Finance Bill 2024 :

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Finance Bill 2024: major changes likely in IR Statutes​

Business Recorder
Apr 6, 2024

ISLAMABAD: The Finance Bill 2024 will issue major changes in Inland Revenue Statutes for Harmonization and Simplification of Inland Revenue Statutes from July 1, 2024.

According to sources, the new Finance Bill will amend the Income Tax Ordinance, 2001; Sales Tax Act, 1990; Federal Excise Act, 2005, and Islamabad Capital Territory (Tax on Services) Ordinance, 2001.

The simplification and harmonisation of the procedures and processes under each of these statutes with each other for uniformity and ease of implementation/compliance for the tax collectors and the taxpayers is a key priority of the Federal Board of Revenue (FBR).

In this regard, proposed drafts of amendments in the Inland Revenue Statutes have been finalised after seeking feedback and comments from the general public and other stakeholders.

Subsequently, after further deliberations with stakeholders, the proposals have been considered during the preparation of the Finance Bill, 2024.
Under the revised laws, the FBR has proposed to give all basic administrative powers of income tax law to the additional/deputy commissioner Inland Revenue and assistant commissioner Inland Revenue under the simplification and harmonisation of Inland Revenue’s tax statutes.

The FBR has also proposed a new definition of toll manufacturing in the Income Tax Ordinance, 2001.

The new definition has been proposed under the draft amendments in the Income Tax Ordinance, 2001, for simplification and harmonisation of tax laws.

Under the proposed amendment in Section 2 (definitions) of the Income Tax Ordinance, 2001, the FBR has introduced a new definition of “banking” under the proposed draft amendments in the Income Tax Ordinance, 2001, for simplification and harmonisation of tax laws.

Under the proposed definition of “banking”, it means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw-able by cheque, draft, and order or otherwise, it added.

The scope of “sales tax fraud” is intended to be enlarged by the FBR by seeking an amendment to Section 2(37) of the Sales Tax Act, 1990.

The existing definition of sales tax fraud provided under Section 2(37) is quite comprehensive, however, the new proposed definition is more exhaustive and drafted to further enlarge its scope.

Copyright Business Recorder, 2024

 

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Pakistan to miss budget deficit goal​

A new International Monetary Fund report showed that Pakistan is set to miss this fiscal year’s budget deficit target by approximately Rs1 trillion, as the global lender anticipates the country’s increased reliance on loans in the coming years.

The IMF released the report from Washington on the same day Pakistan’s finance minister sought assistance from the United States for “debt financing”.

The Fiscal Monitor report of the IMF indicated that the gap between expenditure and revenues may remain at 7.4% of the Gross Domestic Product (GDP) for the fiscal year 2023-24 ending in June. This figure is nearly Rs1 trillion or 1% of the GDP higher than the deficit limit approved by the National Assembly.

Despite the successful completion of the $3 billion IMF programme, the government is expected to miss the budget deficit target. Last year, the IMF forced Pakistan to amend the budget after its presentation in the National Assembly to make it more realistic. Yet, the target of 6.5% of the GDP or Rs6.8 trillion is projected to be missed by Rs1 trillion, necessitating additional borrowings from banks.

The IMF report forecasts that during the next fiscal year, Pakistan’s budget deficit may hover around 7.3% of the GDP — a level deemed unsustainable and likely to increase the country’s debt burden.

Furthermore, the Fiscal Monitor report suggests that Pakistan’s overall budget deficit from fiscal year 2024 to 2029 will remain in the range of 5.8% of the GDP.

The widening gap between expenditure and revenues has left the federal government at the mercy of commercial banks.

Due to the IMF’s policy of completely closing the central bank borrowing window for the federal government, commercial banks are now fully exploiting the federal authorities. With the budget deficit consistently exceeding 7% of the GDP, the central bank is indirectly lending to the federal government through commercial banks, leading to increased government borrowing costs.

Interest payments are estimated to range between Rs8.3 trillion to Rs8.5 trillion during this fiscal year, significantly surpassing the projected net income of the federal government and the single largest expenditure.

Read Budget deficit increases to Rs8.54tr

Meanwhile, Finance Minister Muhammad Aurangzeb met with the Chief Executive Officer of the United States International Development Finance Corporation (DFC), Scott Nathan, on Tuesday.

According to the finance ministry statement, “Finance minister requested DFC’s assistance in the areas of debt financing, political risk insurance, and capacity building to develop and implement potential DFC projects.”

The US Treasury Secretary Janet Yellen and the US Secretary of State Antony Blinken are members of the board of directors of the DFC.

The IMF Fiscal Monitor report showed that the government’s total revenues may remain at 12.5% of the GDP during this fiscal year, which is expected to slightly decrease to 12.4% in the next fiscal year.

