It is an honor for me to present to the house a package of investment and export promotion measures for industrial revival which addresses all the key challenges that the economy is facing but also lays the foundations for macroeconomic stability and growth in coming years.
Pakistan is confronted with serious economic challenges requiring strong corrective actions. These challenges are an outcome of weaknesses in the economy, making country vulnerable to external and internal shocks, and causing economic instability.
While ominous signs were emerging in the economy as far back as 2016, the government was repeatedly urged to prevent the developing economic crises. Not only were no steps taken to arrest the trend of ballooning deficits but in fact a deliberate attempt was made to steal the election at the cost of destruction of Pakistan’s economy. Resultantly, the fiscal and current account deficits kept multiplying as time passed. By the time our government took over, the macroeconomic imbalances had increased to a threatening level, adversely affecting economic stability and fiscal vulnerability.
The challenges – 18th August 2018
When the PTI government took office, the economic situation warranted immediate corrective actions. The fiscal deficit which was 4.6 percent of GDP in FY 2016, shot back up to 6.6 percent in just two years. In addition, financial losses of state-owned enterprises were at a record high level of 1.4 percent of GDP. The energy sector circular debt had crossed Rs 1.2 trillion mark. The current account deficit was also at a record level of US$ 19 billion due to a sharp upsurge in imports while exports remained virtually stagnant.
This unprecedented increase in current account deficit led to a depletion of country’s foreign exchange reserves at an alarming rate and were sufficient only to pay for 6 weeks of imports. Large payments were also due on country’s ever growing external debt. This was all a result of an economic framework focused on consumption with imported capital finance and an overvalued rigid exchange rate regime.
It was clear that in the absence of government-managed adjustment, the macroeconomic imbalances would continue to grow forcing the economy to adjust on its own. In such an event depleting foreign exchange reserves could have forced the country to its default on debt servicing and other payment liabilities, making it extremely difficult to arrange credit in international markets.
At the same time, insufficient reserves would have led to massive compression of all categories of imports, including energy and raw material, adversely affecting exports, growth and consequently, employment. Moreover, import compression would have created shortages in energy and commodity markets, leading to a surge in inflation.
The exchange rate and money markets would have adjusted to the worsening economic conditions leading to massive depreciation of the rupee and large increases in interest rates. Such an adjustment would have been very costly in terms of the pain it imposes on the citizens, particularly on the poor and vulnerable segments of the population.
As such not doing anything was not an option for the government. However, a decision had to be taken on the pace of managed adjustment. One option was to frontload all the corrections removing the imbalances at the start of the PTI government term so that the economy recovers to a high growth and productive employment trajectory early in its term.
The other option was to take a more gradual adjustment path maintaining a balance of price adjustments when needed and, at the same time, vigorously pursuing structural reforms to strengthen the foundations of the economy. The government has opted for the latter option, for the gradual adjustment in structural reforms for two reasons.
First, the government wants to protect the vulnerable segment of the society as the high cost of full adjustment in the first two years would fall disproportionately on the poor, and the public safety nets will not be able to mitigate the full cost. Second, the current economic instability is the outcome not only of weak decisions taken in the recent past but also the deeper structural issues plaguing the economy. These structural problems are the reason why the gains from the past stabilization programs have continued to be unsustainable.
The present government took the necessary adjustment measures which were the need of time and initiated a path of structural reforms. This not only provides solid foundations for economic recovery, and also avoids recurrence of economic instability every few years, but the efficiency gains from structural reforms will lessen the need for strong and rapid stabilization actions, thus mitigating some of the pains of these measures, particularly for the vulnerable segments of the population.
Stabilizing the economy
After taking office, the foremost objective of the PTI government was to stabilize balance of payments situation. Government worked tirelessly, and with considerable success, to mobilize additional financing from friendly countries in the form of short- to medium-term loans, deferred payment on imported oil, and deposits in the central bank.
These efforts have helped (i) improve balance of payment situation, (ii) avoid painful sharp adjustment and (iii) provided the financial space and time to pursue a balanced strategy of macroeconomic stabilization and structural reforms.
Yet our friends can only help to an extent. We have to address our problems on our own. Government took decisive actions, a supplementary budget was approved in October 2018, which took additional tax and expenditure measures to bring the fiscal deficit down from 6.6 percent of GDP in FY 2018 and an estimated more than 7 percent for FY 2019; and lowering the current account deficit from 6.1 percent of GDP in FY 2018 to 5.2 percent in FY 2019.
