Govt on spending spree with third budget

By Khaleeq Kiani  2021-06-12
ISLAMABAD: With certain limitations imposed by the ongoing Covid-19 pandemic and the
International Monetary Fund (IMF) programme, the government on Friday announced its third
budget with an expansionary and feel-good approach, significantly increasing subsidies and
incentives for big business, manuf acturing, corporate market and agriculture sectors and
proposing about 24 per cent hike in revenues, including Rs506bn worth of additional measures.

`The stabilisation phase is now over, and budget 2021-22 will focus on inclusive and sustainable
growth...fostering growth with investment,` Finance Minister Shaukat Tarin said in hisbudget
speech which was marred by loud sloganeering by the opposition parties.

The additional revenues of Rs506bn are based on Rs264bn worth of policy measures and
Rs242bn of administrative. The budget more than doubles (226pc) subsidy allocations and
significantly hikes surcharges and levies on oil and gas, including a 36pc increase in
petroleumlevy. It also allows a 10pc increase in salaries (ad hoc allowance) and pensions at an
additional cost of Rs160bn and promises universal health coverage through Sehat Card.

As such, the revenue plan is based on massive reliance on indirect form of taxation and that too
mostly outside the divisible pool sources that keep the federation financially floating.

For example, Rs115bn alone would be additional revenue on account of gas infrastructure
development cess that would increase by a massive 767pc to Rs130bn next year against just
Rs15bn this year.

A similar and even bigger additional revenue of Rs160bn is targeted to flow from petroleum levy
on oil projects which means petroleum prices would go up in the next fiscal year.

The target for petroleum levy is Rs610bn for next year, up 35pc from current year`s Rs450bn
that would now touch Rs500bn by June 30, 2021.

Another 260pc increase is expected in natural gas development surcharge to Rs36bn next year,
compared to just Rs10bn this year. Also a 52pc increase would come in as royalty on crude oil to
Rs35bn and yet another 20pc higher revenue from royalty on natural gas.

About 68pc increase is projected in extraordinary receipts from UN operations at Rs47bn against
Rs28bn this year. A higher amount of Rs30bn (48pc) is expected from dividends to Rs90bn next
year.

At the same time, the budget projects next year`s fiscal deficit at 6.3pc of GDP (Rs3.42tr) that
too with more than 1pc of GDP (Rs570bn) cash surpluses from the provinces.

The revenue target for next year is fixed at Rs5.829tr compared to Rs4.691tr this year, showing
an overall increase of Rs1.138tr (24pc). About Rs635bn would accrue automatically on account
of 8.2pc inflation and 4.8pc GDP growth rate.
The finance minister said the trickledown effect had not helped the vulnerable over the past 74
years andhence the government would change the course of history by uplifting 4-6 million low
income households in the next year, through bottom-up approach. This would include Rs500,000
interest-free business loan to every household, Rs250,000 interest-free farming loan and
Rs200,000 interest-free loan for tractors and machineries and Rs2m worth of lowinterest loan for
house building.

The next year`s budget entails major concessions to the manufacturing sector, including
automobile, textiles,pharmaceuticalindustry,mobile phone and information technology, and even
small and medium enterprises (SMEs) through reduction in import duties on raw materials and
lower general sales tax.

A major f avour has also been given to the stock market through reduction in Capital Gains Tax
from 15pc to 12.5pc, while a series of withholding taxes have been removed, including those on
banking transactions, stock exchange transactions, margin unancing, air-travel services, debit and
credit card-based international transactions and mineral exploration.

The amount of subsidies for next year has been targeted at Rs682bn, almost 226pc higher than
current year`s Rs209bn which was later revised to Rs430bn. But this is mostly on account of
payments to independent power producers and tariff differential subsidies. Of this, about 327pc
increase has been projected for the power sector to Rs596bn next year against Rs139.5bn this
year. Of this, a major increase of over Rs120bn or 90pc is projected to go to K-Electric whose
share in subsidies would increase to Rs245bn from Rs129bn this year.

