Pakistan's Annual Fiscal Budget 2005-06

Annual Budget 2005

Highlights

	Freedom from IMF Loans
	8.4% GDP Growth Rate
	Pakistan has now become one of the five most impressive economies of Asia, and Second fastest growing economy in Asia
	Overseas Pakistani Remittances: US $ 3.4 bn (during the first 10 months), and reserves in foreign currency account stood at US $ 12.4 bn as on 24th June 2005.
	The main crops set a target of 6.6 per cent and for the agriculture sector as a whole a growth rate of 4.8 per cent. The growth target for manufacturing sector has been set at 11 per cent and for the services sector at 6.8 per cent. After taking into account the targets of the three major sectors we have set a GDP growth target of 7 per cent.
	The budget for the current year was Rs 902.8 billion. After adding an increase of 21.7 per cent the budget for 2005-06 is set at Rs 1,098.5 billion. The deficit for 2004-05 was estimated at 3.2 per cent and for the next financial year the deficit level is set at 3.8 per cent.
	The government has recently got the Fiscal Responsibility Law unanimously passed by the Parliament under which the irresponsible use of borrowed money has been stopped. Under this law every government will have to spend at least 4.5 per cent of the GDP on the development of social sectors.
	The development budget has been increased by 34.7 per cent, which is the highest increase to date.
	Current expenditures will increase by 18 per cent. The main reasons for the increase are the relief that government is giving to the government servants. Additionally, increases are anticipated under the heads of interest charges and subsidy.
	CBR revenue will increase by 17 per cent. Last year revenue through CBR was at Rs 590 billion which will become Rs 690 billion for the next year.
	The resources passed on by the federation to the provinces will increase from Rs 239 billion to Rs 284 billion registering a 19 per cent increase.
	For 2005-06, the National Economic Council has approved a development programme of Rs 306 billion, which is unparalleled in the 58 year history of Pakistan. As a result of this programme a network of development work will be spread all over the country and the destiny of the people will be changed. During 2005-06 completion of 353 projects will be facilitated.
	For the next year the allocation:

	for water will increase by 66.5 per cent,
	for health will increase by 68.6 per cent,
	for education and professional training will increase by 49.5 per cent,
	for higher education will increase by 28.6 per cent,
	for IT will increase by 35.6 per cent and
	for science and technology will increase by 60.8 per cent.

	A sum of Rs 92.2 will be spent on infrastructure so that inadequacies of infrastructure do not become a constraint in faster development.
	Rs 73.1 will be spent on social sector. Rs 38.7 will be spent on IT, science and technology, tourism, environment and law and justice.
	Expenditure on defence will be curtailed to 3.1 % of GNP.

Federal Budget 2005-06

(Rs. in million)

Receipts	%	Rs.	Payments	%	Rs.
(a) Tax Revenue		690000	Current (A)		826502
(b) Other Tax Revenue		42638	General Public Service	46	503114
(c) Non-Tax Revenue		194762	Defence Affairs & Services	20	223501
Gross Revenue Receipts		927400	Public Order Safety Affairs	2	18721
Less: Provincial Share		284319	Economic Affairs	5	56449
I. Net Revenue Receipts	58	643081	Environment Protection	0	147
II. Net Capital Receipts	5	50556	Housing and Community	0	863
III. External Receipts	19	212371	Health Affairs and Services	0	4128
IV. Self Financing of PSDP by Provinces	4	43801	Recreational, Culture Services	0	2309
V. Change in Provincial Cash Balance	3	30652	Education Affairs Services	2	16648
VI. Privatisation Proceeds	2	20000	Social Protection	0	623
VII. Bank Borrowing	9	98040	Development (B)	25	272000
			Provincial Government		68000
			Federal Government		204000
Total Resources (I to VII)	100	1098502	Total Expenditures (A + B)	100	1098502

Figure 1 – Sources of Income

Figure 2 – Application of Funds

Agriculture

	The allocation for agriculture has been increased from Rs.7 billion to Rs.9.1 billion.
	The main crops set a target of 6.6 per cent and for the agriculture sector as a whole a growth rate of 4.8 per cent.
	Farming community's income increased by Rs. 147 bn.
	In 2004-05 Rs. 100 bn loans were provided to the farming sector.
	Imported 238,000 tons of fertilizer and granted a subsidy of Rs. 3.8 bn. to the farmers in various forms.
	41,653 farm tractors have been manufactured during the year

