Wider tax base, subsidy cut main features of upcoming budget

KARACHI: Broadening tax base, introduction of value added tax (VAT), elimination of subsidies and controlling expenditure will be the main features of the upcoming budget, according to analysts.

The fiscal year 2011 budget will be more tax-based and tougher than last year because of the International Monetary Fund (IMF) conditions, said analysts at Topline Securities in their research report on Tuesday. The IMF gave Pakistan a loan of $7.6 billion to lift Pakistan’s macroeconomic indicators with some conditions including cutting subsidies and increasing power tariffs.

Thus, overall the objective would be to stabilise economy rather than giving huge investment incentives and subsidies, said analysts. The federal budget for the coming fiscal year is scheduled to be presented in the National Assembly on June 5. The following are some key points of the upcoming budget.

ECONOMY

The government is projecting tax collection target of Rs1.7 trillion for the coming fiscal year, 10.6 per cent of Gross Domestic Product (GDP). This target seems ambitious, according to Topline Securities. Budget outlay will be Rs2.5-2.6 trillion in the coming fiscal year compared with Rs2.5 trillion in the current fiscal year 2010. VAT on goods and services at 15 per cent will be imposed on businesses having annual turnover of more than Rs7.5 million. Basic food items, charities, public sector education and health will be exempted from VAT. The government is likely to set federal development expenditure of Rs300-400 billion in order to maintain fiscal deficit.

STOCK MARKET

Exemption from capital gains tax (CGT) on sale of shares of listed companies will expire in June 2010. The government, as per an understanding reached with the exchanges, will impose a 10 per cent capital gains tax in the budget if shares are sold within six months. And at the rate of 7.5 per cent if the holding period is greater than six months and less than 12 months.

SUBSIDY

Complete elimination of electricity subsidies is on the cards in line with the IMF directives. The government reduced subsidies to Wapda and KESC amounting to Rs67 billion in fiscal year 2010 compared to Rs88 billion in the same period last year. The government is likely to reduce subsidy on imported fertilisers for the fertiliser sector due to commissioning of new plants in the country. It will abolish inland freight equalisation margin, a component which equalises oil prices throughout the country. This will make prices of oil different across the country.

Published in the Express Tribune, May 19th, 2010.