Moreover, electricity and gas prices were rationalized to improve the financial health of energy utilities, reduce their burden on the budget and part-finance the huge overhang of energy sector “circular debt”. The quasi fiscal deficit for FY 2019 has also been reduced. Needed adjustments were made in the exchange rate by around 10 percent and monetary policy tightening by 250 bps.
These were all very difficult decisions for a democratic government, but we believe they were essential to stabilize the economy. There is evidence that the interventions have started to yield results. Remittances have shown a growth of 10%, trade deficit has shrunk by 5%, current account deficit has dropped by 4.4% in the first half of FY 2019 compared to same period last year.
What is heartening is that private sector businesses have borrowed double the amount in the first six months of this fiscal year as compared to last fiscal year and agriculture credit has grown by 22 percent since last year. There had been some increase in inflation, but due to the prudent policies of the government inflation which stood at 6.8% in October has come down to 6.2% in December and this effect is even more visible in food items.
We will continue to take additional measures to ensure continued macroeconomic stability. All our efforts will ensure that by the end of FY 2019 there will be a further improvement in the trade balance. A healthy trend in remittances will imply a substantial decline in current account deficit from last year. Higher FDI inflows and adequate foreign financing will lead to a build-up in foreign exchange reserves will be stronger than where they stand today.
Accelerating growth through structural reforms
Structural problems in our economy get reflected in three fundamental gaps:
(i) The revenue – expenditure gap: Weak revenue effort remains at the heart of revenue-expenditure gap leading to one of the lowest tax-to-GDP ratios in the world. This is an outcome of a narrow tax base, which is characterized by numerous exemptions; tax policy has a revenue focus with questionable fairness and equity; tax administration is weak and under-resourced; and the system has built-in disincentive against revenue collection both at the federal and provincial levels. Lack of political will has prevented previous governments to take relevant actions to adequately tax the powerful and un-taxed segments of the society. PTI government is committed to removing these weaknesses from the tax system, and has already taken some strong measures in this regard, including separation of tax policy and tax administration, creation of Specialized Tax Unit for foreign assets, tax broadening measures and extensive use of information technology for data mining and detection of under reporting. The government has recently received data from OECD through convention of exchange information. This will make it very difficult for people to hide their assets and bank accounts outside Pakistan. In addition, the Economic Advisory Council has been working on various structural issues that plague the economy. Their recommendations have been finalized and approved by the Prime Minister which will help the government strengthen its future course on structural reforms. The details of the measures taken and recommendations of EAC will be disseminated in a document A Roadmap to Stability and Growth, which we will be releasing in the coming days.
(ii) The export-import gap: The other fundamental weakness in the economy is the large and growing gap between exports and imports. This gap, despite large inflow of workers’ remittances, has been the primary source of balance of payment fragilities and macroeconomic instability. In recent years, the problem has become even more acute because of a surge in imports and a stagnation in country’s exports. Given that 75 percent of country’s imports consist of fuel and industrial raw material, imports will grow with growth in economy. On the other hand, exports do not increase even close to growth of economy mainly because theexports continue to be dominated by low value added textiles, as the country has failed to diversify its export commodities or export markets.More importantly, however, the exports have failed to make a transition from low technology to high technology. As a result, the country has been losing its competitiveness in international markets consequently finding it harder by every passing year to sell even its traditional exports within its traditional markets. The problem has been aggravated by keeping the exchange rate artificially stable.
It is the central theme of government economic policy to expand the domestic supply for creating exportable surpluses by reducing the cost of production through greater reliance on indigenously produced fuels for power generation and aggressively promoting renewable energy; adopting a flexible exchange rate regime and diversifying exports by supporting micro, small and medium enterprises. This will enhance the overall competitiveness of our exports.
(iii) The saving-investment gap:Previous policies have focused on accelerating growth through large scale borrowing to finance investment. Yet as a percentage of GDP, investment in Pakistan is among the lowest in the region — almost half the level in India and Bangladesh.
The most important factor behind inadequate level of investment is the low level of savings, with a national saving rate of only 10.8 percent of GDP. This implies that higher investment can only be financed through higher foreign borrowings, which increases the foreign debt burden and creates balance of payments challenges.
Other than low level of savings, investment is also constrained by a non-favorable investment and business climate created by multi-tiered regulations and taxation, and weaknesses in Pakistan’s financial sector.
The government is moving aggressively to improve exports, investment and savings. The package that PTI government is announcing today is a step in that direction. As mentioned, we have started implementing the recommendations of EAC on all key issues.
New Era of Prosperity
We believe that the course of stabilization coupled with structural reforms we are charting for the economy will usher an era of economic prosperity for the people of Pakistan. In the coming years, our focus would be to accelerate investment and domestic savings. Growth will come through expanding domestic supply and financed largely from domestic resources.