Proposals:

	Government has raised the minimum prices of wheat and cotton for the betterment of farmers.
	Agricultural related items will be given relief by reducing the duties but the protection available to fisheries, poultry and dairy will be considered.
	5% duty is proposed to be abolished on Urea.
	Duty on tractors is reduced to 15% from 20%, on cotton ginning machinery to be abolished; so also on the pressing units in this sector.
	Duty also to be abolished on Bulldozers, levellers, graders etc.
	Inputs of the Poultry Industry to be duty free, similarly poultry feed and poultry meat processing machinery to be duty free.
	The Government has already reduced customs duty on phosphates. With increased demand for urea, it is proposed that 5% customs duty on urea also be withdrawn.

Water & Irrigation, and Power

	For WAPDA resource projects Rs. 21 bn were spent in 2004-05 this has been increased to Rs. 43 bn
	During the current financial year 2004-05, 9300 villages were provided with electricity. Next year another 13000 will be provided electricity. Rs 15.58 billion has been allocated for projects of power sector under the National Development Programme.
	The development funds allocated for water for agriculture have been increased by 64 per cent. During 2004-05 Rs 4 billion were allocated for lining canals and watercourses.
	About 11,000 people would get direct employment and 400,000 jobs would be created through the project of lining of water courses. Next year 10,000 watercourses would be lined.
	Sukkar barrage was reconstructed under the supervision of Army.

 

Proposals:

	The Mangla Dam is being raised, Gomal-Zam, Kurram-Tangi, Mirani and Subzkai dams are being constructed. Kachi, Greater Thal, Rainee and Pat Feeder Extension canals are being constructed.
	During 2005-06 work would start on Neelum Jhelum Hydro Electric Plant. This plant would produce 969 MW of electricity. Through a long-term plan, action is being taken so that by 2010, 700 MW of electricity should be produced through alternate sources.

 

Manufacturing Sector

	The growth target for manufacturing sector has been set at 11 per cent
	The private sector has invested $4 billion in textile industry and textile exports are touching the $10 billion mark. Karachi Textile City is being established. Garments cities are being set up both at Lahore and Karachi. The growth in the textile sector can be judged from 18 per cent increase in the production of cotton yarn, 28.45 per cent increase in the production of cotton and 45 per cent increase in the production of ginned cotton.
	During 2004-05, 31,663 tractors, 1,637 trucks and 1,341 buses 87,992 jeeps and cars and 342,678 motorcycles were produced and offered for sale.
	During the last one year the production of air conditioners increased by 462 per cent, deep freezers by 55 per cent, refrigerators by 19.79 per cent, soaps and detergents by 21.86 per cent. This increase reflects increasing purchasing power of an emerging middle class and its financial strength.

 

Proposals:

	To promote investment in production of capital and engineering machinery making industry it is proposed to rationalize their duty structure. For similar reasons, duty on raw material for zinc and chrome coating is proposed to be exempted.
	The plastic sector primarily depends upon the petroleum sector. Prices in the international market of petroleum sector have skyrocketed in the past year. As plastic goods come into daily use of the common man therefore it is proposed to reduce the customs duty on 55 plastic goods items.
	Raw material used for textile, pharmaceuticals are being exempted from duty or will get substantial relief.
	Raw material, components, and subcomponents to manufacture home appliances like air conditioners, TV, washing machines, refrigerators, computer monitors, circuit breakers, energy saving lamps, composite doors and windows, are being proposed to be given reduction in customs duty.
	Spares and components used for replacement, modernization, and balancing of machinery not produced within the country, will be subject to 5% duty while investment in plant manufacturing sector will enjoy substantial cut in duty.
	In addition, machinery and equipment for setting up, balancing, modernization or replacement of industry are proposed to be kept at 5 per cent duty, and duty on their parts is being brought to the same rate.
	Abolition of sales tax on spares and components for plants and machinery as well as raw materials, spares and components used for manufacture of plants and machinery.
	Similarly lead and chromium raw material will be duty free.
	Artificial silk industry: (all items in the chain) to get duty relief
	Duty paid in respect of export of textile, leather, carpets and sports goods is refunded as duty drawback. This is a problem area and it is proposed to abolish levy of duty altogether.
	Cotton, yarn, clothing are major export items. It is therefore proposed to introduce zero rate for import of all items used in textile industry; so also the carpet, leather, surgical instruments and sports goods industry.
	It is proposed that to increase industrial production the custom duty on basic raw material may be reduced. Hence raw materials for chemical, pharmaceutical, textiles, furniture, confectionary and soap industry are being exempted from duty or is being reduced.
	Abolition of excise duty on soap and detergents.
	Ginning industry has a vital role in the textile chain, therefore, its machinery is proposed to be exempted from customs duty. Similarly duty on presses for ginning industry is also proposed to be withdrawn.

