Pakistan's Annual Fiscal Budget 2007-08

Annual Budget 2007-08

Highlights:

• A budget of major relief to public and other populist measures;
• A budget of Rs. 1.874 trillion, envisaging a revenue target of Rs. 1.025 trillion, with defence spending of Rs. 275 billion and a fiscal deficit of Rs. 398 billion;
• 25% increase in PSDP budget;
• A major chunk of subsidies to WAPDA, KESC, textiles, petroleum companies and oil refineries;
• Handsome increases in minimum wages, pensions of government employees, EOBI pensions and salaries of government employees;
• Promotions to 87,500 federal employees;
• Housing scheme for low-paid government employees in Islamabad;
• Multi-billion rupee subsidy package to ensure the availability of essentials such as lintels, daal chana, moong, mash, rice, cooking oil, ghee, tea, sugar, etc. at utility stores at cheaper rates;
• Announcement of construction of several irrigation and water projects;
• Announcement of construction of several highway projects;
• Tax relief to industrial sector;
• Subsidy on electricity charges on agricultural tube-wells;
• Investment in private equity bonds has been tax exempt till 2014 and reduction of capital gain tax on sale of asset share of private companies to private equity and venture capital;
• Introduction of Real Estate Investment Trust (REIT);
• Share of education is 4% of GDP;
• Sellers of property exempted from tax up to 2010;
• Other relieving tax measures in manufacturing, agriculture, horticulture, medical sciences, computers, automobile industry, etc.

SALIENT FEATURES OF THE FEDERAL BUDGET 2007-08

In the following text, the ‘budgeted year’ should be taken as Year 2007-08, and the ‘previous year’ as the Year 2006-07:

• Total outlay of the Federal Budget 2007-08 is Rs. 1.875 trillion, which is almost 25% higher than the previous budget.

• Budget deficit is estimated to be Rs. 398 billion to be about 6.5% higher than the previous budget.  As ratio of GDP, the budget deficit falls slightly to 4% from 4.2% during the previous year.  This would be met through external resources, Rs. 258 billion; bank borrowing, Rs. 131 billion and remaining through national savings.

• Overall size of the economy (GDP) has been estimated at almost Rs. 10 trillion ($166 billion);

• Current expenditure for the budgeted year is Rs. 1.353 trillion which is 54% higher than the previous budget estimate of Rs. 880 billion.

• Public Sector Development Programme (PSDP) is Rs.520 billion against Rs. 415 billion of the previous year, with an increase of 25%.

• The share of current expenditure in total budgetary outlay is 66 % as compared with 72.4 % in revised estimates for 2006-07.

• Defence expenditure is Rs. 275 billion against Rs. 250.2 billion of the previous year, showing an increase of almost 10%.

• Education sector (including higher education) has been allocated Rs. 24.5 billion, which is about 22% higher than the previous year’s Rs. 20.1 billion.

• Health Sector has been allocated Rs. 14.3 billion which is about 29.7% higher than the previous year’s Rs. 11 billion.

Revenue:

• The overall revenue collection target increased by 22.37% to Rs. 1.025 trillion for the year 2007-08, as compared to Rs. 837.61 billion for 2006-07.
• Direct taxes projected at Rs. 405 billion for the budgeted year as compared to revised target Rs. 320.61 billion for Rs. 2006-07, indicating an increase of 27.3%
• Indirect taxes projections increased by 19.9% to Rs. 620 billion for the budgeted year as against the revised target of Rs. 517 billion for previous year.
• The income tax collection has been revised upwards to Rs. 305 billion.  With this upward revision, the Government has projected an increase of 27.2% over the revised target set for previous year.
• The customs duty collection target was cut by 1.91% to Rs. 154 billion for the fiscal year 2007-08 as against the target of Rs. 157.1 billion for 2006-07.  The customs duty collection for previous year has been revised downwards to Rs. 134 billion.
• The collection under the head of sales tax was increased by 9.97% to Rs. 375 billion for budget year as against Rs. 341.6 billion set for previous year.  The sales tax was revised to Rs. 311 billion because of a shortfall.
• The federal excise collection has been projected at Rs. 91 billion as compared to Rs. 68.1 billion previous year, showing an increase of 33.6%.
• Tax administration has been made more efficient.  More friendly tax reforms are introduced in the CBR.  The future strategy is to co-locate all the domestic taxes under one roof, for which Regional Tax Offices (RTO) are being established in the major cities of the country.
• Similarly, the international taxes are to be handled through the Model Customs Collectorates (MCC) which is being established by adopting best international practices.
• For large taxpayers, three large taxpayers units have been established equipped with modern resources.

