Budget 2007-08
Salient features of the Budget 2007-08 announced by
Mr Omar Ayub Khan, Minister of State for Finance (errors omissions regretted)
Mr. Omar Ayub Khan State Minister for Finance (The Minister) delivers the budget speech.
The Minister said he was proud to present the 5th Budget of a democratic government. Trials and tribulations are a part of every nation’s history. Nations which face them with courage and fortitude come off with honour and dignity.
Earthquake of 8th October 2005 devastated houses, hospitals, roads and mosques but it could not undermine Government’s resolve which remained unflinching. The Government accepted it as a challenge and now places littered with dead bodies and razed habitats have again come to life which speak of the efforts and courage of the nation. Government has disbursed Rs.66 billion for house construction and Rs.40 billion for death/injury compensation.
During the previous year 1500 schools, colleges and hospitals have been built and additional 2500 buildings would be constructed. An amount of Rs.1.5 billion would be spent on agriculture and livestock which will enable people to become self supporting.
Increase in oil prices in the international market last year posed a new challenge but the government, by giving a subsidy of Rs.111 billion on diesel, kerosene, fertilizer, electricity and food items, stabilized prices.
Economic Performance
GDP growth rate remained at 7.02 percent. Growth rate was 5 percent in agriculture: manufacturing sector has grown by 8.8 percent and services sector by 8 percent. Since July of last year to April this year i.e in a 10 month period FDI in Pakistan exceeded $ 6 billion.
Government policies aiming at allocation of greater resources for poverty alleviation and creating employment opportunities have resulted in reduction of incidence of poverty from 34.4 percent in 2001 to 23.9 percent in 2005. In this way 12,700,000 people came out of poverty. The amount of money spent on poverty reduction and employment generation during last 5 years is Rs.1,441 billion.
The Budget has an overall size exceeding Rs.1,874 billion. Federal Government expenditure is estimated at Rs.1,353 billion. Expenditure of this magnitude was made possible through greater revenue collection especially by CBR which will exceed Rs.1025 billion. In view of this, the size of total revenue has been set at Rs.1475 billion. Hence the overall fiscal deficit is estimated at Rs.398 billion which is 4% of GDP. During 2006-07 the budget deficit was 4.2 percent of GDP.
The government has allocated Rs 520 billion under PSDP which will be spent on development and welfare of people. Out of this, 52 percent will be spent on infrastructure development and 48 percent on welfare of people and on social sector.
Based on Provincial Chief Ministers and Finance Ministers assent to Presidential Orders amending NFC award, 45 percent of provincial share has been transferred to Provinces. During 2006-07 an amount of Rs.418 billion has been transferred while Rs.497 billion would be transferred during 2007-08 which would be 46% of the total amount. The transfer from divisible pool would reach 46.25% by the year 2010-11. If subventions are added, transfer of provinces would get 50 percent of the total amount.
The government raised 10 years Euro Bond in the international market which was over subscribed by more than seven and a half times. The government raised US $ 750 million through this Bond. This was despite the fact that the rate of interest offered was lower than that of previous periods. Last year this government launched 10 and 30 years bonds in the international market which elicited good response. This is a reflection of confidence of international investors in government policies.
The previous government between 1996-99 raised the rate of interest on National Savings Schemes as high as 18 percent because of which present government now has to pay a huge accumulated liability of Rs.163 billion which is more than 4 times of the principal.
This year an allocation of Rs.275 billion is being made for defence of the country.
Relief Measures
Salaries of government servants are being increased by 15 percent in the present budget. Pension of government pensioners is being increased by 15 to 20 percent. Increase in pension is being given in two tiers: old pensioners will get 20 percent raise while new pensioners will get 15 percent raise.
Upgradation of posts was a long standing demand of the clerical staff. Employees in BPS 5, BPS 7 and BPS 11 are being promoted to BPS 7, BPS 9 and BPS 14 respectively. A total of 87500 federal employees will benefit from this measure.