The federal expenditures are budgeted at Rs8.487tr for next year against Rs7.34tr of revised
estimate for the current year, showing an increase of 15pc.The gross revenues on the other hand
are targeted at Rs7.909tr, com-pared to revised Rs6.395tr of this year, showing an increase of
24pc.

Non-tax revenues are projected to be higher by 22pc next year to Rs2.08tr, compared to Rs1.7tr
this year. Of the total FBR revenue of Rs5.829tr, the share of indirect taxes is estimated at
Rs3.647tr next year against Rs2.9tr this year, up by 26pc, while growth in direct taxes is less
than 22pc at Rs2.18tr against Rs1.789tr this year.

The provincial share in federal taxes would increase from Rs2.7tr this year to Rs3.4tr next year,
up by about Rs707bn or 25pc, but about Rs570bn would be retained by the federal government
as provincial cash surplus to contain federal density that would otherwise go beyond 7.1pc of
GDP.

The current expenditure of the federal government would be around Rs7.5tr next year, up 14pc
over current year`s Rs6.56tr. The interest payments are projected at Rs3.06tr, com-pared to
Rs2.85tr this year, an increase of 7pc. The pension bill, excluding the latest10pc increase,is
estimated at Rs480bn of which Rs260bn goes to the military pensioners. The running of the
entire civil government would cost Rs479bn, down from Rs487bn this year, while defence
expenditure would go up to Rs1.37tr against Rs1.29tr this year, showing an increase of just
5.8pc. The Public Sector Development Programme (PSDP) is projected at Rs900bn next year
against Rs650bn this year which has now been cut by another Rs20bn.

The hallmark of the taxation side is reintroduction of self-assessment scheme that was previously
introduced by the Musharraf government, but this is balanced through a thirdparty audit and a
restriction on tax notices by the Federal Board of Revenue.

The finance minister said the budget did not impose any new tax onsalaried class. The tax
compliance costs would be reduced, putting an end to proble updadon every year despite
submission of entire data as part of tax returns. The budget also provided relief in federal excise
and sales taxes on locally manufactured cars of less than 850cc and electric vehicles.

The minister also announced incentives for setting up cold storages for agriculture products and
tax exemptions on Covid-related medical equipment, etc, for another six months. He also
promised a minimum wage of Rs20,000 per month for private workers, an increase of 20pc.

He said the government had given an economic programme in the budget which addressed welf
are of all segments of society, from agriculture to industry and from services to social sector,
from labour to farmer to women to students, homeless, government servants, youth and the poor
households.
 Feel-good budget
 2021-06-12
We have been here before. Every time a government gets some fiscal space it immediately
shifts gears to growth, ditching politically unpopular reforms. The `growthfriendly` budget,
based on an expansionary fiscal policy, for the next financial year rolled out on Friday is no
different. After pursuing contractionary economic policies during the last three years and getting
nowhere, the PTI-led administration has decided to switch to growth as the 2023 elections draw
closer. In the new budget, the incumbents have revisited their spending priorities, decided to
increase development investment by a hefty 40pc to Rs900bn while offering a slew of significant
tax incentives and relief to businesses, and announcing some schemes to put a bit of money in
the pockets of low-middle-income segments. That is in line with what Finance Minister Shaukat
Tarin had promised a day earlier a combination of the bottom-up and trickle-down approaches
for supporting the poor and incentivising businesses. It is another story that the policy still
appears tilted more towards the trickle-down philosophy than the bottom-up approach.

Apart from political considerations, the build-up of an unexpected growth momentum during the
present fiscal year on the back of major monetary stimuli, provided by the central bank to help
businesses cope with the impact of Covid-19, and significant improvement in the external sector
have helped the government reverse its contractionary policies. The planned US exit from
Afghanistan has also enhanced Islamabad`s leverage with Washington. So for the government
the time is ripe to defer IMF-mandated policies and change course to create a feel-good effect.
How these factors play out is anyone`s guess.

More than the above-mentioned factors, the success of the budget for 2021-22 hinges on the
ability of the government to raise estimated tax revenues of around Rs5.83tr, up by 24pc from
the projected collection of Rs4.69tr during the outgoing year. The target is ambitious, given the
fact that the government has let go significantly large revenues through its tax incentives, and is
difficult to achieve if the performance of the FBR in recent years is anything to go by.