In comparison, government expenditures are estimated to be 19.9% of the GDP for this fiscal year, which may marginally decrease to 19.6% in the next fiscal year. However, in absolute terms, expenditures will remain significantly higher than this fiscal year, maintaining the government’s dependency on banks.

Aurangzeb also addressed the JP Morgan Seminar on Pakistan’s Economic Policy Outlook. According to the finance ministry, the minister outlined three crucial reform areas: taxation, energy, and privatisation, as priorities of his government.

However, just days before departing for Washington to discuss fiscal policy, Aurangzeb approved four salary increases for officers of the Prime Minister’s Office. This decision suggests that the government may not fully grasp the gravity of the fiscal situation.

The report indicates that Pakistan may achieve the primary budget surplus target of 0.4% of the GDP for this fiscal year. However, the World Bank stated earlier this month that the country is likely to miss this core IMF goal of achieving a primary surplus by the end of the fiscal year.

The Fiscal Monitor report suggests that the record number of elections being held worldwide in 2024 poses a significant risk to fiscal consolidation prospects for the year. The 88 economies or economic areas that have already had or are expected to hold nationwide elections include Bangladesh, Brazil, the European Union, India, Indonesia, Mexico, Pakistan, Russia, the United Kingdom, and the United States. These economies represent more than half the world’s population (or 4.2 billion people and 55% of global GDP).

According to the IMF report, there has been little change in the distribution of debts, deficits, and public finance risks and vulnerabilities globally. It added that while monetary policy remained restrictive in more than 85% of the world’s economies in 2023, only half of them tightened fiscal policy, down from about 70% in 2022.

After sharp declines in 2021–22, global public debt edged up again in 2023 and remained above pre-pandemic levels by 9 percentage points of GDP. The share of low-income countries and emerging markets in or at high risk of debt distress remained elevated. The finance minister held a meeting with Ajay Banga, President of the World Bank Group, and highlighted the government’s commitment to advancing reforms in taxation, energy, and privatisation sectors. Both sides agreed on the need for a rolling Country Framework Plan for 10 years.

Published in The Express Tribune, April 18th, 2024.

 

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KP budget 2024-25: ​

KP draws Centre’s ire by pre-empting federal budget​

Manzoor Ali
May 25, 2024

• With total outlay of Rs1.7tr, Rs100bn surplus budget proposes Rs416bn for development projects
• 10pc hike in salaries, pensions; minimum wage increased to Rs36,000 per month

PESHAWAR: In an unprecedented move that drew the Centre’s ire, the PTI-led Khyber Pakhtunkhwa government on Friday unveiled its first budget of Rs1.7 trillion for the upcoming fiscal year (FY25) with a development outlay of Rs416 billion mainly focusing on social protection, law and order and economic development.

It is extremely rare for a provincial government to present its budget before the federal government lays out its financial plan, scheduled to be unveiled on June 7 this year.

The budget, presented by KP Finance Minister Aftab Alam Afridi in a provincial assembly session presided over by Speaker Babar Saleem Swati, envisages a surplus of Rs100bn. The budgeted expenditure of Rs1.65tr is 21 per cent higher than Rs1.3tr incurred during the current fiscal year (FY24).

Mr Afridi said an amount of Rs28bn has been allocated for the provincial government’s flagship Sehat Card Plus programme. Similarly, he said Rs29bn has been allocated for wheat subsidy and Rs12bn for three youth employment programmes.

Mr Afridi said Ehsaas Rozgar, Ehsaas Youth and Ehsaas Hunar programmes will generate 100,000 employment opportunities for the youth.

He said the provincial government has allocated Rs3bn for Ehsaas Apna Ghar scheme under which 5,000 houses would be constructed.

In a major development, the KP government has also allocated Rs10bn for the much-delayed Chashma Right Bank Canal lift-cum-gravity project in Dera Ismail Khan district, the hometown of KP Chief Minister Ali Amin Gandapur. Mr Afridi said this project would resolve the food security issue of the province.

He said the government has earmarked Rs3bn in subsidy for the Peshawar Bus Rapid Transit (BRT).

Centre’s reaction

Minister of State for Finance Ali Pervez Malik came down hard on the PTI-led KP government for announcing the provincial budget before the federal budget for FY25, calling it ‘irresponsible’.

At a press conference in Islamabad, Mr Malik accused the PTI of “bringing the country to the brink of bankruptcy”. “The KP government should have waited for the federal budget announcement,” he said, alleging that Imran Khan’s party is determined to ruin Pakistan’s economy.

He said the KP budget was based on assumptions and hoped that the KP government would “review its behaviour”. He also expressed the hope that Chief Minister Gandapur would cooperate with the federal government and the finance minister.

Salaries, pensions

The KP finance minister announced a 10pc hike in salary and pension for government employees and pensioners, besides increasing the minimum wage from Rs32,000 to Rs36,000 per month.

