Pakistan's Annual Fiscal Budget 2006-07

Annual Budget 2006-07

The Federal Budget 2006-07 has been presented at the back of a sustained high economic growth. The objectives of the Federal Budget have been:

• To provide relief to the fixed income group as well as to the common man,

• To work for the welfare of the common man,

• To create employment opportunities,

• To promote investment and growth,

• To broaden the tax net,

• To strengthen the country’s physical infrastructure, and

• To improve social indicators.

SALIENT FEATURES OF THE FEDERAL BUDGET 2006-07

In the following text, the ‘budgeted year’ should be taken as Year 2006-07, and the ‘previous year’ as the Year 2005-06:

• Total outlay of the Federal Budget 2006-07 is Rs.1315 billion, which is 19.7% higher than the previous budget.

• Current expenditure is Rs.880 billion which is 6.4 % higher than the previous budget estimate of Rs.826.5 billion.

• Development expenditure is Rs.435 billion, which is up by 59.9%. Of which, federal component stood at Rs.320 billion which also include Rs.50 billion for earthquake reconstruction and rehabilitation program. The provincial component is Rs.115 billion.

• The share of current expenditure in total budgetary outlay is 66.9 % as compared with 74.5 % of previous year (2005-06).

• The share of development expenditure in total budgetary outlay increased sharply to 33.1% as against 25.5% of previous year budget (2005-06).

• Debt servicing is estimated at Rs.295.8 billion which is lower by 3.0 % over previous year’s revised estimates of Rs.304.8 billion.

• Defence budget is estimated at Rs.250.2 billion or 2.8 % of GDP as against revised estimates of Rs.241.1 billion or 3.1 % of GDP of previous year (2005-06).

• Expenditure on running civil administration at Rs.126.9 billion higher than previous year’s estimates of Rs.103.1 billion on account of various relief measures provided by the government.

• Transfers to the provinces are estimated at Rs 378 billion under net proceeds of the Federal divisible pool against previous year's revised estimates of Rs 331 billion, showing an increase of about 19 % or Rs 47 billion higher.

• For the next year, revenues from investments are projected at Rs 16 billion against Rs 51 billion for the previous budget, showing a decrease of over 300 %, perhaps because of disinvestment of government shares in public sector entities.

• The estimates for the budgeted year's foreign inflows has been put at Rs 239 billion which is 12.7 % higher than the previous budget.

• An amount of Rs 504 billion has been earmarked for general public service which includes interest payments, debt servicing and superannuation allowances. This accounts for about 57.3 % of total current expenditure.

• For the budgeted year 2006-07, it has been projected that the government will earn about Rs. 20 billion from privatisation proceeds.

• Government borrowings – The Government is targeting to borrow Rs 140 billion from the banking sector to meet its budgetary deficit during the next fiscal year. Previous year's revised estimates (2005-06) for bank borrowing have now been put at Rs 66.8 billion.

• The government has estimated zero collection on account of petroleum development levy compared with previous year's revised collection of Rs 20 billion to cap oil prices. However, it would collect Rs 18 billion development surcharge on natural gas.  The government will not charge petroleum development levy on diesel.

• The government expects Rs 239.3 billion resources from foreign sources compared with previous year's revised estimates of Rs 234 billion. This includes Rs 213.4 billion from foreign loans and Rs 26 billion grants. Foreign loans also include Rs 76.4 billion project loans, Rs 76.5 billion programme loans, Rs 30.2 billion foreign currency bonds and others. Foreign grants during previous year amounted to Rs 45 billion, according to budget documents.

• The Government has also allocated Rs 89 billion subsidy for WAPDA, KESC, Utility Stores, cement, and other such commodity operations against previous year's revised estimates of Rs 64 billion, showing an increase of over 28 %.

• For cement prices, the government has allocated a subsidy to maintain a lower price in the next year through an amount of Rs 720 million.

Public Sector Development Programme:

• Out of the Federal PSDP of Rs.270 billion (excluding earthquake-related spending), 44.3 % (Rs.119.5 billion) will be spent on physical infrastructure and 44.1 % (Rs.119.0 billion) on social sector.

• Within infrastructure development, water and power, including village electrification received Rs.70.6 billion or 59.1 %. This allocation is up by 44.4 % from previous year (2005-06).

• Allocation to communication (including NHA, Ports and Shipping and Railways) is Rs.37.6 billion or 31.5 % of infrastructure development.