A look at the Finance Act 2022 shows that the government plans to achieve the `additional
revenues` through a 30pc increase in income tax and sales tax. That will require tough decisions
and serious efforts to broaden the tax base by bringing untaxed and undertaxed sectors such as
retail into the net. This is something that many governments, including the incumbent, have tried
many times in the past and failed because of their fear of the political fallout of the move. The
failure to achieve the targeted tax revenues will force the government to slash its fiscal stimulus
or borrow more to finance its development package. Similarly, the targets for non-tax revenue
collection and privatisation yields are also on the higher side. Hence, the scepticism about Mr
Tarin`s overall growth-budget plan.
 Rep Omar`s tweet
 2021-06-12
CONGRESSWOMAN Ilhan Omar`s comparison of Hamas and the Afghan Taliban with the US
and Israel has raised a media storm in her home country. The Muslim lawmaker of Somali origin
has been lambasted not only by rightist trolls, but also by her Democratic colleagues, while she
has received death threats as well.

All it took was a tweet in which Ms Omar said that `unthinkable atrocities` have been
`committed by the US, Hamas, Israel, Afghanistan and the Taliban`. Along with being called
anti-Semitic, Democrats have urged her to `clarify her words` while a senior Republican
lawmaker has termed the statement `anti-American`.

Rep Omar, meanwhile, has shot back by decrying the `offensive ...

Islamophobic tropes` deployed against her.

Behind all the noise, the American lawmaker`s comments are quite interesting. The comparison
of sovereign actors such as the US and Israel and Hamas, which won an election, and the Afghan
Taliban, which once ruled Afghanistan with limited recognition, may not be apt. But there can be
little denying the fact that Washington and Tel Aviv have indulged in actions not too dissimilar
and at times even worse than the Palestinian and Afghan groups. So, instead of feigning horror at
the comparison, the American political establishment needs to dig a little deeper. Hamas is a
legitimate entity, ruling over Gaza and resisting Israeli occupation. As for the Afghan Taliban,
while their violent tactics and enforcement of obscurantist codes during their rule over
Afghanistan can hardly be justified, they are stakeholders in their homeland, which is why the
Americans have signed a peace deal with them. Moreover, the targeting of civilians either by
states or non-state actors is totally unacceptable. Now, let us examine briefly the record of the
US and Israel in the international arena. Over the last several decades, America has been
instrumental in destabilising a number of Muslim states, including Afghanistan, Iraq, Syria and
Libya. Whether in the name of fighting terrorism or bringing `democracy` to these states,
America`s uninvited military adventurism has resulted in massive death and destruction for the
peoples of these countries. As for Israel`s conduct, on countless occasions Tel Aviv`s brutal
onslaughts against the Palestinians have been described by experts as falling within the definition
of war crimes. This has included the slaughter of children as well as other defenceless segments
of the Palestinian population.

Therefore, instead of pillorying Rep Omar, perhaps her colleagues in Congress need to discuss
these ugly realities in a democratic manner.
Massive taxation relief to boost industrial growth
By Mubarak Zeb Khan  2021-06-12
ISLAMABAD: The third budget of the PTI government, announced on Friday, aims to reduce
the input cost of several industries. It also plans on tapping online transactions and bring these
under the Sales Tax (ST) net.

The Budget 2021-22 of fers unprecedented relief measures in Customs Duty (CD), ST and
Income Tax (IT) for the industrial sector amid a proposed plan that explains how the government
intends to meet the Rs1,129 billion hike in the Federal Board of Revenue (FBR) target.

As per proposed plan, under the revenue relief changes announced in the Finance Bill, the
government aims to give away Rs119bn to industries and individuals. Of these, Rs42bn has been
given in CD, 19bn in ST and Federal Excise Duty (FED) while Rs58bn in IT.

The revenue measures under IT will generate Rs116bn, followed by Rs215bn from ST & FED
and Rs53bn from CD measures.

The net revenue impact will be Rs264bn after deduction of relief measures.