Budgetary estimates have pitched the province’s receipts at Rs1.7tr, with the federal receipts totaling over Rs1.2tr. Province’s share of federal tax assignment has been pitched at Rs902.5bn, 1pc of federal divisible pool in lieu of war on terror at Rs108.4bn, straight transfers at Rs42.9bn, windfall levy on oil at Rs46.3bn, net hydel profit (NHP) at Rs33.1bn, and NHP arrears at Rs78.21bn.

Province’s own revenue estimates have been projected to be Rs93.5bn, including Rs63.1bn tax and Rs30.2bn non-tax receipts. Similarly, the ways and means advance facility from the federal government has been proposed at Rs31.3bn. In addition to this, Rs259.9bn has been earmarked for federal receipts for the merged districts. This includes current budget allocation of Rs72.6bn, additional demand for current budget at Rs55.3bn, annual development programme (ADP) of Rs36bn, Accelerated Implementation Programme (AIP) of Rs40bn, unfunded Rs39.2bn, 3pc share (Rs17bn) for merged areas and rehabilitation of temporary-displaced persons.

Foreign project assistance has been estimated at Rs130bn, including Rs122.7bn foreign loans and Rs7.8bn donors’ grants. In addition to this, development and non-development grants under the federal Public Sector Development Programme (PSDP) have been pitched at Rs26.4bn.

Expenditures have been estimated at Rs1.23tr, including Rs1.093tr for settled districts and Rs144.5bn for the merged districts. Settled areas’ provincial salary has been pitched at Rs246bn, medical teaching institutions’ (MTIs) salary at Rs26.9bn, tehsils’ salary at Rs263bn, pension at Rs162.4bn, non-salary expenditures at Rs264.7bn, MTI’s non-salary budget at Rs28.68bn, tehsils’ non-salary at Rs29.5bn, capital expenditure at Rs40.3bn and repayment of ways and means advance at Rs31.3bn.

On the other hand, merged districts’ provincial salary has been estimated at Rs52.1bn, tehsils’ salary at Rs42.6bn, pension at Rs4.4bn, non-salary expenditure at Rs418.5bn, temporary-displaced persons’ allocation at Rs17bn and tehsils’ non-salary expenditure at Rs9.8bn.

Development expenditure

An amount of Rs416.3bn has been earmarked for development expenditure for the next fiscal year, including Rs120bn provincial ADP, Rs24bn for districts, Rs36bn for merged districts, Rs79.2bn for the Accelerated Implementation Programme, Rs130.5bn for foreign-assisted projects and Rs416bn for federal PSDP projects.

Finance minister Afridi said the provincial government has proposed a drop in sales tax on services in various categories. He said sales tax on hotels has been cut to 6pc from 8pc, but at the same time, restaurant invoice management system has been made mandatory for all hotels.

Similarly, the budget proposes a fixed tax on wedding halls.

Mr Afridi said the government also decided to reduce per kanal property tax to Rs10,000 from Rs13,600. Commercial tax rate on rentals has been reduced to 10pc of the rent from the existing 16pc, while tax on the private hospitals, medical stores and other health-related businesses has been reduced to 5pc from 16pc.

Published in Dawn, May 25th, 2024

 

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Incompetence at its peak. Thats all.
Pakistan's economic crisis is by large a direct result of short sightedness of our govs.

 

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Budget proposals: ​

OICCI calls for abolishing advance tax on telecom subscribers​

ISLAMABAD: The Overseas Investors Chamber of Commerce and Industry (OICCI) has recommended the government to abolish

 

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Govt decides to do away with subsidised gas for fertilizer industry​

Mushtaq Ghumman
May 26, 2024

https://defencepk.com/forums/javascript:void(0)
ISLAMABAD: The federal government has decided to do away with subsidised gas to the fertiliser industry for urea as the impact of subsidy is not being passed on to the farmers, one of the key demands of the International Monetary Fund (IMF).

This far-reaching consensus was evolved at a recent federal cabinet meeting when ECC decisions of May 7, 2024 were presented before it for ratification titled “fertiliser requirement for Kharif 2024 and measures to meet to requirement of urea fertilizer for Kharif 2024.” During the ensuing discussion, Cabinet deliberated on both decisions of the ECC in the context of direct provision of subsidies to the farmers.

 

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5,700 ongoing uplift schemes will be prioritized in budget: Nasir​

Press Release
May 25, 2024

KARACHI: Provincial Minister of Energy and Development and Planning Syed Nasir Hussain Shah has said that the Special Investment Facilitation Council (SIFC) is our institution which will take steps on a solid basis for the improvement of other institutions and the stability of the country, tourism institutions will remain with the Sindh government.