 

Services Sector

	The growth target for the services sector at 6.8 per cent.
	The services sector performed an exceedingly satisfactory role in achieving 7.9 per cent growth.
	Service sector accounts for 52% of country's economy. Services occupy centre stage of the economy and their share in the GDP of Pakistan has surpassed that of agriculture and industry. And it is proposed to bring more services within its ambit.

 

(a) Banking & Finance

	During the year banking and insurance sector have registered growth rate of 21.76%.
	The result is that in the first nine months of the financial year there was record increase of credit to the private sector which stood at Rs. 348 billon out of which Rs. 100 billon were given to the agriculture sector.
	During the last four years, 500,000 families have availed micro-financing. During the next four years the number of those who availed micro-financing will increase to three million. Within one year one million small micro loans will be made available. Khushhali bank will by 2007 make 563,000 micro loans available.
	It is now proposed to build up the service sector of the economy.  In this connection, the Excise Legislation is being rationalised, and it is proposed to levy excise duty @ 7.5 per cent on fees and commission charged by banks for services for letters of credit, guarantees, broking and foreign currency dealings; and also levy excise duty @ 7.5 per cent on charges received on account of lease management fee, documentation fee and processing fee at the time of executing lease agreements. However lease money and mark-up will be exempt.

 

(b) Whole Sale and Retail, and Other Service Sectors

	Within the service sector wholesale and retail trade increased by 12 per cent. This year 270 companies related to export and import, 240 companies offering miscellaneous services and 117 telecom companies got themselves registered. A total of 2,697 companies started operating in the country. Out of these 54 companies belong to 20 different countries.
	The annual retail sale of clothes and garment, carpets, sport goods in excess of Rs. 5 million will be subjected to 3% tax inclusive of 1% income tax. and it will be considered as final tax.
	The retail prices of cigarettes is proposed to be increased by cigarette manufacturers, accordingly threshold of excise duty is proposed to be increased by 7% to 8%.
	Withdrawal of sales tax on laundry, dry cleaners and marriage halls is proposed.
	To support SME sector the Government will establish the Business support fund.
	Tourism & hotel industry will pay only 5% duty on machinery and equipment used by them but aviation sector will pay no duty on the machinery.
	Presently, machinery and equipment used in hotel and tourism industry carries concessionary duty of 5 per cent, while other items used in such industry are not so entitled. It is proposed that 5 per cent customs duty also be allowed to all other items on certification by Ministry of Tourism. Besides, duty on Machinery, equipment and parts used by Aviation Industry is proposed to be exempted.

 

Telecommunication

	According to one estimate up to June 2005 $3 billion have been invested in the telecom sector.  In telecom sector alone government revenues has increased from Rs. 3.7 bn to Rs. 15.6 bn.
	Number of mobile phone users increased by 125%.
	The mobile connections in the country have exceeded 10 million.

 

Proposals:

	Tax on mobile connection presently at Rs. 2,000/- shall be reduced to Rs. 500/-
	It is proposed to levy 15% Excise duty on the sale of pay phone and pre-paid calling cards instead of on the billed amount of PTCL. The proposed measure would not bring additional burden to consumers and call charges would also remain the same, because the price at which such cards are sold to consumers have an in-built component of excise duty.
	It is proposed to levy 15% Excise Duty on Wireless Local Loop.