Residential accommodation is a major problem for employees in Islamabad . Government has decided to solve this problem. Prime Minister Shaukat Aziz has ordered immediate construction of 37, 000 houses for the low paid employees and give it to them on ownership basis. Work on the construction of 5,000 units will immediately start for which land will be provided by CDA at official rate. Government employees will have the facility to get loan for construction of house.
Low cost Housing Scheme would be started in collaboration with Provincial and District Governments. Loan from HBFC will be available. Under this scheme an estimated number of 250,000 units would be constructed in the next 5 years.
For the welfare of Railway employees the government has decided upgradation of Basic Scale by one step for the remaining 62,482 staff excluding Secretarial Staff. Long standing demand of Railway employees regarding upgradation of posts has already been accepted alongwith increase in their allowances. A total of 12,510 employees have benefited from this increase. In this way, government has provided relief to 74,992 Railway employees.
Additional Relief:
1. Minimum wage of unskilled workers is being increased from Rs.4000/- per month to Rs.4600/- per month
2. Old Age pension, old and new both, has been increased by 15 percent. Minimum pension has been increased from Rs 1300/- to Rs 1500/- per month
3. Worker’s widow shall now get pension of her deceased husband as per entitlement. Earlier she used to get minimum pension
4. Earlier husband or wife, both contributing to Old Age Benefit, would not get pension of the deceased partner. Now the surviving partner shall get the pension of the deceased spouse
5. Under the Workmen Compensation Act 1923 workers receiving more than Rs.6000/- per month were not entitled to compensation on account of disability. This restriction has been removed and now all the workers regardless of their wage level would be entitled to compensation on account of disability caused during the course or as a result of performance of duty
6. Contract employees have been made entitled to receive companies profit under the Companies Profit (Workers Participation) Act 1968. The limit of profit has been enhanced from Rs.12000/- to Rs.20000/-
7. Workers Welfare Fund Ordinance 1971 is being amended to allow industrial workers to get medical, education, housing and death grant from Worker Welfare Fund. This facility shall apply to those units having an annual income in excess of Rs.500,000/-
8. Workers Welfare Fund Ordinance 1971 amended to increase the limit of death grant from Rs.200,000 to Rs.300,000/-
Utility Stores: Under this and under the Prime Minister’s Ramzan and Eid package, relief of about Rs 5 billion was provided. In addition, government has allocated subsidy worth billions of rupees in the Financial year 2007-08.
Daal Chana, Moong and Mash which is being sold in market at Rs 38 per kg, Rs 56 per kg and Rs 72 per kg would be sold in Utility Stores at Rs 29, Rs 47 and Rs 57 respectively. From tomorrow there would be a per kg relief of Rs 10, Rs 5 and Rs 5 on tea, sugar and rice respectively. Cooking oil will sell at the utility Stores at Rs.67 as against the market price of Rs.80/- per kg.
It has been decided to increase the number of Utility Stores by additional 5,000 and provide a utility store at every Union Council in the next 4 months.
For the first time, people will also get medicines at reduced rates at the utility stores.
The government is setting up farmer markets at federal, provincial and district level, so that farmers bring their produce directly to the market, thereby circumventing hoarders, middlemen and profiteers. Moreover, daily bazaars would be set up. First daily bazaar would be set up at Islamabad while the first whole sale bazaar is being immediately set up in Islamabad .
An allocation of Rs.7.5 billion has been made for Pakistan Bait-ul-Mal which is Rs.2.5 billion more than the allocation for last year. Pakistan Bait Mal is at present helping 1,500,000 households through its food support programme. This year 700,000 more households will benefit thus bringing the number of beneficiaries to a total of 2,200,000.
A subsidy of 20% payable on electricity charges for tubewells is being introduced. This subsidy will be shared by the Centre and Provinces equally.
The minister also announced additional subsidy on DAP from Rs. 400 per bag to Rs. 470 per bag.
