget speeches that the federation would primarily retain three major taxes, namely sales tax, income/corporate tax and custom.
Wealth tax has been abolished but still the assessees declaring Rs5 lakhs income would be required to file wealth statement. Similarly following the emergence of GST, it was indicated that excise duty will also be phased out and abolished, particularly on those items which are liable to sales tax.
However, the element of double taxation in some cases still continues to persist. In the ambit of income tax, although the basic thresh-hold of income tax has been raised from Rs80,000 to Rs100,000, but the demand of the business community of reducing the maximum tax rate to 25 from 35 per cent has not been acceded to.
However the proposal to withdraw mandatory payment of 15 per cent of disputed tax for filing first appeal is being appreciated. The power tariff rates are one of the highest in the world.
The households, commercial and industrial consumers have been offered 10 paisa, 25 paisa and 58 paisa per unit reduction respectively in tariff. The reduction in rates has been described as peanuts.
However, some thing is better than nothing, but the most agonizing dimension of this proposal as appeared in a section of press, is that the tariff concession presently would apply to Wapda consumers and the KESC consumers would have to wait. Why this discrimination?
The tax-revenue for the fiscal has been fixed at Rs580 billion as against Rs510 billion for the on-going year, thus depicting a rise of Rs70 billion. The basis and break-up of the additional tax generation has not been made clear.
This amount could be raised by imposing withholding tax on commission income at 10 per cent of petroleum dealers, imposition of capital value tax (CVT) at the rate of 0.1 per cent on the purchase of shares in stock exchange, increase in excise duty on cigarettes, levy of excise duty on advertisement on cable, TV.
A 15 percent GST on over 218 items has been proposed through the finance bill. The CVT proposal on purchase of shares in stock exchanges has irked them and could be replaced.
The rest of the rise in tax-collection could be possible due to the buoyancy of tax-system, rise in GDP and reflection of inflation dimension. The Finance Minister at a post budget conference revealed that the readjustment of duties and taxes would have a negative revenue impact of Rs7.5 billion, whereas the ad-hoc increase in salaries and pensions would cost the exchequer about Rs15 billion.
Thus, the loss of revenue, as a consequence of new budgetary Tax relief measures would not be much to the government exchequers, but, they, in addition to financial benefits, would provide a much needed psychological relief and business-friendly atmosphere.
Finally, the incentive-laden budget which is indeed historic in many respects, has attempted to create an investment and business friendly environment. Many constraints irritants and distortions, escalating the cost of doing business in Pakistan have been duly identified and corrective measures proposed. Such a strategy will help reinforce the positive trends, discernible in the ambit of investment, production and export.