This institution will take measures with the collaboration and mutual support of the Sindh government. In this regard, a meeting was held between CM Sindh and SIFC in which the institution assured the Sindh government that whatever steps they will take. They will do it by taking the Sindh government into confidence and by mutual consent.

Nasir Shah said that Sindh government will have the authority to decide the final steps regarding SIFC.

 

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Business community, aware of govt’s limitations, holds low expectations for budget​

Budget proposals from various business forums reveal that trading house demands are more prominent in Sindh than in Punjab.

Afshan Subohi
May 27, 2024

As budget makers in Pakistan grapple with demands, possibilities and public aspirations, the business community, aware of the government’s limitations, holds low expectations. However, this hasn’t stopped them from inundating policymakers with their own proposals that project their priorities as national interest.

“With limited flexibility in national accounts [high expenditure demand and low resource mobilisation], and keen donor’s oversight, the budget has become more of an annual ritual, lacking innovation or intent to challenge the status quo.

“Addressing the key parasitic elements is not even on the agenda, as the current crop of politicians fear unmanageable chain reactions. They prefer playing it safe, using tried and tested donor-cleared formulas, making the budget a mere follow-up exercise,” commented an observer.

The conduct of the business community is not much different in this respect. Each year before the budget, they present their wish lists to the government, framing their interests as those of the entire country.

Analysing the budget proposals from various business forums reveals the diverse and regionally distributed shades of interests within Pakistan’s business class — trading house demands are more prominent in Sindh than in Punjab.

‘Annual budget proposals from chambers are an exercise of registering wishes with little hope for material change’

In Karachi, the thrust of demands of key constituents of the city chamber, the five industrial areas bodies — Sindh Industrial Trading State Association (Site Association), Korangi Association of Trade and Industry, Landhi Association of Trade and Industry, Federal B Area and North Nazimabad Association of Trade and Industry, prioritise security and infrastructure, along with concerns about high production cost and harassment by state and non-state elements.

Furthermore, budget proposals from the Karachi Chamber of Commerce and Industry and the Federation of Pakistan Chamber of Commerce and Industry focus heavily on sales tax and duties.

The corporate sector, meanwhile, emphasises fair and simple taxation, documentation, digitisation, privatisation and further liberalisation to create a more conducive environment for investment and industrial growth.

Sectoral bodies such as textiles, sugar, cement, auto, fertiliser, power companies, and pharmaceuticals lobby the government before the budget, seeking continued concessions and reduced costs for government levies, credit, raw material and utilities.

They emphasise the potential of job creation and tax contributions, warning of risks if their demands remain unmet. In addition to submitting formal memorandums to the relevant official forums, they run media campaigns to pressure the government and gain public support.

Commenting on the private sector budget proposals, Ehsan Malik, CEO of the Pakistan Business Council (PBC), stated, “Given the Federal Board of Revenue’s (FBR) inability to offer relief to the over-taxed or tax the under-taxed, annual budget proposals from chambers are an exercise of registering wishes with little hope for material change.

 

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Budgets 2024: thinking afresh​

Huzaima Bukhari | Dr Ikramul Haq | Abdul Rauf Shakoori

“Simplify taxes, reduce the cost of excessive documentation, open the economy for higher growth and employment, taxes too will increase”—Pakistan Institute of Development Economics (PIDE) Policy Viewpoint [16:2020] Doing Taxes Better: Simplify, Open & Grow Economy

The biggest challenge on tax mobilisation front faced by Federal Board of Revenue (FBR) and provincial tax authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA) is bridging the monstrous tax gap through automation, introduction of tax intelligence system and levying taxes on the rich, rather than enhancing the rates of existing ones, especially indirect taxes—have already made us uncompetitive in the world.

The budgets for fiscal year 2024-25 by federal and provincial governments are in the making amid very difficult times when we are faced with economic meltdown and stagflation. The federal budget is expected to be presented on June 7, 2024.

The traditional approach adopted for decades in Pakistan for balancing the books, levying irrational taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances as a paradigm shift is needed in our economic policy to come out of perpetual fiscal mess.

In these columns, we have been presenting concrete measures to increase revenues (tax and non-tax) without hampering the already collapsing economy, incentives and stimuli to revive businesses fast, proposals for better fiscal management in the post-Constitution (Eighteenth Amendment) Act of 2010 [18th Amendment] and finally using integrated new city model to achieve desired growth of over 8% for a sustainable period of at least a decade by tapping rich natural and human resources.

The efficient and enhanced collection of revenues (tax and non-tax) is very important to meet the needs of a rapidly-growing population and running the State effectively. These are urgently required to help millions living below poverty line identified in the latest United Nations’ Human Development Report [2023-24] to rescue them from a charity-dependent trap.

The central theme of all budgets of 2024—federal and provincial—should be achieving the long-delayed and much-needed goal of simplification of tax system, ensure welfare of the common people and provide universal entitlements [free education and health, decent living, affordable public transport, universal pension, income support, civic amenities etc.] through a comprehensive social security system.