President, General Pervez Musharraf announced the Rozgar Scheme in the last financial year. The small amounts advanced at low rate of markup of 6% enabled the youth to start their own businesses. In the last financial year 10,321 applications were approved under this scheme and Rs.1 billion disbursed. Rs.104.7 billion will be disbursed under this scheme in the next 5 years.
There is a shortage of skilled manpower. In order to meet this shortage in the last year’s budget the government established NAVTEC . The allocation is five times higher in this year’s budget as compared to the last budget.
In order to help our youth General Pervez Musharraf ordered an Internship Programme so that the youth gain experience to be able to gainful employment. For this purpose, each graduate is provided a stipend of Rs.10,000 per month. As of now 8,000 interns are working and this figure will increase to 30,000 next year.
Micro-Credit Banking has been started and so far, one million households have benefited from Micro-Credit. The target for the next three years is 3 million households.
Healthcare
In the cities of Islamabad , Rawalpindi , Karachi , Lahore , Faisalabad , Peshawar and Quetta , 815 medical clinics are being set up at the Union Council level. In each medical clinic there will be a doctor, lady health-worker and dispenser.
Safe drinking water: President General Pervez Musharaf has given directions for installation of a water purification plant in each Union Council on emergent basis. A total of 327 plants have been installed.
Khushal Pakistan Programme : Under this programme, 14,000 villages were provided electricity, at a cost of 1.5 billion rupees; 1207 cities and villages were provided sui gas at a cost of 71 billion rupees; roads were constructed and water supply schemes launched. For the KPP, around 34 billion rupees are being kept in the current budget. In the last 5 years, the government provided electricity, sui gas connections, constructed roads, provided clean drinking water and sanitation facilities at a cost of Rs. 51 billion. Under the KPP, in 25 districts of Balochistan, development work of Rs. 3 billion is being undertaken. Further schemes will be identified by MNAs which will be implemented immediately. Rs.5 crores will be paid to each district, Rs.1 crore to each Tehsil and Rs.10 lac to each Union Council for development work.
Agriculture: As a result of government measures, the growth in agriculture sector in the current financial year was 5%. Wheat production is now more than 23 million tons thanks to timely fertilizer availability , agriculture loans and availability of water. Support price of wheat (Rs.425 per maund) benefited the farmers to the tune of Rs. 250 billion. Cotton production increased by 4.8% over last year. Rice production was also very healthy.
Livestock: To promote the sector, the Government has formed two companies in the private sector:
a. Livestock and Dairy Development Board
b. Pakistan Diary.
Under these companies two big projects have been started worth 2 billion rupees. Under Prime Minister Special Cell livestock produce and allied services will be spread to 1963 Union Councils all over the country benefiting three million poor farmers. As a result of these measures, 12 million litres additional milk will be produced and 2 lac tons additional meat will be produced.
A multinational company has set up the largest milk processing plant in Asia in Pakistan . Similarly, other companies are also bringing investment from within as well as outside the country.
Along with the subsidy on fertilizer, the government has also increased the availability of agricultural loans. In 2006-07, agricultural loans of Rs. 160 billion were targeted.
With the use of better seeds agriculture production can potentially increase by 20% to 30%. The government has allocated Rs.336 million for production of better seeds. 15 new seed testing laboratories will be set up. For better production of cotton, BT Cotton seeds and Bio-Safety arrangements will be introduced.
The government also provided the agriculture sector Rs.250 billion which was entirely spent in the rural areas. The farmers spent this amount on their children’s education, purchase of motorcycles, televisions, cycles, WLL sets, furniture, tractors, harvesters etc. They set up tubewells and built houses.
Construction industry has grown exponentially. There are 52 other industries associated with construction. Employment has also been generated in other industries 200,000 jobs in the motorcycle industry; 35,207 in banking, 24,000 as a result of installation of mobile towers, 90,000 additional jobs in the IT Sector; 2,000 jobs in cement industry.