 

Poverty Alleviation

	Poverty alleviation allocation will go up from Rs. 278 bn to Rs. 324 bn next year.
	Poverty reduction expenditures will increase by 16.5 per cent. Last year Rs 278 billion were allocated, while in the next year Rs 324 billion will be spent on this account.
	Under the Khushal Pakistan Programme next year Rs 7.5 billion will be spent. Under this programme clean drinking water, sanitation, electricity and farm to market metal roads will be provided on which in the initial two phases, local development projects totalling Rs 5 billon are under implementation. A substantial increase has been made in the households that use electricity and gas.
	50 % tax rebate is available to senior citizens whose income does not exceed Rs. 300,000/-. Now this limit is proposed to be increased to Rs. 400,000/-
	A special programme has been developed for 32 less developed districts of the country which will benefit 22,000,000 citizens.
	The government of Pakistan is contributing Rs 7.74 for every litre of diesel to give relief to the people. Similarly, on every litre of kerosene oil Rs 8.24 is being contributed by the government.  The price per litre of kerosene oil instead of Rs 36.24 is Rs 28.
	To maintain the prices of petroleum products at a lower level, the government had to withstand a loss of Rs 52 billion in its revenue. In India, the average price of diesel is Rs 40.12 and of petrol Rs 55.93, which on an average is Rs 10 litre more than the prices in Pakistan.
	In the annual development program National Housing Authority has been allocated Rs. 20 bn.
	For widows and orphans HBFC Loan upto Rs. 100,000/- has been written-off.

 

Human Resource Development

	Government is establishing an institution under the name of NTEVTA to provide vocational and technical training to youth.  So that they will have better job opportunities in technical side.
	Under Khushhal Pakistan Programme young people will get local jobs.

 

Health

	Rs.12.4 bn will be spent on health sector next year.
	The federal government is also initiating a basic health programme for women in all the provinces. The services of lady health workers will be provided in each district.
	People having access to tap water have increased from 25 per cent to 40 per cent.

 

Education

	Next year Rs 12.4 billon will be spent by the federation on education.
	During 2004-05 from July to March the federation and the four provinces spent Rs 74.43 billion on education.
	The changes that are taking place can be gauged from the fact that primary school enrolment of children has increased from 71 to 86 per cent.
	During the last four years the rate of literacy has increased from 45 per cent to 53 per cent whereas the literate males have now become 65 per cent.

 

Transportation

	Pakistan Railways will be provided Rs. 9.8 bn to complete 12 development projects.
	Pakistan Railways now does not need subsidy. There will be a saving of Rs5 billion in the subsidy allocated for it in the current year.
	Karachi has been connected with Gwadar Port through the Makran Coastal Highway and now the entire coastal region of Balochistan is ready for development. Projects are being implemented to connect Gwadar Harbour with Quetta and other cities of the country and onwards with Peoples Republic of China, Afghanistan and Central Asia.
	Work is in progress on Peshawar-Islamabad and Faisalabad-Multan Motorways. Work on Lowari tunnel will be started and alternate route will be provided to Gilgit through Jalkad Chilas Road. Indus Highway is being made operational between Karachi and Peshawar. Once this highway is completed the distance will be reduced by 400 kilometres. Rs 20 billion have been allocated in the Annual Development Programme for the National Highway Authority so that these important projects are completed well in time.

 

Energy

	To provide relief to people of Pakistan government is providing subsidy of Rs. 7.74 per litre of diesel. Likewise on Kerosene oil government is providing subsidy of Rs 8.24 per litre. To maintain oil prices at minimum possible level Government has suffered loss of revenue by Rs. 52 bn.  The price per litre of kerosene oil instead of Rs 36.24 is Rs 28.
	During the year Government has provided 250,000 new gas connections to domestic users, whereas gas has been provided to additional 270 towns and villages.  529 kilometres of pipeline were laid to make the gas available.
	Liquefied Petroleum Gas (LPG) is being used in 1.81 million houses and it is expected that next year the households using this gas will increase to 2.1 million.

 

Construction

	The construction sector grew at a rate of 6.2 per cent. The construction sector has become the main job provider for the technical and non-technical people. During 2004-05, 134 construction companies registered themselves with SECP.
	Imported Vehicles (including CNG kits & other automobile spare parts)
	For imported cars duty will be paid in three slabs:

 

	50% on cars upto 1500cc,
	65% on cars of 1501cc upto 1800cc, and
	75% on cars of more than 1800cc.