This would only be possible by following a rational tax system proposed in 2016 and updated in 2020 [Towards Flat, Low-rate, Broad and Predictable Taxes] and some concrete measures suggested below.

At least for coming five years we will have to strive to ensure survival and revival of businesses adversely affected first by Covid-19 pandemic and later by political debacle that started on April 10, 2022.

An overwhelming majority of industries is now struggling to survive. Industries and businesses in Pakistan have been suffering due to sluggish economic activities, high utility bills and markup rate even prior to Covid-19 outbreak that further accentuated the challenges after harsh conditions imposed by the International Monetary Fund (IMF) for its two bailout packages of July 2019 [abandoned] and July 2023 [completed].

Since 2020, no one, except PIDE and a few writers, have suggested some out-of-box solutions to overcome persistent fiscal mess and stagflation.

In these columns, it has been repeatedly emphasised that the iniquitous prescription of erratic and oppressive taxes and austerity in the federal and provincial budgets by IMF and local economic wizards (sic) will not solve our problems, especially in the prevalent circumstances.

The federal and provincial governments need to generate and spend more money on infrastructure improvement and human resource development to create more employment and ensure higher growth, engaging private sector to take part in public projects to revive and grow. This would kick-start the economy.

Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their inefficient machinery, monetize all perquisites of bureaucracy and make taxes simple and low-rate.

State lands, occupied unproductively by elites, owned by the federation and provinces should be leased out for industrial, business and commercial ventures. It will generate substantial funds, revenue (in public auctions 10% full and final tax can be collected amounting to billions and thereafter on development and construction of various housing and commercial projects huge amount of taxes, both direct and indirect, for FBR and provincial tax agencies) and facilitate rapid economic growth opening many vistas for employment.

The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local and corporations) and Public Sector Enterprises (PSEs), who mostly waste time and money creating hurdles for citizens and businesses rather than serving them.

Rightsizing of monstrous administrative machinery and improving quality of public services should be top priority in the agenda of reforms. This can be done by transferring much of the work to Local Governments, which should be installed from the lowest level up.

Local elected authorities should handle all health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax etc.

For making Pakistan a self-reliant economy, we must stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, the government-owned corporations should be run with private-public partnerships, giving stock shares to the employees and introduce other steps to make these profitable through complete restructuring, increasing productivity through better technology and trained human resource, improving agricultural sector to meet local needs as well as creating exportable surplus; and reducing economic inequalities through redistribution of income and wealth using rational tax policy.

The following are some measures to generate revenues (tax & non-tax) for both federal and provincial governments to become self-reliant as well as steps for providing relief to all, especially the weaker sections of society. In the present difficult economic situation, we have a great opportunity to create nation-wide data of all persons, showing their earning/expenditure levels and ownership of assets in order to provide a comprehensive social security system.

The political parties having governments in the centre and provinces can easily implement these through negotiations with opposition under democratic process. They will certainly extend their consent as for pro-people changes none would like to face the wrath of voters.

• Till the time, the governments complete the process of digitization and automation, actual quantification of income of non-corporate businesses and professions should be deferred and taxation may be moved to gross basis at fixed rate (after determining the fair rate for each class of business/profession). There should be no audit/raids. Taxpayers in their books should be allowed to take credit of imputable income.
• Presently, barring a few, income tax is levied on net income with minimum tax to the extent of amounts collected through over 50 withholding provisions. It is patently unconstitutional as held by Supreme Court in the Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582].

The Supreme Court held that the National Assembly through Money Bill can impose taxes on income under Entry 47, Part I, Fourth Schedule to the Constitution or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”. Since the Finance Act 2019, this blatant violation is persistently going on.