Mega Projects
The Minister announced the launch of Neelam-Jhelum Project which will cost Rs. 84.5 billion.
The next in line is the Bhasha – Diamir Dam, the design of which will be completed in 2008. However, Rs. 500 million have been reserved for this Project in the PSDP. Work on Gomal-Zam Dam, Kurram Tangi Dam, Subak Zai Dam is in full swing.
Work on the up-raising of Mangla Dam started by WAPDA is close to completion. As a result, 2.09 million acre feet additional water will be available for storage and 644 MW electricity will be generated. By construction of these Dams, 2.6 million acres land will be irrigated.
The Government has allocated a sizeable amount for Greater Thal Canal, Reni Canal and Katchi Canal on which the work is in full swing. The Government is also starting work on expansion of Kara Kurram Highway. The work on the expansion of Hasanabdal-Mansehra Section will start in the next few months. The N-5 Highway will be linked with the National Trade Corridor. For this purpose.
Gwadar: So far an investment of Rs. 13.5 billion has been made on this Project. This amount excludes foreign investment. The Coastal Highway which links Karachi with Gwadar has already been completed.
The Government has decided to increase share of education to 4% of GDP. During the last 2 years, the education budget increased by 36%.
Private Equity Fund: It has been made tax exempt till 2014. In case assets or shares of private companies are sold to Private Equity and Venture Capital Funds, the rate of Capital Gains Tax has been reduced from 35% to 10%.
Real Estate Investment Trust: Through REITs a new form of investment tool is being introduced for investment in capital markets which will enable small investors to reap profits from investments in real estate, which , so far, was open only to large investors. In order to increase use of REITs their use has been given tax concession. For example, the profit of REITs, will be exempt from taxation upto 90%, upon distribution. The most important tax concession for REITs is that under this scheme sellers of property will be exempt from tax upto 2010.
Amendment in Companies Ordinance: For the benefit of shareholders, any shareholder who has 12.5% shares of any company can call for an election of new Board of Directors in the next AGM. In order to provide protection to minority shareholders, any person or persons with 20% or more than 20% shares of any company, can request SECP for special audit.
Demutualization: In order to bring our capital market upto international standard the demutualization of stock exchange is being implemented. Under this assets of stock exchange transferred to demutualized exchanges will be given special tax treatment.
Industrial Sector: This year the growth of large scale manufacturing was 8.8 percent. Sugar (19.6%), beverages (28.4%), shoe (13.2%), paint and varnish (43.8%), motor tyre (17.2%), cement (21%), steel (24%), air conditioning (36.8%), electric transformers (25%) and tractor manufacturing (11.4%).
Special Economic Zones: A SEZ near Lahore is being set up for Chinese products, with Chinese assistance. Chinese companies would exclusively invest there. Apart from that, companies intending to set up SEZs would be given various tax breaks. Those companies making investment will be given different incentives. Appropriate laws are being framed for this purpose.
On account of continuity of policies, good faith, sincerity, honesty and dedication of the government. Investment of US $ 6 billion has been made during one year.
Tariff reform is an integral part of tax policy initiatives. For the last many years not only the tariff rates have been gradually reduced, but the number of tariff slabs has also been reduced considerably. The Tariff Rationalization process is an on-going process. This will continue in the coming years as well. Furthermore, in order to reduce cost of raw material, a zero tariff slab has been proposed. This change is expected to accelerate industrial development, promote exports and increase national income.
The guiding principle of the government policy is to increase exports, ensure availability of cheap raw material for industries. To continue with the policy, customs duty is proposed to be withdrawn from the machinery used in horticulture, furniture, marble & granite, surgical and medical instrument-business. Similarly, the customs duty on raw material used in the electrical, capital goods, paper & paper board, chemicals, plastic and rubber industries is proposed to be reduced by 5%.