• Within social sector development, allocation to the health and population sectors amounted to Rs.15.4 billion – which is up by 21.3 % from previous year (2005- 06).

• Allocation to education including HEC has been increased to Rs.22.9 billion – up by 52.7%.

• Allocation to the Science & Technology is up by 95.3 % (Rs.4.4 billion vs. Rs.2.3 billion).

Revenue:

• The target for next year overall revenue collection has been estimated at Rs 1.083 trillion, which is 16.8 % higher than the year 2005-06 budget estimate. This would include a tax revenue of Rs 840.9 billion, up by 17.5 % higher than previous year and non-tax revenue at Rs 241.89 billion, up by 6.4 % over previous year’s budgeted estimates of Rs 227.3 billion.

• Direct tax is estimated at Rs.267.0 billion (18.7 % higher than previous year) and indirect tax is targeted at Rs.568.0 billion (18.6 % higher than previous year).

• The target for non-tax revenue has been put at Rs 242 billion, compared with previous year's revised estimates of Rs 307 billion, showing a reduction of about 21 %. This also includes Rs 115 billion revenue estimates from properties and public departments, about Rs 4 billion less than previous year.

• Tax collection by CBR is targeted at Rs.835 billion – up by 18.6 % against revised estimates of previous year (Rs.704 billion).
• Fiscal deficit as percentage of GDP is targeted at 4.2 % including earthquake related spending, and without earthquake spending it is targeted at 3.7 % of GDP, mainly on account of unprecedented increase in the PSDP.

Relief to the Common Man:

• In the last five Budgets the salary of the government servants was raised for four times. In the Federal Budget 2006-07, the government will provide Dearness Allowance at the rate of 15.0 % of the basic salary.

• Pensions of the government servants have also been raised. Those government servants who retired before May 1, 1977, their pensions are up by 20 %.

• Those who retired after May 1, 1977, their pensions are up by 15 %.

• The overtime of Drivers and Dispatch Riders are up by 50 %.

• Conveyance Allowance of Grade 1-16 government servants is up by 50 %.

• Pension under the Employees Old Age Benefits Act 1976 has been increased from Rs.1000 to Rs.1300 per month.

• Grant of Workers Welfare Fund for daughter’s marriage has been increased from Rs.30,000 to Rs.50,000.

• In the event of the death of the workers, the grant to their heirs has been increased from Rs.150,000 to Rs.200,000.

• The scholarship for workers’ children has been increased from Rs.800 to Rs.1000 per month.

• The ceiling of workers’ share in Institutions Profit has been enhanced from Rs.6,000 to Rs.12,000.

• The Minimum Wage of Worker has been increased by 33.3 %, that is, from Rs.3000 to Rs.4000 per month.

• Teachers will get additional relief with a slab of Rs.500, Rs.750 and Rs.1000 per month, depending upon their qualification.

• In the event of the death of the government servants:

(a)    the widow will receive one time grant ranging between Rs.200,000 to Rs.1.0 million, depending upon the grade of the deceased government servants;

(b)   the widow can retain the official accommodation provided to the deceased for up to 3 to 5 years;

(c)    once heir will get a contract job for two years in Grade 1-15;

(d)   one child will get free education until the age of 18 years;

(e)    the widow will receive life-long free medical facility;

(f)     2% quota is now fixed for the heirs of the government servants who die during service in Government Housing Scheme;

(g)    the members of the Law Enforcing Agencies who die during their service, their heirs will get a relief package according to the nature of the assignment performed by the deceased.

• The rates of return for the various schemes of the National Savings have been raised as follows:

Schemes	Increases in Rate of Return
Special Savings Certificates	from 8.6 % to 9.17 %.
Regular Income Certificates	from 8.88 % to 9.24 %.
Defence Savings Certificates	from 9.46 % to 10.0 %.
Pensioners Benefit A/c & Bahbood Savings Certificates	from 11.04 % to 11.52 %.
Savings Accounts	from 5.0 % to 6.0 %.
Prize Bonds Rate	from 5.1 % to 6.5 %.

• The senior citizens of 65 years and above, with annual income up to Rs.400,000, were exempted from taxation. This facility will now be received by citizen of 60 years and above.

• Pulses of various types will be sold through the Utility Stores Corporation (USC) at less than the market price from June 6, 2006. The prices of gram pulse are fixed at Rs.30/kg; Masoor daal at Rs.31/kg, Moong daal at Rs.53/kg; and Mash daal at Rs.58/kg.