Through the above policy direction, we will create quality jobs for the unemployed youth of the country by equipping them with requisite knowledge and skills, protect households from rising cost of living and above all raise the productive capacity of the economy. It is mainly through our corrective measures in managing the current account and fiscal deficits that we have shielded the poor and middle classes from exorbitant price shocks. In addition, we will continue to provide targeted subsidies on food and energy for the vulnerable segments through subsidies and expanding the social safety nets.
Yet we are cognizant of both the external and internal influences on the economy. On some of these influences, the government may have limited control. We continue to monitor the performance and direction of the economy, on a daily, weekly and monthly basis; and will take corrective measures whenever and wherever needed.
Our envisaged economic framework ensures that the economy stays on an accelerating growth path; the current account deficit will decline sharply; fiscal consolidation leads to a reduction in the fiscal deficit. In addition, the government will continue to manage quasi fiscal deficit in the energy sector and bring the flow of this build up to zero.
Through aggressive structural reforms, FBR revenue will grow significantly in real term as a percentage of GDP, with provinces expected to follow the same. It will also be ensured that inflation is well controlled. Our structural measures will affirm a positive trend in domestic savings, thus ensuring that a substantial portion of higher investments will be financed through domestic resources.
In addition, it will also ensure that growth in exports and remittances will be in double digits along with higher FDI inflows. Adequate foreign financing from bilaterals, multilaterals, launch of Pakistan Banao certificates and Panda Bonds, launch of Sukuk and Euro bond and commercial financing will ensure that the financing needs are holistically addressed. All these measures will help build the foreign exchange reserves to a comfortable level of import in the medium term.
Social Sector Protection Priorities
Along with economic growth, social development remains an integral ingredient of government policies. The government is laying special emphasis on substantially reducing the incidence of stunting among children through better nutrition, which will also cover Pregnant & Lactating Women.
In order to address the problem of absolute poverty, the government is already committed to spend substantial sums in poverty alleviation programs. The government is also starting a graduation program for people to move out of poverty through asset transfers.
The PTI government is expanding the scope of Waseela e Taleem program to almost entire country so as to enroll as many out of school children of poor families in schools.
Provision of quality health care for the poor is also a priority area of the current government. The government is aiming at increasing the coverage of Insaaf Health Card across Pakistan.
Affordable and Low Cost Housing is one of the major priority areas of PTI government. The government is aiming at building houses for the very poor in the first phase of the project. The government is establishing Rs. 5 billion revolving fund to provide Qarz e Hasana to needy families to own a house.
Our framework for revival of the economy is centered on sound governance. The principle instrument of sound governance is appointing right people for the right positions. We have ensured that in all our appointments in key institutions capable and professional people.
The Financial Action Task Force framework has been strengthened through developing national risk assessment strategy to be implemented by all stakeholders. Coordination of all stakeholders has been further strengthened.
Gas Infrastructure Development Cess
The government intends to support the industry through this business revival package. It is thus proposing a settlement of GIDC arrears and a reduction in overall rate of GIDC for all sectors in an effort to reduce cost of doing business in the country.
Helping the Pakistani farmers through provision of credit is being ensured by enhancing the value of Produce Index Unit from Rs. 4,000 to Rs. 6,000. This will mean 50% increase in the value of collateral available to the farmers for obtaining agricultural loans from the banking sector.
The government has ensured adequate supplies of urea in Rabbi Season by providing a subsidy of Rs. 1,143/bag for 100,000 tons of imported urea. Local manufacturers have also been subsidized to Rs. 714 per bag of urea by providing cheaper feed gas. The government has recently operationalized two fertilizer plants, located at SNGPL network, by providing Rs. 1,137 per bag of urea as subsidy for using LNG. This intervention will aid in keeping a competitive price of Urea in domestic market at Rs. 1,805 per bag.
In addition we are considering reducing the Gas Infrastructure Development Cess (GIDC) on Urea fertilizer by 50 % for all such industries which agree to pay the arrears of GIDC. This will not only clear the struck up revenue of the government as GIDC is not been deposited in the exchequer, provide additional revenues to the government but will reduce the price of urea by a minimum of Rs. 200 per bag as well as the prices of associated fertilizers i.e. DAP, NP (Nitrophos) and CAN (Calcium Ammonium Nitrate) will also decrease accordingly.
Mr. Speaker, as already mentioned, one of the leading reasons for low foreign and domestic investment in Pakistan is the high cost of doing business due to distortions in tax regime and cumbersome processes. This is a multi-faceted problem and has to be addressed comprehensively.