The country is facing acute shortage of electricity. To provide relief to the people and industrial establishments, it is proposed to withdraw customs duty on generators for home consumption. Similarly, reduction in customs duty is proposed on generators for industrial consumption. Likewise, it is also proposed to withdraw customs duty on the components used in alternative energy sources such as solar energy and wind energy. The sales tax at import stages on these items has also been proposed to be waived off. To encourage energy saving lamp, customs duty is proposed to be reduced from 15% to 10%.
CVT: Presently CVT is levied on imported cars, while the domestically manufactured vehicles are exempt from CVT. In order to remove this the disparity, withdrawal of CVT on imported vehicles is proposed. However, to maintain protection level intact, adjustment in customs duty at the rate of 5%, 10% & 15% for different CCs of cars is proposed. There is a proposal to levy 5% withholding tax on the local vehicles. To facilitate the middle income groups customs duty on 800cc cars is not being charged. Finally, the capping for old and used cars previously for 5 years is being reduced to 3 years so that the domestic industry attains stability. The condition of 3 years will be applicable to TR, Gift Scheme, and Baggage rules.
Textile is the back-bone of the economy. Besides export earnings, this sector is a prime source of employment generation. Therefore, more attention is required to be focused on this sector so that to make it internationally competitive. Some time ago R & D facility was provided to this sector. Now the DTRE system is being revamped whereby the import of PSF will be allowed. Through DTRE, R&D facility will also be available to fiber manufacturers @ 3.5%, which will be availed through SBP. The facility of debt/swap to spinning sector is granted. Similarly, for exporter the existing WHT rate of 0.75% to 1% is being rationalized and 1% rate of WHT is being proposed. The textile exporters will also be the beneficiaries.
Keeping in view the widening trade deficit and also to restrict the conspicuous consumption, 1% levy special surcharge is levied on all imports with the exception of petroleum product, edible oil, fertilizer, medicine, necessary food items (vegetable & pulses). Furthermore, the already exempted items will continue to remain exempt from this levy.
Sales Tax & Excise: The scope of zero rating is being widened to include sewing machine, bicycle & cotton seed oil. Cable TV is a basic necessity of daily life, therefore, excise duty on cable TV is proposed to be withdrawn. The traders belong to FATA & PATA are facing difficulties in carrying out their businesses due to unresolved disputes lying pending with the courts. Therefore, in consultation with them, the sales tax already due is proposed to be waived off enabling them to carryout their business.
The raw material imported for iron and steel plastic and paper industries the sales tax of 15% is proposed to be enhanced 20%. However, the rate of 15% sales tax on final product for these sectors will remain the same.
Income Tax: A task force was constituted to bring improvement in the provisions of law relating to holding companies. In view of the recommendations made by the task force, amendments are proposed in legislation relating to Holding Companies; 75% share holding will be required if none of the companies is a listed public company; 55% share holding will be required if one of the group companies is listed public company; Current losses can be surrendered by Holding Company to a subsidiary or between subsidiaries which fulfill the requirements of share holding; inter-corporate dividend shall be liable to 10% adjustable withholding tax.
It is proposed that for formation of group, transfer of shares between companies and the owners in one direction may not be treated as taxable event. Further, group taxation is allowable for 100% owned companies as one fiscal unit and no relief will be available in respect of losses prior to formation of group. It is also proposed that group taxation will be restricted to domestic companies only and for assessment on group basis option will have to be exercised for a minimum period of 5 years.
It is proposed that transfer of shares between companies and share holders in one direction under an approved scheme, (not involving cash) may not be taken as taxable event if the purpose of such transfer is formation of a group. The incentive will be available under scheme of Merger and Acquisition, approved by High Court, SECP or SBP (as the case may be) which does not involve cash payments.
For computation of income of the banking companies a separate schedule will be added to the Income Tax Ordinance, 2001. This measure is being taken on the recommendations of the SBP and PBA on the analogy of taxation of Insurance Companies. Inter corporate dividend is proposed to be subjected to adjustable withholding tax @ 10%.
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