To encourage private sector to import pulses the government will provide subsidy to importers so that pulses are imported and supplied in large quantity in the market.

The government is determined to enhance the supply of pulses in the market and keep their prices stable. Subsidy on imports and sale of daal through utility store will cost Rs.2.5 billion to the government.

• The common man will continue to get sugar at Rs.27.5/kg from the USC. The government is supplying 33,000 tons sugar to USC every month for sale to common man at a much cheaper rate than the market.

• The government has decided to establish at least one Utility Stores at Tehsil level.

• The USC will establish Mobile Units of the USC to cater the needs of the far-flung areas. The USC is also considering setting up Franchise.

• The Government is appointing Price Magistrates in every District for the implementation of the Price Mechanism Law. The Magistrate will have the power to punish profiteers and hoarders. The relevant Law has been amended.

• A model Sabzi Mandi (Vegetable Market) will be constructed in Islamabad and the Provincial Chief Ministers will do the same in their respective Provinces. This will improve the supplies of the essential commodities in the market and will help stabilize their prices.

• Rs.55 billion subsidy will be provided from the Budget to keep the price of electricity at affordable levels in 2006-07. The government has provided Rs.44 billion subsidy in 2005-06 for the same.

• The government will provide facilities of Angiography, MRI and Dialysis free of cost to the deserving persons in Federal Government Hospitals.

• The government is spending Rs.11 billion to control Malaria, TB, HIV/AIDS, Hepatitis and Blindness.

• Threshold income increased to Rs.200,000 from Rs.100,000 for income tax purpose for working women; for non-salaried women, this has been increased from Rs,100,000 to Rs.125,000.

• Free textbook for students up to class VIII from September 1, 2006. Education up to Metric class is already free.

Agriculture:

• A Program of Rs.7.8 billion is being introduced to increase the incomes of the farmers in 13,000 villages. The Program will start from 1000 villages in 2006-07.  This will create jobs in rural areas.

• A Public-Private Partnership in dairy sector development with Rs.3.6 billion has been launched. This Company will set up 1200 Model Dairy Farms and will establish 2950 farms for raising livestock. This project will enhance rural incomes.

The production of dairy products is now exempt from Sales Tax. The dairy and livestock equipments are exempt from custom duty and sales tax. The custom duty on the packaging material of dairy products has been reduced to 5 %. This will help promote dairy sector in rural area.

• Drip irrigation and sprinklers technology are being introduced in agriculture with Rs.15.0 billion.

Rs.7.0 billion is being spent in 2005-06 for lining of 15,000 canals. Rs.6.0 billion will be spent in 2006-07 for the same. As a result, the loss of canal water will be reduced by 25%.

• Rs.5.5 billion will be spent on Katchi Canal in 2006-07. The government is constructing Katchi Canal with Rs.22 billion in Balochistan. This will bring revolution in agriculture in Balochistan.

• Rs.10 billion is allocated for the initial work on big dams in 2006-07.

• The government has provided Rs.5.0 billion subsidy on fertilizer in 2005-06. In 2006- 07, Rs.12.3 billion subsidy will be provided to keep the price of fertilizer at affordable level for the farmers.

• To enhance the agricultural productivity the government is launching National Agricultural Research Program with Rs.2.5 billion.

• The machinery for agriculture, horticulture and Floriculture will be exempt from custom duty.

• Machinery for promoting fisheries will be exempt from custom duty.

• Custom duty is reduced from 60 % to 30 % on refrigerated vans.

• Exemption from custom duty on new and used agriculture tractors in CBU conditions.

• Special incentive package in the shape of reduced tariff rates for poultry industry has been proposed.

All these measures will help enhance agricultural activities in the country. This will increase the incomes of the farmers.

Promoting Investment and Growth:

1. Manufacturing:

• Incentives for promotion of exports of leather/ footwear industry, marble and granite, pharmaceutical industry and parboiled rice plants.

• Incentives for industrial growth and development to aluminium processing, boiler manufacturing, chemical industry, CNG dispenser manufacturing, electrical devices for vehicles and electronics, plastic industry, iron and steels industry and engineering industry.

• Reduction of duty on industrial inputs like copper raw material, forging and foundry inputs, zinc, lead, refractory cement, chemicals used for tanning leather, earth colours, pharmaceutical chemicals, plastics and sheets, solution for Rubber, etc.

• Exemption of duty on material for manufacture of fixed wireless towers for CDMA, CNG equipment for assembly, inputs of leather and leather products, broadcasting equipment, computer hardware and parts.

