Rs3.3 trillion federal budget unveiled

ISLAMABAD: Finance Minister Dr Abdul Hafeez Shaikh presented the federal budget for fiscal year 2011 on Saturday with a total outlay of Rs3.3 trillion, showing a gap of Rs685 billion, to be financed by foreign and local bank borrowing.

Announcing a tight-fisted budget, dictated by circumstances, the finance minister proposed massive cuts in subsidies, a freeze in current expenditure and an annual development plan focused solely on completing on-going projects.

Total revenues are estimated at Rs2.58 trillion, with the budget deficit amounting to 4 per cent of Gross Domestic Product (GDP), 25 per cent less than the desired level. This is in line with the International Monetary Fund’s conditionality of restricting the deficit to a reasonable level.

The total outlay of the budget for the forthcoming financial year is almost 11 per cent more than the budget of the current fiscal year.

The government has proposed to take new tax measures of Rs 133.3 billion to achieve an ambitious tax target of Rs 1.677 trillion.

The major chunk of the new taxes would be collected by increasing the sales tax rate by one per cent and levying more taxes on cigarettes, increasing the withholding tax rate on commercial imports to 5 per cent, levying capital gains tax on stock market transactions and increasing tax on compressed natural gas.

Shaikh, who took oath as finance minister a few hours before the budget speech, said the federal budgetary outlay would be Rs2.3 trillion, which was 13 per cent higher than the current year’s budget.

After factoring in provincial allocations, the ERRA development budget and other development expenditure, the total federal expenditure would amount to Rs2.76 trillion. The Centre’s gross revenue receipts would be Rs2.4 trillion.

The Centre will spend Rs1.3 trillion on public services and a major chunk of it would go towards debt servicing and foreign loans repayments.

The federal budget deficit would be around 5 per cent of the total size of the economy and the provinces are tasked with generating a cash surplus of Rs167 billion, to keep the overall budget deficit at 4 per cent of the total size of the economy.

In order to bridge the gap between income and expenditure, the government will borrow Rs185.8 billion or over one-fourth of its financing needs from external sources. Domestic borrowing would amount to Rs499.2 billion and two-third of it would be obtained from non-banking sources like the National Saving Schemes. Bank borrowing is expected to amount to Rs166.5 billion.

Dr Hafeez Shaikh said that the Federal Board of Revenue’s tax target would be Rs1,667 billion, which is 9.4 per cent of the total size of the economy. “Economies with less than 10 per cent tax-to-GDP ratio are always in trouble. We want to enhance this through tax reforms,” said Dr Shaikh.

He, however, could not give a firm date for the implementation of the Value-Added-Tax. Failure to implement the VAT from July 1 has resulted in the government turning to its Plan B, which heavily counts on indirect tax measures.

New taxes

The government will increase the sales tax rate by one per cent and this would be applicable from the standard 16 per cent to the highest slab of 25 per cent.

The standard rate would now by 17 per cent, the tax on telephone call, cards would be now 20.5 per cent against the earlier 19.5 per cent and the tax on sale volume of the CNG would be 26 per cent.

At present prices, this measure will generate more than Rs33 billion. The new tax measures on the income side would generate an additional revenue of Rs42 billion.

The government has also proposed to increase the income tax rate for small companies and associations of persons to 25 per cent from 20 per cent. The move would yield an additional Rs 3.5 billion. With this move, the existing progressive rates would be abolished.

The government will increase the tax rate by one per cent to 5 per cent on all types of the commercial imports. The measure is expected to generate additional revenue of Rs12 billion. However, the tax on import of raw material would remain at 3 per cent.

The government has also withdrawn the capital gains tax exemption on the sales of the shares at the stock market from July 1 2010. This measure will generate Rs5 billion.

The government has levied income tax on goods transport vehicles at the rate of Rs1 per kg and the amount would be calculated taking into account the axle limit. The move is expected to generate Rs2.5 billion.

In addition to cash transfers, the government has also proposed to levy 0.3 per cent withholding tax on withdrawal of amount on account of demand drafts, online transfers and telegraphic transfers. The tax would be adjustable for registered persons. The measure is expected to generate Rs10 billion.

To shift the burden to higher income groups, the government has proposed to increase income tax rate to 20 per cent from 18.5 per cent for the highest salaried class slab that now starts on an income of Rs4.55 million per annum. Earlier 20 per cent income tax was imposed where the income exceeded Rs8.5 million. Now the Rs4.55 million income slab would be treated as the highest income class.

The government has also slapped a 5 per cent federal excise duty on domestic air tickets, which is expected to generate Rs3 billion in additional revenue.

Indulgences tax

In a bid to combine public health concerns with the need to raise revenues, the government has also proposed to levy Rs1 per filter rod of cigarettes. The measure would generate Rs 3 billion and is applicable from Sunday.

The tax authorities have also proposed certain measures at the federal excise duty stage that would generate Rs26 billion. On three different categories of cigarettes, the tax rates have been revised upward.

The government also levied 10 per cent federal excise duty on locally manufactured and imported air conditioners and deep freezers. The move would generate Rs3.4 billion.

On natural gas, the federal excise duty rate was also doubled, as the new rate would be Rs10 per MMBTU against Rs5.09 MMBTU, which would generate Rs5.8 billion. The government has given an incentive to the beverage industry, which would cost Rs3.8 billion to the national exchequer.

Published in the Express Tribune, June 6^th, 2010.