Pakistan's Federal Budget 2010-2011

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SLAMABAD: The government announced on Saturday an overall consolidated budget of Rs3.259 trillion for 2010-11, including additional taxation measures of Rs133 billion, and offered some relief to the poor and salaried people.
Pledging to increase tax revenue, pursue a tight fiscal policy, check inflation and protect economic recovery and poorer sections, Dr Abdul Hafeez Sheikh, the Minister for Finance and Revenue, in his budget speech in the National Assembly described the tax measures as “fair, just and equitable guided by the principle of ‘ability to pay’ set in the context of a war economy”.
The budget outlay of Rs3.259 trillion (including provinces) is about 11 per cent higher than the Rs2.897 trillion budget for the outgoing financial year.
The budget sets a tax revenue target of Rs1.779 trillion, compared with the last year’s Rs1.494 trillion -- an increase of about 19 per cent. The Federal Board of Revenue has been given a collection target of Rs1.667 trillion which is 20 per cent higher than the current year’s target of Rs1.380 trillion.
Dr Hafeez said the budget aimed at seven major objectives -- protecting economic recovery, controlling inflation, achieving self-reliance through domestic resource mobilisation, targeted social protection regime for poverty reduction, controlling losses of public sector entities, reducing unemployment, improving investment climate and overcoming energy shortages.
The FBR’s revenue target of Rs1.667 trillion includes direct taxes of Rs657.7 billion and indirect taxes of Rs1.121 trillion. Direct taxes are about 22 per cent higher than the current year’s revised estimate of Rs540.4 billion. Indirect taxes are about 19 per cent higher than the current year’s Rs943 billion. Indirect taxes include Rs675 billion sales tax, Rs153 billion federal excise and Rs181 billion customs duty.
Against a total outlay of Rs3.259 trillion, the new budget forecasts total revenue at Rs2.574 trillion, leaving a fiscal deficit of Rs685 billion or four per cent of the gross domestic product (GDP). It will be met through net external financing of Rs186 billion, net non-bank borrowing of Rs332.6 billion and banking borrowing of Rs166.5 billion. An amount of Rs1.033 trillion will be transferred to the provinces under the seventh NFC award, compared to Rs655 billion during the current year, showing a substantial increase of about 58 per cent.
The next year’s current expenditure has been estimated at Rs1.998 trillion against the current year’s original estimate of Rs1.699 trillion, up about 17.6 per cent. This includes expected defence expenditure of Rs442 billion which is 17 per cent higher than the current year’s revised estimate of Rs378 billion.
Allocations for the Public Sector Development Programme have been increased by 2.6 per cent to Rs663 billion. The current year’s original allocation was Rs646 billion.
An amount of Rs873 billion has been set aside for debt servicing, compared to the current year’s revised estimate of Rs815 billion, showing an increase of about seven per cent. The servicing of foreign debt will consume Rs251 billion against Rs219 billion of the current year. The servicing of domestic debt has been estimated at about Rs622 billion against the current year’s revised estimate of Rs596 billion.
The finance minister said the total federal budgetary outlay had been estimated at Rs2.229 trillion -- 13.1 per cent of the GDP.
As an austerity measure, the non-salary current expenditure will stand frozen at the current year’s level. The government will be required to get an approval from the cabinet for any supplementary grant beyond 10 per cent of the approved budget.
The government has estimated total federal resources at Rs2.764 billion against the current year’s estimate of Rs2.462 trillion. Net revenue receipts have been estimated at Rs1.377 trillion. The current year’s estimate was of Rs1.352 trillion.
Dr Hafeez avoided discussing the much talked about value added tax (VAT), but said the general sales tax system would be reformed by October 1 in consultation with the provinces and other stakeholders. In the meantime, he said, GST rates would be raised by one percentage point to be replaced with the proposed single lower rate of 15 per cent on October 1.
The minister, however, said that operating under the international framework, the government would have to honour sovereign commitments to protect international credibility while aiming to be self-reliant and less dependant on foreign loans.