We have to act on multiple fronts; including better law and order, improved infrastructure, streamlining of regulations, improving facilitation services, better enforcement of commercial laws and dispute resolution. Work is in progress on all these aspects. Reducing cost of compliance with tax laws and rationalizing burden of taxation is a central to these efforts. I am pleased to announce that providing incentives for investment and reducing the cost of compliance with tax law are the most important components of this Finance Bill.
All federal taxes; income tax, sales tax, federal excise duty and custom tariffs are being modified to remove anti business distortions and provide a pro growth and pro investment framework.
Business Support Interventions
Mr. Speaker, easy availability of credit is very important for growth in all sectors of the economy. Our Government is also trying to increase the availability of credit through various measures, including National Financial Inclusion Strategy. Through this bill, we are proposing tax incentives to promote lending by banks to priority sectors which can spur economic growth and create jobs.
These include Small and Medium Sized Enterprises, Low Cost Housing and Agriculture. We are confident that additional credit would flow towards these priority sectors which would be the drivers of economic growth.
Incentive to Banks for advancing Loans to Small & Medium Sized Enterprises
The Small & Medium Sized Enterprises have a significant contribution in national GDP. Despite their pivotal role in growth of the economy, the flow of credit to such enterprises is still very low. In order to address this issue, it is being proposed to reduce the tax rate on Bank’s income arising out of additional Small & Medium Sized Enterprise financing’ to 20% instead of current applicable rate of 35%.
The additional financing will be worked out on the basis of average advances to this sector in calendar year 2018. This provision will be applicable from the tax year 2020 to 2023.
Incentive to Banks for advancing Loans for Low Cost Housing Finance
Low cost housing is another priority sector. Pakistan has been facing shortage of housing units. The impact of this shortage is felt more acutely by the low-income groups of the society. The outstanding housing finance is currently less than 0.5% of GDP, one of the lowest in the region. To promote low cost housing finance, it has been proposed that a reduced tax rate of 20%, instead of current applicable rate of 35%, be imposed on income of Banks arising out of additional low-cost housing finance above the baseline of financing to this sector in calendar year 2018. This provision will be applicable from the tax year 2020 to 2023.
Incentive to Banks for advancing Loans on Agricultural Financing
Provision of timely agriculture credit, particularly for small farmers, is critical for enhancing productivity. There is, thus, need to provide cheaper credit to the agriculture sector. In order to promote agriculture finance, it is proposed that a reduced rate of tax of 20%, instead of current applicable rate of 35%, may be imposed on income arising out of additional agricultural financing, in excess of baseline of financing in calendar year 2018. This provision will be applicable from the tax year 2020 to 2023.
I should also highlight that the taxable income of Banks from such advances in these three categories will not be subjected to Super Tax.
Abolition of Advance Tax on Cash Withdrawal for Filers
Mr. Speaker, currently advance income tax is withheld on cash withdrawal where the aggregate of cash withdrawal from all bank accounts of the person exceeds PKR 50,000 in a day.
The rate of tax to be deducted is 0.3% of the cash amount withdrawn for filers and 0.6 % of the cash amount withdrawn for non-filers. This Withholding Tax causes unnecessary burden on tax payers who are already complying with tax laws by filing income tax returns. It also discourages transactions in documented sectors through banks.
In order to facilitate compliant taxpayers and promote the documented sector, it is proposed that the tax on cash withdrawals by filers be eliminated. The tax on non-filers will continue. They can also avoid this tax by filing returns and claim adjustment of tax deducted in their income tax returns. We continue to encourage non-filers to become filers and comply with tax laws of the country.
Abolition of Advance Tax on Cash Withdrawal from bank accounts wholly fed through foreign remittances
Overseas Pakistanis contribute substantially to national development in many ways; foreign remittances being the most prominent. There is Withholding Tax on foreign remittances through banking channels.
To facilitate Overseas Pakistanis and encourage foreign remittances through banking channels, it is proposed that Withholding Tax on cash withdrawal from PKR accounts, which are solely funded through foreign remittances, be abolished.
Abolition of Advance Tax on Banking Instruments Purchased against Cash for Filers
Filers are compliant taxpayers. We want to recognize them. There is an advance income tax collected on purchase of certain instruments from banks against cash if a banking instrument including Demand Draft, Pay Order etc. or online transfer etc. is made against cash. This disadvantage for Filers is proposed to be abolished for the persons filing income tax returns.