• For ease of doing business and waiving off lengthy disclosures in exceptional circumstances, if presumptive tax is imposed on turnover/receipts under Entry 52 as was done in 1991-92, the collection would be around Rs 3000 billion from all businesses and professions, other than companies, and employees that would keep on paying taxes under the existing tax rates and system. Its working and enforcement will be discussed in the next week’s column elaborating efficacy of tax intelligence system developed by some top experts to capture turnovers/receipts for all businesses and professions.
• The total collection, if we add corporate sector’s contribution, after levying excess profit tax to counter monopolies and cartels, under the head income tax for fiscal year 2024-25 alone would be Rs 9000 billion. Revenue under one head alone can be a great achievement without hampering economic revival and, in fact, giving businesses and professions a stimulant to grow. FBR can get much more tax than what is presently collected after giving share to provinces under the 7th National Finance Commission (NFC) Award.
• The federal government should also amend the definition of “agricultural income” to bring into its ambit receipts from sale of orchards, lease of lands, nurseries and in this way, the rich absentee landowners and those engaged in businesses of nurseries will come under the Income Tax Ordinance, 2001. Additional revenue of Rs 400 billion can be obtained from this source, if taxation is based under Entry 52 as discussed above.
• The historic decision of taxing “agricultural income” by the federal government was passed by Federal Parliament in the shape of Finance Act, 1977, but was thwarted by the military regime of General Ziaul Haq.
• Through the Finance Act, 1977, the Parliament amended the definition of “agricultural income” to tax big absentee landlords under federal income tax law. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in Pakistan’s history but was unfortunately foiled by a military dictator. It needs to be revived. Small farmers having holdings up to 15 acres are already exempt from income taxation and will remain so. There is no need to amend the 18th Amendment or disturb NFC Award if this measure is adopted in Finance Bill 2024.
• During Zia’s 11-year rule and that of General Pervez Musharraf for nearly 9 years, absentee landowners did not pay a single penny as agricultural income tax, capital gain tax or wealth tax.
• Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution under Entry 47. All four provinces have enacted laws to this effect, but total collection during the last five years never reached even Rs 2 billion cumulatively (share of agriculture in GDP on average was about 20% for this period). Therefore, there is need to impose income tax on the rich absentee landowners as suggested above.
• Military rulers abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax, etc. Now these are with provincial governments after the 18th Amendment, but they are least interested in taxing the rich and mighty. If these taxes are imposed an additional revenue of Rs.300 billion can be generated.
• Multinational Companies (MNCs) through abusive transfer pricing mechanism deprive Pakistan of taxes of over Rs 500 billion every year and this can easily be recouped with advance transfer pricing agreements—presently, no provision exists to this effect.
• The Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis. The repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.
• Through amnesties and asset-whitening schemes successive governments have caused billions of rupees loss to the national exchequer. Levy of 1% tax on those having net moveable assets exceeding Rs 10 million by the Federal Government and at the same rate on immovable assets by the provincial governments will bring equity as the rich will be forced to contribute at least Rs 500 billion to help the economically distressed.
• Total collection by imposing unified sales tax on goods and services (as done by India in 2017) can reach Rs 7,000 billion. This would not only give fiscal space to the federal government to narrow down fiscal deficit but also enhance distribution amount to the provinces. Distribution to be strictly as per the Constitution. Collection under new law could be by FBR as provincial assemblies only need to pass resolutions under Article 144 of the Constitution, empowering the National Assembly to enact integrated sales tax on goods and services.
• There is no need to enter into any controversial amendment in the Constitution disturbing the 18th Amendment. The slogan of ‘One nation, One Tax’, adopted by India in 2017, and Harmonized Sales Tax (HST) by Canadian federal and provincial governments is the way forward as taxpayers operating on transprovincial level are facing many difficulties. If provinces do not agree, then for transprovincial entities, FBR can include in Finance Bill 2024, sales tax on services, following the command of Supreme Court in the case of Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802. It extensively elucidates that the post-Eighteenth Amendment position vis-à-vis legislative competence of federation and federating units as under:

“We are in agreement with the observation made by the learned High Court that though in a Federal system, provincial autonomy means capacity of a province to govern itself without interference from the Federal Government or the Federal legislature, but as the Provincial legislature does not possess extra-territorial legislative authority i.e. it cannot legislate regarding the establishments operating beyond the territorial boundaries of that province”.

• Supreme Court’s above pronouncement is not restricted to any particular law and covers tax laws as well. It is binding under Article 189 of the Constitution and if provinces do not agree for integrated sales tax of goods and service they are bound to suffer.
• In Customs, massive evasion takes place due to under-invoicing and wrong declarations. If revenue leakages are plugged as suggested in Dismantle containers’ mafia, Business Recorder, September 14, 2018, revenue could be Rs 2000 billion.
• Loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is about Rs 200 billion a year. It can be plugged by track and trace (T&T) system [see detailed study by Huzaima & Ikram, Flourishing illicit tobacco industry & “soft state”, 2020].

As evident from the above, the additional revenue generation of at least Rs 9000 billion is possible at federal and provincial level, improving tax-to-GDP ratio substantially and reducing fiscal deficit in fiscal year 2024-25, if measures as suggested above are taken.

In the next column, we will discuss why a paradigm shift is required in various areas in the tax system and fundamental structural reforms to improve tax collection at federal and provincial levels making Pakistan a self-reliant and truly welfare state and paying off internal and external debts.

Copyright Business Recorder, 2024

 

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Uncertain budget plans​

Editorial
May 31, 2024

WITH the Shehbaz Sharif-led government still fine-tuning the next budget, it might be too early to speculate upon the contents of the document. We will have to wait for a few more days before the budget proposals are firmed up and their contents finalised.