• Reduction of duty on bicycle parts and components, flat rolled steel products and articles, cutting tools, machine tools, electrical devices, plastic raw materials, petrochemicals, machinery, inorganic and organic chemicals and chemicals used in textile processing.

• Promotion of medical tourism through good quality hospitals and care facilities by exempting duty and taxes on import of plant and machinery, medical, surgical, dental or veterinary machinery/ equipment, fixtures, fittings, and furniture, diagnostic kits not manufactured locally.

2. Services Sector:

• In order to attract investment in wholesale and retail trade, exemption from customs duty in excess of 5 % on import of equipments for establishing the wholesale/ retail chain stores, like, refrigeration system, fork lift trucks, high racks, fittings/ fixtures, etc.

3. Automobile Industry:

• Introduction of tariff based system (TBS), rationalization of duty on multi-axle trucks, rationalization of duty on purpose built taxi, exemption from duty on agriculture tractors in CBU condition.

Import of old/ used cars – Importability in TR, baggage and gift (for age of car) to be restricted to five years.

4. Transport Sector:

• For promoting transport system in the country the government is reducing custom duty on buses, trucks and dumpers from 20 % to 10 % in CKD condition and from 60 % to 30 % in CBU condition. Trucks and dumpers of more than five tons are exempt from sales tax.

Export Promotion:

To increase export, the Government has introduced Export Promotion Package under which leather, shoe, marbles, granite and pharmaceuticals industries have been exempted from customs duty.

Self-Employment Generation:

• Rozegar Scheme with Rs.12 billion is launched. Educated persons in the age bracket of 18 – 40 years will get loan for self-employment. This will begin from July 2006. They can establish PCO, mobile utility store; can get franchise for USC; can own transport (taxi etc.). The Government will share the risk associated with loan.  The government will pick up half of the mark up and other half will be picked by the person himself.

National Bank of Pakistan will issue the loans. Under this scheme 1.8 million jobs will be created during a span of 5-years.

Welfare of the People:

i) Rs.4.0 billion is allocated for 6035 big filters for clean drinking water in villages and Union Councils.

ii) In the next two years, 425 more villages will get gas.

iii) Rs.35 billion has been allocated for Khushal Pakistan Program. This money will be spent on rural roads, village electrification, water supply, gas, education, health, sanitation and levelling of lands for irrigation purpose.

Pays and Pension:

• For salaried employees income tax exemption base has been increased from Rs. 100,000 to Rs, 150,000.
• Likewise for salaried employees, range of Tax rates has been decreased which was 3.5% - 30% previously, now it has been revised downwards in the range of 0.25% - 20%.

• Rise in salary of railway employees.

Health Sector:

• The budget has allocated Rs 4.728 billion for health sector.

• Promotion of health sector through reduction/ exemption of duty on life saving drugs, diagnostic kits and equipments like all medicines for cancer, drugs used for kidney dialysis and kidney transplant, all types of vaccines for hepatitis, interferon and other medicines for hepatitis, all vaccines/anti-sera, cardiac medicine, injection anti-D immunoglobulin, bloods bags CPDA.1, all medicines for HIV, all medicines for thalassemia and eye drops and medicinal ointment.

Education Sector:

• Allocation to education including HEC has been increased to Rs.22.9 billion.

• Promotion of education sector through special incentive package for setting-up of universities and technical training and research institutes on import of machinery, instruments, equipments, spares and parts and other related items, required for setting-up or up-gradation of projects of educational nature recognized by the HEC.

Others:

1. Stock Market

i)            Withholding tax on brokerage commission on sale and purchase of shares has been increased from 0.005 % to 0.01 %.

ii)          Withholding tax on trading has been increased from 0.005 % to 0.01 %.

iii)         CVT on the purchase of share has been increased from 0.01 % to 0.02 %.

2. Real Estate

• CVT @ 2.0 % on the purchase of 500 Sq. Yards and above or one kanal and above which ever is less, residential plot in urban areas.

• CVT @ 2.0 % on all purchase of commercial property.

• If there is no determined value then a CVT charge @ of Rs.50/Sq. Yard.

3. Cash Withdrawal from Banks:

Last year 0.1 % Tax was imposed on cash withdrawal of Rs. 25,000 or more from banks. Now, this tax rate is being enhanced to 0.2%

4. FOREX Dealing:

5% excise duty has been imposed on FOREX dealers.