Budget FY23: a reasonable effort

Targets of GDP, exports, remittances and revenue realistic and within reach

ISLAMABAD:

Contrary to most expectations, the federal budget for 2022-23 did not usher in harsh austerity measures or kite-flying.

Most targets are realistic. Major ones such as gross domestic product (GDP) growth of 5%, exports of $35 billion, remittances of $33.2 billion and revenues of Rs7 trillion should be within reach.

Nevertheless, some targets may be more challenging. These include keeping the average inflation rate within 11.5%, trade deficit at 2.2% of GDP, raising Rs300 billion from petroleum levy and Rs96.41 billion from privatisation.

Perhaps, the most anxiously awaited detail was which sector would be affected by any new taxation and to what extent. It was a relief that the new taxation measures are worth only Rs440 billion and almost two-thirds of these would be direct taxes, primarily targeting the rich.

Many steps taken through the retrogressive taxation in the mini-budget of 2021 were reversed. These include removing the sales tax on solar panels, supplies to hospitals, imports for export processing zones, temporary imports and goods donated to non-profit charitable hospitals.

The agriculture sector would be a notable beneficiary as sales tax has been withdrawn on seeds, tractors, and other agricultural implements.

In the case of customs duty, some progressive steps have been taken. These include rationalising the duty rates on about 400 tariff headings, reforming the regulatory duty regime and abolition of customs duty on several active pharmaceutical ingredients.

In the case of income tax, relief has been provided where it was due, such as for lower income groups, by raising the taxable income threshold from Rs600,000 to Rs1,200,000 per annum. On the other hand, high earners – those earning more than Rs30 million annually – would be subjected to 2% additional tax.

Similarly, the banking sector, which was recently making windfall gains on government securities, would see its tax raised from 39% to 42%.

Several steps have been taken to reduce the harassment of taxpayers. These include restriction on audit frequency to once in four years, the fixed tax regime for retailers and specified service providers, and removal of several withholding taxes.

Several measures, including sharing information between FBR and NADRA, are being instituted to check tax evasion.

The previous government had moved too far in supporting the real estate sector. As a result, most investments had started moving to that area.

Several tax concessions have been withdrawn to restore balance with other sectors, and some rates have been increased on real estate.

For example, all immovable properties barring first homes with fair market value of more than Rs25 million, will be taxed at 20% of the deemed rental income. The deemed rental income will equal 5% of the property’s fair market value.

Similarly, 15% capital gains tax has been imposed on the immovable property held for less than one year. Advance tax on the sale and purchase of properties will go up from 1% to 2% for filers and 5% for non-filers.

Allocation for the Naya Pakistan Housing Authority has been reduced from Rs30 billion to Rs0.5 billion.

A pleasant surprise the entertainment industry has welcomed is the tax concessions and other initiatives to uplift films, culture and arts.

These concessions include a five-year tax holiday for filmmakers, construction of new cinemas, tax rebate for the export of films and exemption from customs duty on the equipment for films and dramas.

In addition, a film finance fund and insurance scheme for artists have also been established.

All these measures come at a relatively good time. Pakistan was never known internationally for its artistic achievements.

At the recent international film festivals at Cannes and Amsterdam, Pakistani films won the top prizes in their categories. No doubt these measures would significantly contribute to improving our softer image.

Similarly, another good news is the setting up 250 mini-stadiums to promote sports. This measure would provide opportunities for physical activities for the people of all ages and reduce the spending on health-related problems.

Over time this measure would give the youngsters opportunities to engage in positive actions rather than turn to crime.

While the budgetary measures show that the government is trying to offset the adverse effect of inflation on the poor and asking the rich to pay higher taxes, they do not indicate any significant remedy for our present financial malaise.

Our difficulties arise from low exports, low FDI, and increased expenditure on non-productive sectors. Our economy is one of the most protected in the world, earning about half its tax revenue from tariffs on international trade.

Under the current circumstances, raising our trade-to-GDP ratio or attracting any significant FDI would remain merely a dream.

At such a desperate time, most developing countries, now major exporters, radically changed their import substitution policies to export-led growth. Unfortunately, this budget does not show that we are as yet moving in that direction.

The writer has served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva

 

Published in The Express Tribune, June 20^th, 2022.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.