 

	The import & supply of CNG buses, Euro II buses will be exempted from sales tax.
	Exemption of duty on CKD Kits for CNG buses and Euro-II buses (CNG Kits for cars are already duty-free).
	CNG Dispensers: Duty reduced to 10%.
	For tyres imported for small trucks, duty will be 20% but 10% on construction vehicles.
	Bicycle is a popular conveyance amongst the population. To reduce its cost, customs duty on all bicycle parts is proposed to be reduced from 35 per cent to 25 per cent.

 

Pay & Pension

Under the pay & pension committee, the government has announced the following relief for the government employees.

 

	15 % increase in pay scale
	10 % increase in pensions
	Total increase of 23 % to 29 %.

 

	The government will spend Rs25.5 billion on the increase in pay and pension
	The minimum wage has been increased from Rs. 2500/- to Rs. 3000/- similarly the lowest pension limit has been increased from Rs. 700/- to Rs. 1000/-.

 

Proposals Relating to Income Tax

	The salaried class needs our special attention. Our present regime is two tiered. The standard tax rates range between 7.5 per cent to 35 per cent. To simplify and rationalize law, it is proposed that tax rates for salaried persons may be reduced to lie between 3.5 per cent to 30 per cent.
	In order to further facilitate salaried taxpayers, it is proposed that if their source of income is only salary, then they need not file income tax return or employer's certificate if their employer has filed mandatory tax deduction statement of his employees.
	Teachers & researchers also need special encouragement. Therefore, the existing tax reduction limit of 50 per cent for them is proposed to be enhanced to 75 per cent.
	It is proposed that perks carrying zero marginal cost to the employers be exempted from tax. This will benefit teachers, hospital employees, hotel employees, employees of transport companies and of educational institutions.
	Limit of contribution towards approved pension fund for claiming tax credit is being enhanced from Rs 200,000 to Rs 500,000.
	Taxpayers are allowed tax credit on donations made by them to non-profit organizations. In order to encourage philanthropy, it is proposed to convert this credit into straight deduction from income for tax purposes in case of donations made to specific welfare institutions.
	The profit on investment up to Rs 150,000 in National Saving Schemes is exempt from withholding tax whereas 10% tax is withheld on investments in TFCs. It is proposed to bring the investors in TFCs at par with them, and to allow similar exemption from withholding tax for investments up to Rs 150,000 in TFCs. In order to provide an incentive for investment in IPOs, the limit of investment for claiming tax credit is proposed to be enhanced from Rs. 100,000 to Rs. 150,000.
	The corporate sector has prime importance in the Country's economy. The Government aims to strengthen and revitalize this sector. It was announced in 2002 that there would be the gradual reduction in corporate tax rates. These rates are therefore proposed to be further reduced for tax year 2006 to the following levels:

 

	Banking companies 38%
	Public Companies 35%
	Private Companies 37%

 

	Further more, it is proposed to exempt capital gain of insurance companies.
	To encourage enlistment, a reduction of 1% in tax is proposed for companies enlisted on stock exchange during next year.
	Small and Medium Enterprises (SME) entities is an established vehicle to play a major role in creating employment. It is our proposal that those SMEs that transform into companies, a reduced corporate rate of 20% be applied to them, and no turnover tax be payable by them.
	The maximum value of passenger transport vehicle (not plying for hire) for the purpose of depreciation allowance is Rs 1 million. It is proposed that this maximum limit be removed.
	Currently, withholding tax is deducted @ 3 per cent of the value of the condemned ship imported for the purpose of breaking. This industry was once a thriving sector providing livelihood to thousands of people. With passage of time, ship-breaking activity has come to a standstill. In order to revive this industry, it is proposed that rate of withholding tax be reduced to 1 per cent.
	It is proposed that large trading companies be exempted from Presumptive Taxation so that more of them are attracted to make investment in Pakistan. The tax to GDP ratio needs to be improved. This can only be possible by expanding the tax net. To further strengthen these initiatives it is proposed that: On cash withdrawals from banks of amounts exceeding Rs 25,000, withholding tax at 0.1 per cent be deducted.
	At present imported cars are subjected to 6 per cent withholding tax. It is proposed that sale of locally manufactured new cars be also subjected to withholding tax at the same rate. However, that tax would be adjustable.
	Sales Tax regime has been rationalized by zero-rating imports and supplies consumed by textile, carpets, leather, surgical and sports goods' export sectors. As a package deal their tax rate is being revised upward by 0.25 per cent.