Advance Income Tax On Commercial Importers To Be Final Tax
An amendment was made in In Finance Act 2018 to change the scheme of taxation of commercial importers. The tax deducted at the time of import, previously determined as final tax, was made “minimum tax”. Commercial importers, already paying high rate of tax, consider this as excessive. Commercial importers are a very important part of our commercial and business practices.
They bear inventory and financing cost on behalf of manufacturers and traders. In order to mitigate the hardship, commercial importers are being taken out of the minimum tax regime. The previous position is being restored and tax deducted on such imports will again become their final tax liability.
Relaxation of Restriction on Registration of Motor Vehicle for a Non-Filer.
Our Government is keen to encourage tax filing. There are, thus, restrictions on non-filers for purchase of immovable property and vehicle. Non-filers can, however, purchase immovable property upto PKR five million.
Such dispensation is not available for purchase of vehicles. A reasonable limit, therefore, is also required for purchase of vehicles by non-filers. It is, hence, proposed that non-filers be allowed to book, register or purchase a new locally manufactured motor vehicle upto 1300CC. This would remove the distortion between purchase of immovable property and vehicles. It would also stimulate the production of local vehicles with positive impact on automobile industry and associated vendors. To promote compliance with tax laws, the withholding tax rates for non-filers on such registration is proposed to be enhanced by 50% of existing rates.
Reduction of Withholding Statement filing from twelve to two per year
Private businesses and Government institutions in Pakistan also provides a very valuable public service of collecting taxes on many transactions. Presently, under section 165 of the Income Tax Ordinance, withholding agents are required to file, each month, withholding statement in respect of such tax collection.
This additional burden on businesses increases the cost of doing business. In order to reduce this load and to facilitate the businesses, it is proposed that the requirement of filing withholding statements be made bi-annual rather than monthly. This would save businesses from hassle and extra transactions.
Reduction in Minimum Withholding Tax on Small Wedding Halls
Mr. Speaker, our Government is committed to provision of relief for the low and middle income segments and small businesses. Currently, there is flat rate of PKR 20,000 on a person holding a function in a marriage hall, marquee, commercial lawn etc.
It is proposed that the minimum rate of advance adjustable income tax be reduced from PKR 20,000 to PKR 5,000 if the function area is less than 500 square yards. This would reduce burden on low and middle income families on such occasions.
Simplified Scheme of Income Tax for Small Shopkeepers
The number of tax filers in Pakistan is quite low despite an increase of 34% during our regime. Broadening of tax base still remains a major challenge. Small businesses are a substantial part of national economy.
They find the tax regime complicated and daunting. We have to facilitate these small businesses for better tax compliance. A considerable number of such shopkeepers are part of the undocumented economy and, at present, outside the tax system. The aim of documentation of economy cannot be achieved until small businesses file tax returns.
Through this bill, it is proposed to introduce a provision that will allow the Federal Government to notify simplified tax schemes for the small shopkeepers. Such scheme shall, initially, be applicable in Islamabad Capital Territory. It will be extended to rest of the country after monitoring and evaluation of results in Islamabad.
Exemption from Customs Duty on import of newsprint
Media plays a critical role towards keeping society informed about development in our national life as well as in the global arena. Presently, newsprint, in rolls or sheets if imported by publishers of newspapers or periodical, as certified by All Pakistan Newspaper Society (APNS), is allowed import at concessionary CD rate of 5%.
In order to reduce input cost of newspapers and support print media industry, and for cheaper access of newspaper for all citizens, it is being proposed that the existing 5% CD may be exempted subject to existing condition of certification by APNS.
According to latest State Bank Report the industrial sector missed its growth target in FY18. Manufacturing sector only constitutes 13.50 % of GDP. Its contribution to the GDP in percentage term has remained static during the last decade.
The size and quality of our manufacturing sector is way behind the emerging economies. The largescale industry is mostly concentrated in Cement, Sugar, Fertilizers, Textile, Petroleum& Food Sector. Pakistan’s industry is low on technological and competitive indices. Our Large Scale & SME industrial Sector needs a huge boost in terms of cheap input costs & technically equipped workforce. The present government aims at production led growth as opposed to consumption led growth.
Mr. Speaker, to achieve the twin objective of industrialization and export promotion, I would now announce some measures of custom tariff and Inland Revenue. The existing Customs tariff structure, in some areas, is revenue led. An extensive exercise has hence been carried out between Industries, Commerce, FBR and Finance Ministries to identify tariffs which are high and adversely affect export competitiveness and domestic production. This exercise has resulted in review of Regulatory Duties and Custom Duties on some categories.