Public Sector Development Programme (PSDP):

• Rs. 520 billion has been earmarked for Public Sector Development Programme (PSDP), showing an overall increase of 24% over the last year’s allocation and a 30% jump in the provincial development programmes’ amount.
• 86% of the PSDP allocated to on-going projects, leaving only 14% for new high-priority projects.
• The real PSDP amount reduces to Rs. 427 billion when foreign loans totalling Rs. 58.6 billion and Rs. 35 billion earmarked for earthquake reconstruction is deducted.
• The PSDP/GDP ratio is 4.8% for the budgeted year as compared to 4.3% for previous year.
• The federal share in the PSDP is Rs. 335 billion while the provincial governments are expected to receive 15 billion.
• Public sector corporations will invest Rs. 204 billion beside the budget increasing the volume of the overall PSDP to Rs. 724 billion.
• Water and power sector will receive Rs. 84 billion, power sector Rs. 26 billion, agriculture 15.8 billion, Kashmir affairs and Northern Areas 13.72 billion, petroleum and natural resources Rs. 72.81 billion, communications Rs. 6 billion, ports and shipping Rs. 17.39 billion, interior division Rs. 15 billion, industries and production Rs. 1.42 billion and defence division Rs. 19.1 billion.
• No funds have been allocated for Kalabagh Dam.

Provinces’ Shares:

• The Federal Budget 2007-08 envisages Rs. 491.7 billion net transfers to provinces, including Rs. 403 billion in net proceeds from the federal divisible pool under the interim National Finance Commission (NFC) Award.
• The budgeted year’s provincial share out of net proceeds from the divisible pool and straight transfers has been estimated to total Rs. 465.9 billion, up by 19.5% against previous year’s Rs. 390 billion.  This does not include project aid and subventions.
• Punjab would get a total of Rs. 236.3 billion on account of net proceeds, up by 25% when compared to previous year’s Rs. 188.9 billion.
• Sindh would get a total of Rs. 144.15 billion increased by 11.57% as compared to previous year’s Rs. 129.2 billion.
• NWFP would get a total of Rs. 55.9 billion increased by 24.77% as against Rs. 44.8 billion.
• Balochistan would get a total of Rs. 29.6 billion increased by 5.8% as compared to Rs. 28 billion previous year.
• Similarly, special grants and subventions to the provinces have been projected at Rs. 31.27 billion as against Rs. 29.25 billion during the fiscal year 2006-07, thus showing an increase of 6.9%.
• Project aid to the provinces has been projected at Rs. 26 billion increased by 55% as against previous year’s Rs. 16.8 billion.
• Straight transfers to provinces for the budgeted year have been projected at Rs. 62.8 billion as compared to 70.3 billion during the year 2006-07 showing a decline of 11%.
• The provinces will get 1/6^th of sales tax revenue, which would subsequently be transferred to district government and cantonment board.  Under this head, Punjab will get 50%, Sindh 34.85%, NWFP 9.93% and Balochistan 5.22%.
• The remainder of the divisible pool would be distributed among the provinces on population basis.  Under this head, Punjab will get 57.36%, Sindh 23.71%, NWFP 13.82% and Balochistan 5.11%.
• Total transfers to provinces during the budgeted year 2007-08 would be Rs. 524.5 billion against Rs. 439.6 billion of the year 2006-07, increased by 19.3%.  However, the federal government will deduct Rs. 32.8 billion as interest payments and debt servicing of federal loans, leaving total transfers of Rs. 491.75 billion.