But what is certain is that in trying to achieve a balance between its political compulsions — providing succour to households no longer able to hold up against backbreaking inflation — and the necessity of plugging a deep fiscal hole in the economy, the government is faced with one of its most difficult challenges.

The confusion in the minds of the party leadership on how to deal with this paradox became even more evident on Wednesday when a PML-N meeting chaired by party leader Nawaz Sharif and attended by the prime minister decided to prepare a ‘people-friendly’ budget while adhering to IMF dictates.

Not surprisingly, there was no official word either from the PML-N or the federal government on the outcome of the discussions. However, it is abundantly clear that the prime minister, caught between public expectations and harsh IMF demands, is in a fix.

 

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Pakistan’s FY25 budget to be presented on June 10, sources say​

Reuters | BR Web Desk
May 31, 2024

ISLAMABAD: Pakistan will present the financial year 2024/25 annual budget on June 10, two government sources said on Friday, ahead of seeking a new International Monetary Fund (IMF) loan.

The budget was originally due to be presented on June 7 but was delayed because of Prime Minister Shehbaz Sharif’s visit to Beijing from June 4 to June 8, said the two sources, a top official at the finance ministry and an official close to the prime minister.

They spoke on condition of anonymity as they are not authorised to disclose the information.

The information ministry did not respond to a request for comment.

Finance Minister Muhammad Auragzeb, who will be accompanying Sharif to Beijing, will present the budget, which the finance ministry official said would be one of the most crucial ahead of a new loan from the IMF.

An IMF mission held two weeks of technical and policy level talks with Pakistani officials before it left last week to discuss fiscal consolidation measures to lay the groundwork for the new loan.

The talks made significant progress towards reaching a staff-level agreement for an extended fund facility, the IMF said after concluding the talks.

The IMF had opened discussions on the new loan programme after Islamabad completed a short-term $3 billion programme, which had helped stave off a sovereign debt default last summer.

Pakistan is likely to seek at least $6 billion under the new programme and request additional financing from the IMF under the Resilience and Sustainability Trust.

Earlier Business Recorder reported that the federal government will present the budget for the coming fiscal year in the National Assembly on June 7 (Friday).

“The upcoming budget session will start on June 6 (Thursday) and the federal government will present Budget-2024-25 in the National Assembly on June 7 (Friday),” the report stated.

After the budget 2024-25, the Speaker National Assembly was to adjourn the House for two days.

 

[ghazi52]

Uplift budget in tatters amid ‘misplaced priorities’​

Khaleeq Kiani
June 3, 2024

• Development spending cut by 25pc to Rs717bn; PSDP size falls from 1.7pc of GDP in 2013 to 0.9pc in 2023-24
• Planning Commission summary suggests finance ministry violating NEC decisions
• Budgetary resources being diverted to ‘constituency politics’, deficit financing

ISLAMABAD: The country’s development programme seems to be in tatters, incapable of meeting even a fraction of its infrastructure and growth potential, while budgetary allocations are flowing to constituency politics and deficit financing, in what is deemed a blatant violation of the decisions of the National Economic Council (NEC), the apex economic decision-making body.

This is the crux of a formal summary, presented by the Ministry of Planning, Development and Special Initiatives to the Annual Plan Coordination Committee (APCC) and the NEC, for course correction as part of the next year’s budget, with instructions to the Ministry of Finance to stay within the financial limits granted by the NEC to avoid stymieing national development.






Specifically, it required the finance ministry to “provide the foreign exchange component (FEC) cover wherever required and also exempt the development spending from austerity measures”, not to make at-source deductions of cash development loans (CDL) and not to divert development funds to the non-development side during a specific year.

The summary suggested that the Ministry of Finance’s boasting about surpassing the primary balance target — even significantly higher than committed to the IMF — during the outgoing fiscal year was at the expense of development projects, increasing their costs, delaying beyond repeated annual deadlines and losing significantly on opportunity cost.

It said the current year’s Public Sector Development Programme (PSDP) was cut by 25 per cent to Rs717 billion against Rs950bn allocation approved by the NEC and the parliament.

Against this backdrop, the PSDP for the next year faced a series of critical challenges. The ministries and divisions came up with demands for Rs2.8 trillion as the project throw-forward surged to Rs9.8tr this year against Rs3tr in 2013-14. The size of PSDP allocation and expenditure remained stagnant at an average of Rs630bn during the decade.

With this pace, the projects already under implementation would take 16 years to complete, provided no new projects are taken in hand.

“The size of PSDP in terms of the percentage of GDP shrunk over time and reduced from 1.7pc of GDP in 2013 to 0.9pc of GDP in 2023-24,” the Planning Commission said. It added that the “size of PSDP is also decreasing in real term due to inflation and depreciation of the rupee. Moreover, due to the IMF programme, the primary deficit has been managed with a cut on PSDP, which has worsened the development investment in the country”.