He praised the government for presenting the first budget after the consensus NFC award, reflecting the will of the people to transfer more resources to the provincial governments to steer development in education, health, law and order and municipal services.
Dr Hafeez said the reformed GST would not apply to health, education and food items consumed by the poor or to those whose annual turnover was less than Rs7.5 million. The proposed system would broaden the tax base instead of burdening the existing taxpayers.
A pilot scheme of Rs5 billion will be launched in 120 union councils in 12 least-developed districts and others which have suffered the most because of the security situation. Under the scheme, a guaranteed daily wage equal to minimum wage will be provided to unskilled workers for 100 days a year. The amount will be transferred from frozen non-salary current expenditure to benefit 200,000 households next year.
Dr Hafeez said that federal government employees would be allowed an ad hoc increase of 50 per cent in their basic salary without giving additional increase to those who had already availed it. This increase will not be allowed to cabinet members whose salaries would be cut by 10 per cent.
The government has allocated Rs131 billion for hydel, thermal and nuclear energy projects to augment generation and improve transmission. Diamer-Bhasha dam will be launched as a mega project during the fiscal year.
Dr Hafeez said that Rs50 billion would be spent under the Benazir Income Support Programme to provide targeted cash grants to the poorest of the poor. At the same time, a comprehensive exist strategy scheme based on international best practices will be introduced like Waseela-i-Haq to provide self-employment through small business.
Taxation proposals
Following are the highlights of taxation measures announced in the budget for fiscal 2010-11.
• The system of General Sales Tax will be reformed to replace multiple tax rates with a single lower rate of 15pc.
• The reformed GST will not apply to health, education and food items consumed by the poor.
• The GST will not apply to turnover of less than Rs7.5 million per year whereas the current threshold is Rs5 million a year. The system will be automated, reducing the possibility of corruption and refund delays.
• It will broaden the tax base, instead of burdening the taxpayers.
• The GST reform is expected to be in place by Oct 1 after consultations with the provinces and other stakeholders.
• As an interim measure, the GST rates are proposed to be raised by 1 percentage point. Once the reformed GST is in place, the proposed single lower rate of 15pc will become effective.
• One per cent Special Excise Duty levied on most items of imports and manufactured locally has been abolished.
• Federal Excise Duty incidence on all categories of cigarettes has been enhanced and an FED levy of Rs1 per filtered cigarette has been proposed.
• The rate of FED on natural gas has been increased to Rs10 per mmbtu, while a levy of FED at 10pc ad valorem on air-conditioners and deep freezers is proposed.
• Income tax exemption limit for the salaried class has been enhanced from Rs200,000 to Rs300,000, benefiting approximately 430,000 taxpayers.
• Exemption limit for non-salaried income is also proposed to be raised from Rs100,000 to Rs300,000 per year, benefiting approximately 350,000 taxpayers.
• Rate of income tax collected along with monthly electricity bill from industrial and commercial consumers is proposed to be reduced from 10pc to 5pc, providing a relief of Rs4.5 billion to 66,000 taxpayers.
• Under the Prime Minister’s Fiscal Relief Package for Khyber Pakhtunkhwa, Fata and Provincially Administered Tribal Areas, an additional tax relief of about Rs2 billion has been provided to benefit 300,000 taxpayers.
• Instead of monthly withholding tax statements, only quarterly withholding statement will be required to be e-filed.
• Taxation on interest free/concessionary interest loans provided by an employer is proposed to be waived.
• Rate of final withholding tax on non-specified payments to non-residents is to be reduced from 30pc to 20pc.
• Tax-free payments to non-residents on profits on debt will be allowed 10pc tax credit for balancing, modernisation and replacement to all companies.
• A 5pc tax credit is proposed to be allowed to a company in the tax year of its enlistment.
• 10pc withholding tax has been announced as final charge on profit on debt (in debt instruments) and also for the investment in government securities (treasury bills and PIBs) to allow hassle-free compliance by non-residents.
• It has been proposed that income tax be raised for the association of persons (AOP) at a flat rate of 25pc against the existing progressive rate averaging up to 20pc.—APP