Relief for Employees and Retired Employees:

• In the Federal Budget 2007-08, the minimum wage for unskilled labour has been increased to Rs. 4,600 per month from Rs. 4,000 per month, showing an increase of 15%.  But critics argued that it is still impossible for a poor man to survive in a monthly income of Rs. 4,600.
• Increase in the salaries of government employees by 15%.
• Pensioners retired before 1997 will get 20% increased pension and pensioners retired after 1997 will get 15% increased pension.
• Government employees in the grades BPS-5, BPS-7 and BPS-11 are being promoted to BPS-7, BPS-9 and BPS-14 respectively.  87,500 federal employees will be benefited from this measure.
• Government announced a housing scheme for low-paid employees in Islamabad.  37,000 new houses would be constructed for such employees on ownership basis.  In the first phase, construction of 5,000 units would begin immediately and the land would be provided by Capital Development Authority (CDA).
• About 250,000 housing units would be constructed in five years under the ‘low-cost housing scheme’ to be launched in collaboration with the provincial and district governments, for which the loan from the House Building Finance Corporation (HBFC) would be available.
• Upgradation of basic salary of railway employees by one step for the remaining 62,482 workers, excluding secretarial staff.  The long-standing demand of railway employees regarding upgrading of posts had already been accepted with an increase in their allowances and 12,510 employees had benefited from the increase.  In this way, the government has provided relief to 74,992 railway employees and their long awaiting demand has been met.
• EOBI pension has been increased by 15% and the minimum pension has been increased from Rs. 1,300 per month to Rs. 1,500 per month.
• Earlier, if a husband and wife both contributed to old-age benefit, the surviving one did not get the pension of the deceased spouse.  Now the surviving partner shall get the pension of the deceased spouse.
• All the workers, regardless of their wage level, will be entitled to compensation on account of disability caused during the course or as a result of performance of duty.  Earlier, the Workmen Compensation Act, 1923 did not allowed the compensation for workers receiving more than Rs. 6,000 per month.
• The Workers Welfare Fund Ordinance, 1971, is being amended to allow industrial workers to get medical, education, housing and death grant from the fund for units having an annual income in excess of Rs. 500,000.  The Ordinance has been amended to increase the limit of death grant from Rs. 200,000 to Rs. 300,000.

Technology (including Defence):

• The defence budget for the year 2007-08 has been increased to Rs. 275 billion from Rs. 250.2 billion of the year 2006-07, showing an increase of 10%.
• Separate allocations may be made for the purchase of JF-17 Thunder aircraft from China and F-16 multi-role fighter jets from US.
• An amount of Rs. 1.789 billion has been earmarked for 32 ongoing projects, including 10 of the Space and Upper Atmosphere Research Commission (SUPARCO).
• There are 36 new projects.  An amount of Rs. 500,000 has been allocated for reconstruction of an observatory in Balakot.
• Rs. 1.8 billion for Pakistan Communication Satellite System (PakSat IR).
• Rs. 7.171 million for metrological training facilities for neighbouring countries.
• Rs. 13.719 million for capacity building of the meteorological department.
• Rs. 9.935 million for establishment of the aeronautical met office at Sialkot International Airport.
• Rs. 103.71 million for the remote sensing data transmission facility.
• Rs. 37.392 million for the satellite bus development facility (Phase I).
• Rs. 26.161 million for development of satellite dynamic system test facility.
• Rs. 41 million for establishment of the atmospheric data receiving and processing centre.
• Rs. 245.79 million for the PakSat project (Phase I extended).
• 31.5 million for upgradation of the precision machine shop.
• Among the ongoing projects Rs. 7.175 million has been allocated for networking in the offices of the defence ministry.
• Rs. 17.587 million for National Centre for Drought and Early Warning System.
• Rs. 750 million for construction of Gwadar International Airport.
• Rs. 100 million for development of a satellite environmental validation and testing facility in Lahore.

 Health:

• Rs. 14.3 billion has been earmarked for health sector development in the year 2007-08, showing an increase of 29.7% over the last year’s Rs. 11 billion.
• Rs. 12.68 billion will be met from domestic resources and Rs. 1.52 billion through foreign assistance.
• President’s Initiative for Urban Clinics envisages 815 medical clinics at the union council level in cities like Karachi, Rawalpindi, Lahore, Islamabad, Peshawar and Quetta.  A doctor, lady health worker and a dispenser would work at each clinic.  Staff would be recruited from local union councils to generate 4,917 jobs.
• There are total 100 different ongoing and new projects under health sector.
• Significant among the new projects is construction of a medical tower at Jinnah Postgraduate Medical College (JPMC) in Karachi at a cost of Rs. 400 million, which will be met by the Government through its own resources.  The total cost of the project is Rs. 3.3 billion.
• Rs. 200 million has been allocated for construction of a medical tower at the Pakistan Institute of Medical Sciences (PIMS), Islamabad.  The total cost of the project is Rs. 2.2 billion.
• Establishment of a burns centre in Faisalabad at a cost of Rs. 240 million is also included.  An amount of Rs. 140 million has been earmarked for upgrading the paediatric cardiac unit at the National Institute for Handicapped in Rawalpindi, from a total of Rs. 321 million allocated for the project.
• Government is also planning to construct two trauma centres in Lahore and Rawalpindi.
• Rs. 60 million has been earmarked for providing 64 Slice Helical CT Scan angiography equipment at the Karachi Institute of Heart Diseases.
• A cancer hospital in Lahore will also be constructed for which Rs. 46.340 million has been reserved.  A sum of Rs. 50 million has been fixed for strengthening the National Control Authority for Biology, Islamabad, and its independent laboratory.  The project’s total cost is Rs. 231 million.
• Rs. 4.89 billion has been allocated for National Programme for Family Planning and Primary Healthcare, of which Rs. 4.5 billion will be Government’s own contribution and Rs. 360 million foreign loan.
• Rs. 360 million has been earmarked for Enhanced HIV/AIDS Control Programme.

Agriculture:

• In Pakistan, two big companies are working in the private sector producing dairy products.  Under Prime Minister Special Cell livestock produce and allied services will be spread to 1,963 union councils all over the country benefiting 3 million poor farmers.  As a result of these measures, 12 million litres additional milk will be produced and 200,000 tons additional meat will be produced.
• As a result of this Government policy, a multinational company, i.e., Nestle, 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.
• With the use of better seeds agriculture production can potentially improve 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 general lifestyle of poor farmers living in rural areas has been improved during the last 5 – 6 years.  They are now spending their incomes on their children’s education; renovation of houses; set up of tube-wells; purchase of tractors, harvesters, cycles, motorcycles, mobile / WLL telephone sets, TV, DVD/VCD player, furniture, etc.

Mega Projects:

• The long awaited Bhasha-Diamir Dam’s designing is going to complete in 2008.  Rs. 500 million has been reserved for this project.
• The work on upraising of Mangla Dam started by WAPDA is close to completion.  As a result, 2.09 million acres 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.  Underdeveloped areas will be transformed into prosperous pieces of land.
• The work is also started on expansion of Kara Kurram Highway.
• The work on expansion of Hasanabad-Mansehra Section will be started in the next few months.
• The N-5 Highway will be linked with the National Trade Corridor.  Rs. 29 billion has been allocated for this purpose.  The total length of this highway is 1,585 km, which will be constructed at a cost of Rs. 147 billion.

Real Estate Investment Trust (REIT):

Through REIT 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 the use of REIT their use has been given tax concession.  For example, the profit of REIT, will be exempted from taxation up to 90%., upon distribution.  The most important tax concession for REIT is that under this scheme sellers of property will be exempted from tax up to 2010.

Amendment in Companies Ordinance, 1984:

For the benefits of shareholders, the shareholder who has 12.5% shares of any company 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 shares of any company, can request SECP for special audit.

Industrial Sector:

• A Special Economic Zone (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 and different incentives.  These measures would boost up our industry.
• Appropriate laws are being framed for setting up of SEZs.
• Some time ago R&D facility was provided to textile 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 fibre manufacturers @ 3.5%, which will be availed through SBP.
• The facility of debt/swap to spinning sector is granted.  Similarly, for exporter the existing withholding tax rate of 0.75% to 1% is being rationalised and 1% of withholding tax is being proposed.  The textile exporters will also be beneficiaries.
• Customs duty on more than 400 tariff lines of raw materials and machinery used in textile industry has been reduced.
• Exemption of raw material and components for local production of CNG processors, the non-conventional energy sources equipment from sales tax and customs duty.
• Duty reduced to 0 on sports football bladder raw materials.
• Duty reduced to 5%-10% from 10%-20% on components on electrical transformers.

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