It said the NEC had approved policy guidelines last year to ensure smooth execution and completion of ongoing development projects that included 25pc funds for each quarter under a flexible release strategy, non-deduction of cash development loans from PSDP funds, and exemption of development funds from austerity cuts.






Instead, the “Finance Division issued a back-loaded release strategy at 15pc, 20pc, 25pc and 40pc, contrary to the NEC-approved release strategy for quarters Q1, Q2, Q3 and Q4, respectively,” it said.

On top of that, out of the total releases of Rs131bn in the first quarter (July to September) of this fiscal year, Rs61.26bn (or 47pc) was earmarked to SDGs schemes (for parliamentarians ahead of elections), leaving behind only Rs69.74bn for all other PSDP projects.

Additionally, Rs20bn was diverted to the non-development side during the year, and a 20pc (Rs184bn) cut was made in releases for the fourth quarter to maintain the primary budget balance, thereby compressing the PSDP size from Rs950bn to Rs746bn.

“Further, Rs29bn was deducted at source by the Finance Division on account of CDL recovery. Thus, the actual/effective size of PSDP was reduced to Rs717bn,” the Planning Commission said.

It said the ministries and divisions kept on pointing out major obstacles like restrictions on procurement, deduction of CDL, skewed release strategy, and requirement of rupee cover for foreign-aided projects in the execution of their respective projects.

“The at-source deduction of CDL dues from the development budget not only affects the cash flow/work plan of budgeted projects but also causes cost and time overrun in the long run,” the commission said.

“Thus, the expected financial and economic benefits from important highways and power projects are delayed and minimised besides affecting future cash flow through cost and time overrun.”

The Planning Commission pleaded the NEC to resolve the matter beforehand so that CDL repayment from development budget may be avoided.

Moreover, the share of provincial projects and programmes in the federal PSDP amounted to around 33pc irrespective of the fact that such projects were the responsibility of the provincial governments after the 18th Amendment.

“The inclusion of these projects in the PSDP hampered the financial and physical progress of the core mega-projects of national importance” while “on the other side, pressing demand of over Rs300bn emerged to provide budgetary cover to the foreign aid secured during the course of the financial year”.

Even at the formulation stage, the PSDP for the next fiscal year has been marred by Rs184bn liability rollover from this year due to a cut in PSDP size, thin spreading of programme allocation and rising throw-forward, rupee depreciation and price hike, additional demands of important projects, huge demand for rupee cover against foreign exchange component and at-source deduction of uplift loans by finance ministry.

Therefore, only 10pc of total development budget could be considered for new projects to ensure priority funding to strategic and core ongoing projects with 80pc completion, with particular focus on water, transport and energy. The provincial nature projects have, therefore, been excluded from the federal PSDP, except those in the 20 least developed districts.

Published in Dawn, June 3rd, 2024

 

[ghazi52]

Budget 2024-25: PSX proposes tax reforms to boost capital market​

BR Web Desk
June 5, 2024

The Pakistan Stock Exchange (PSX) on Wednesday submitted its proposals to the government for the upcoming budget, calling for tax reforms to boost the capital market.

The PSX proposed the government to bring the Capital Gains Tax (CGT) rates on listed securities in line with CGT on the sale of immovable property.

“This is essential to eliminate the tax driven distortion between different asset classes,” the PSX said in its report on budget proposals.


It also asked to align the rates of CGT on all derivatives and future contracts traded on PSX with future commodity contracts traded on Pakistan Mercantile Exchange Limited (PMEX).

Tax relief for foreign investment

The PSX also sought tax relief to attract foreign investment in the capital market.

“In order to attract and encourage foreign investment into capital market, it is proposed to offer tax relief to foreign investors in terms of exemption on capital gains and dividend earned on such investment, in line with similar tax relief offered for investment in GoP securities,” it proposed.

Rationalisation of tax rates for listed companies

The report called for reinstatement of the repealed section 65C of the Income Tax Ordinance, 2001 amended to allow tax credit to certain companies meeting the prescribed requirements of 25% free float, saying it would generate CGT and other tax revenue.

“Inequality of taxation of businesses should gradually be removed by reducing corporate tax rate/increasing tax rates for Association of Persons (AoPs).”

The proposal also included the restoration of exemption on inter-corporate dividend between companies eligible for group taxation and enhanced tax credit for small and medium enterprises (SMEs).

Government of Pakistan must move away from short-term measures and frequent changes in tax regime and adopt long-term measures to promote savings and investment and development of the capital market.

The PSX, in its budget proposals, proposed to withdraw the amendment made in clause (29) of Section 2 and newly inserted section 2362 of the Ordinance through Finance Act 2023.

It also requested to reinstate Section 62 of the Income Tax Ordinance that was removed in the Federal Budget 2022-23 to promote savings for the taxpayers with no major impact on revenue.