Certain raw materials / inputs (impacting 135 Tariff lines) meant for the plastic, footwear, tanning, leather, home appliances, diaper and chemical sectors have been identified for reduction of Customs Duties and Additional Customs Duties (ACD) as well as removal / reduction in applicable rates of Regulatory Duty (RDs).
Initially, the proposals regarding reduction / removal of RDs as well as reduction in Custom Duty on import of Plastic Moulding Compound would be implemented with passage of this Finance Bill whereas the proposals for reduction in the Custom Duty / ACD rates on the remaining items would be implemented by March 31, 2019. These measures would significantly encourage the domestic manufacturing sector and also improve competitiveness of the country’s exports.
The Domestic Auto assemblers, chambers and individual manufacturers of auto parts have represented that Regulatory Duty be removed on certain input materials as such goods are used in manufacturing of auto parts by local vendors (mostly SMEs). In order to sustain the domestic vending sector and encourage local manufacturing of auto parts, Regulatory Duty is proposed to be removed on import of input materials (around 200 Tariff Lines) used in manufacturing of auto parts by local vendors.
Waiver of Penal Surcharge on Overstayed Goods
Goods worth more than PKR five billion are lying uncleared in the bounded warehouses. In order to provide relief to the business community, facing liquidity crunch, the government intends to waive the penal surcharge of about PKR 400 Million on overstayed goods. This measure would also facilitate the imports of industrial inputs etc.
Investment Promotion in SEZs
To further incentivize the duty / taxation regime in respect of Special Economic Zone (SEZ), the government intends to remove anomalies for improving the Investment Climate. The Board of Investment (BOI) is piloting a bill for suitable amendments in the Special Economic Zone Act, 2012. These would thereafter be incorporated in the First Schedule to the Customs Act, 1969 and related laws, which would facilitate investments in SEZs.
Exemption on plant and machinery to Greenfield industries
Presently, sales tax exemption on plant and machinery is available only to specified sectors. Other sectors have to pay sales tax on import of plant and machinery. This sales tax is adjustable against future output tax but such adjustment takes place after a time lag when the industry starts selling its product.
This acts as an impediment to investment by increasing initial costs of the investor. In order to encourage Greenfield investment and industrialization, it is proposed to grant exemption from payment of sales tax on plant and machinery to be used for setting up new industry for production of taxable goods.
Industrial Undertakings set up for Equipment Manufacturers of Renewable Energy
Pakistan has been facing high energy cost for many years. It has not only created problems for the general public but it has also seriously hampered the competitiveness of the industrial sector. Such adversity necessitates promoting generation of renewable energy, like solar and wind power, whose cost has come down substantially.
Presently, the income tax law grants exemption to income derived by industrial undertakings from manufacturing of plant & machinery and other related items which are dedicatedly used to generate renewable energy. This exemption will be available fro a period of five years to the newly established industrial units involved in such manufacturing.
Tax concession for companies participating in National & International Sports Leagues
Sports play an important part in building and developing a healthy society. Sporting achievements are a source of pride for the country.
These activities also provide a platform to build the country’s image internationally. Sports events, in addition, generate economic and business activities. This government believes that encouragement of sports is an important social responsibility of the government. In order to promote sporting activity and to encourage participation of international players, it is proposed that advance tax at the time of auction of franchise rights, from participating teams in national and international sports leagues organized by any Sports Board or entity established by the Government for the purpose of governing a recognized sports, be abolished. This provision shall become applicable from July 1, 2019.
Abolition of Super Tax on Non-Banking Companies
Super Tax was introduced through Finance Act 2015. It is chargeable on non-banking taxpayers with income of PKR 500 million or higher and all banking companies.
In order to lower the burden of tax on corporate sector and promote economic activity, it is proposed that the super tax for non-banking taxpayers may be abolished after tax year 2019. For banking companies, super tax was chargeable at the rate of 4% prior to Finance Act 2018. It is, however, proposed that same rate may continue for the banking companies.
Continuation of Declining Rates for non banking companies
Through Finance Act 2018 a declining rate for non banking corporate sector was introduced, which will gradually reduce to target rate of 25% in 2023. In order to give confidence to the business community it is reiterated that the gradual reduction in non-banking corporate rate of tax provided through Finance Act 2018 shall continue.
Abolition of Tax On Undistributed Profits
Another measure, introduced through Finance Act 2015, proved to be detrimental for accumulation of capital for investment in new projects and for balancing, modernization and enhancing capacity of existing projects. This tax was introduced on undistributed reserves of certain public companies, that derive profits in a tax year, but do not distribute cash dividend within six months of the end of the tax year.
This provision turned out to be a major hurdle for companies who want to build up reserves for new investment. In case of multinational companies, which pay dividend to shareholders outside Pakistan, this measures forced flow of capital outside Pakistan. It is, hence, proposed that this tax on undistributed profits may be abolished after the current tax year to encourage building up of reserves by companies for investment in existing and new projects.
Rate Reduction for Inter-Corporate Dividend for Companies availing Group Relief
In order to help revitalization of sick and cash strapped companies and to encourage investment in these companies, the Income Tax Ordinance 2001 provides the option of Group Relief which allows transfer of losses between a holding company and subsidiary companies subject to certain conditions.
In order to further encourage investment in such companies and to revitalize them, it is being proposed that, from tax year 2019 onwards, payment of dividend between such companies, may be subject to reduced rate of tax in proportion to their share holding if they are availing the facilities of group relief in that tax year.
Abolition of Advance Tax on Members of Stock Exchange
Stock Exchange is an important barometer of economic activity and its strength gives a signal of strong Pakistani economy to the international markets. In order to promote investment through the stock exchange, several measures are being taken.
Currently, Members of a Stock Exchange registered in Pakistan are subject to collection of advance income tax on purchase and sale at the rate of 0.02% of value of shares. On demand of Pakistan Stock Exchange and business community, and in order to facilitate and increase investment and business confidence, this advance income tax is proposed to be abolished.
Allowance of Carry Over of Capital Losses for Three Years
The rate of income tax on the gains from trading of shares on stock exchange has been gradually increased since 2010 and the taxable period has also been enhanced several times. However, the loss from Stock Exchange is not allowed to be carried forward to next year under the current income tax law.
To promote investment in Stock Exchange, it is proposed that, from tax year 2019 onwards, the capital losses on trade of shares and securities may be allowed to be carried forward for a period of three years for adjustments against capital gains on stock exchange from shares and securities.
Narrowing Trade Deficit: Import Compression Measures
At the start of our tenure, the country was facing huge Balance of Payment problems due to large trade deficit. During the Supplementary Finance Act 2018, our Government took several import compression measures which are already showing positive results.
There has been significant decline in import of luxury items, especially during the last two months. The government intends to continue the same policy to further narrow the trade deficit.
Levy of FED on luxury cars and jeeps
Federal Excise Duty is already imposed on imported cars and jeeps of engine capacity exceeding 1800cc at 20%. In order to further discourage the import of such luxury cars and jeeps, it is proposed to enhance the rate of Excise Duty from 20% to 25%, for cars and jeeps up to capacity 3000 cc and to 30% for cars exceeding 3000 cc.
Furthermore, a considerable amount of foreign exchange is utilized in import of CKD kits of locally assembled cars and jeeps. In order to reduce such imports, it is proposed to levy Excise Duty at 10% on cars and jeeps with engine capacity exceeding 1800cc. Though these are Import Compression measures, it could also be seen as the only revenue measure in this Finance Bill.
Simplifying the Duty and Tax Structure on Import of Mobile Phones
Mr. Speaker, presently, various duties and taxes i.e. Regulatory Duty (RD), Sales Tax, Withholding Tax and Mobile levy are levied in different slabs on mobile phones. This has resulted in a complicated taxation structure.
Recently, Pakistan Telecommunication Authority has deployed the Device Identification, Registration and Blocking System (DIRBS), which would be able to identify mobile devices which are brought into the country illegally and block their usage. Subsequent to implementation of DIRBS, there could be price escalation of mobile phones.
It is thus essential to revise the fiscal treatment of imported mobile sets so that the low-valued phones do not experience price rise on account of the demand-supply imbalance.
Accordingly, the government intends to simplify the existing mechanism of collecting various taxes on mobile phones by introducing uniform and convenient slabs based on the C&F import value of a set. Importantly, this measure will ensure that low-end cell phones are charged at a low rate whereas higher taxes are levied on high end phones.
In addition to measures adopted in this budget for import compression the recent data shows that earlier measures in this regard in the October budget have already yielded positive results. The non-oil imports have decreased by 12.8% and reduction of 23% has been witnessed in respect of imports pertaining to 1994 tariff lines alone in the month of December 2018.
Narrowing Trade Deficit: Promoting Exports
The other part of improving our trade balance relates to export promotion measures. Due to interventions made by the government in the last quarter, the exports are already showing a healthy and increasing trend. It is anticipated that the measures being proposed in this Finance Bill will sustain this positive growth trajectory.
Export promotion and facilitation
The Regulatory Duty regime on the export side is being reviewed. In the first instance, government is removing regulatory duty on copper & lead products exported under DTRE and Manufacturing Bond schemes.
Simultaneously, complete revamping of export promotion schemes like DTRE and Manufacturing Bonds, and Export-Oriented Units is underway for optimal utilization by exporters in the Small and Medium Enterprises (SMEs). This also includes inclusion of such input raw materials i.e. Coke of Coal & Carbon Blocks as fuel / energy for units utilizing these schemes. It is anticipated that the proposed measures would reduce input costs of export industries.
In addition, there has been a sustained focus on automation of all export promotion schemes, particularly DTRE and Duty Drawback, which would ensure speedy clearances of raw materials / goods imported under said schemes. The government has also initiated an exercise to unify the regulatory framework of the export schemes which shall be brought before this House in the Finance Bill 2019 for implementation in FY 2019-20.
At present, import of RBD palm oil / olien is allowed, under the DTRE Scheme, to units located in Khyber Pakhtunkhwa and Baluchistan only. To allow for equitable access of this facility to businesses in the other provinces, it is proposed to extend this facility to units located in Sindh and Punjab as well.
Payment of sales tax and income tax refunds through promissory notes
Huge amounts claimed by taxpayers are stuck up in refunds. This causes liquidity crunch for businesses. These refunds have accumulated over a long time. Our Government has decided to expedite the refund payment process by increasing the role of automation in refund payment system.
As regards, the past outstanding claims, it has been decided to pay the same through promissory notes, which shall have a maturity period of three years. Reasonable profit shall be paid on these promissory notes.
The claimants shall also be able to raise the much needed cash by selling these notes in the market. The taxation laws are being amended to include provisions for payment of refund in this manner. This would provide business much needed working capital
Provisional assessment for Taxation of Off-shore assets
Mr. Speaker, curbing tax evasion through off shore assets is a major priority of our Government. We have already started receiving data from Organization of Economic Cooperation and Development (OECD) and other territorial jurisdictions.
Taxation of offshore assets is difficult and time consuming due to involvement of multiple jurisdictions. It is, hence, proposed that option of provisional assessment in case where an offshore asset not declared in the income tax return or wealth statement is discovered by any government agency, such off-shore asset would be subject to summary assessment and tax shall be immediately recoverable on provisional basis. This amendment will ensure better recovery of tax from off-shore assets detected and will promote tax compliance.
Reducing Healthcare Costs
Health Sector is a priority area for the Government. It was pointed out that an ostomy procedure (surgery) requires the availability of specialized accessories and equipment.
The existing concession are somewhat restrictive in that it did not fully allow for duty free imports of the entire range of items meant for such procedures raising the cost for patients suffering from serious diseases.
Accordingly it is being proposed to broaden the scope of the PCT Code so that all items for Ostomy use as identified by Drug Regulatory Authority of Pakistan and Ministry of Health are included in existing exemption regime.
Mr. Speaker, our Government is continuously striving to provide best possible framework for doing business with an emphasis on improving the investment and business climate in the country that will fundamentally impact productivity of the domestic manufacturing sector, promote exports and job creation. Through this economic reform package and the forthcoming Finance Bill 2019, the main guiding principles are;
- adopt measures that promote export-led growth
- bring about significant improvement in the ease of doing business in Pakistan
Trade facilitation agenda that include significant up-gradation of the Customs Clearance System to provide end-to-end solution for importers / exporters.
An important milestone is deployment of the e-Payment system that allows traders to pay duty/taxes directly from their accounts rather than sending an employee to the bank.
We are comprehensively reviewing the Customs Tariff, for which specialized groups have been created, to examine the tariff in consultation with all stakeholders including Chambers/ Trade Associations. This exercise, to be completed by March 2019, would lead to suitable changes in the tariff structure for enhancing competitiveness of the manufacturing / export sector. The major areas include the Chemicals & Plastic sector, Textiles, Steel, Home Appliance Sector, Paper & Paperboard and Machinery & Capital Goods.
Mr. Speaker, this house, and through it the people of Pakistan, can clearly see that our Government has an Economic Revival Roadmap. The measures announced today are all to stimulate investment and industry.
No new taxes are being levied instead the government is sustaining revenue loss of Rs. 6.8 billion for the remaining five months of current financial year. We have embarked on a bold and aggressive plan to firmly place the economy on a sustainable growth path in the medium term. The results of these measures would be visible in the months to come.
Domestic industrial capacities would be enhanced, new investments would come in and export led growth would take place. There would be jobs, livelihoods and new businesses – the elements of a ‘Naya Pakistan’, prosperous and self assured.
Thank you very much, Mr. Speaker.