Official documents suggest that GDP growth at the rate of 5.2pc in FY22 will help generate
Rs236bn while projected inflation at 8.2pc will yield an additional revenue of Rs385bn. The
FBR aims to collect an additional revenue of Rs242bn from enforcement.

The cumulative impact of all these measures will be Rs1,127bn to reach the target of Rs5.829tr
for FY22.

FED has been proposed on potassium chlorate, reclaimed lead and electronicallyheated tobacco
products. The government proposed withdrawing FED on industrialunits located in the erstwhile
FATA/PATA.

FED has been reduced to 16pc from 17pc on telecommunication to facilitate business and
provide relief to masses.

On the intervention of Prime Minister Imran Khan the proposed FED on usage of mobile and
internet, which earlier in the cabinet meeting approved was reversed through a tweet late night.
FBR estimates show Rs100bn from this levy.

Locally-manufactured small cars up to engine capacity of 850cc are exempted from excise duty
along with reduction in ST rate from 17pc to 12.5pc and withdrawal of value-added tax.

Industrial relief measures The government has either reduced or exempted completely CD,
additional customs duty (ACD) and Regulatory Duty (RD) on imports of 584 tariff lines
including fabric in the value chain of the textile sector.

The estimated loss of revenue from this major measure is Rs10bn It was proposed to rationalise
CD, ACDand RD on the import of flat-rolled products of HRC and stainless steel.
Tariff policy board has proposed reduction in CD and ACD on 328 tariff lines related to raw
materials, chemicals and intermediate goods for chemical, engineering and leather industry, etc
as part of its tariff rationalisation plan. Under this, 241 tariff lines are completely exempted from
CD and ACD while CD and ACD on 87 tarif f lines reduced to 3pc from 16pc, 11pc.

To incentivise pharmaceutical products, CD and ACD has been exempted on 358 active
pharmaceutical ingredients (APIs), raw material of auto-disable syringes and Remdesivir.

CD reduced from 20pc to 16pc and ACD from 7pc to 4pc on uncoated paper and paperboard for
printing and graphic arts industry; exemption on raw materials for vaccines and feed additives to
incentivise the dairy sector. CD reduced 50pc duty on 100 tariff lines relating to adventure
tourism. The government reduced duty to 3pc from 11pc on inputs for poultry industry.

On 2,436 tariff lines, ACD has been reduced from 7pc to 6pc. These items are placed under the
20pc CD slab. This slab includes garments, footwear, processed food, home appliances and other
goods.

Regulatory duty It has been proposed to impose Rs15,000 as RD on import of high-end mobiles.

However, the prime minister has not approved the measure. The revenue impact of this measure
is calculated at Rs16bn.

The rates of RD have been further scaled up on 78 tariff lines on import of non-essential/luxury
items to support local industry. This will increase revenue collection by over Rs11bn. The net
effect of tariff rationalisation for the auto sector is Rs15bn.

The increase in RD rate on import of tyres by 5pc to 10pc will generate Rs5bn.

The government imposed 10pc RD onimport of uncoated paper, paper board, neutral glass tubing
and pencils and crayons.

The government levied 17pc sales tax on crude oil and other items by withdrawing zero rating.
This levy will generate Rs38bn for the government. A 17pc GST imposed on 42 imported food
items including like cereals, milk and cream, frozen meat and sausages, fat filled milk at. This
will lead to a revenue collection of Rs14bn.

A 17pc sales tax imposed on several products like silver, gold jewelry, f at filled milk,
LNG/RLNG to raise Rs35bn for the FBR.

FBR will collect Rs11bn from e-commerce and Rs7bn on collection of sales tax on sugar at retail
sector and another 8bn from integrated POS retailers.

Income tax The government has proposed Rs51bn worth new income tax measures in the budget.
The Rs65bn worth exemptions and concessions withdrawn through an ordinance have now made
part of the Finance Bill. Twelve withholding taxes were withdrawnon banking transactions, air
travel, stock exchange, CNG, petroleum products, international debit credit card transactions,
and extraction of minerals.

It has proposed to introduce normal tax by eliminating block taxation of property income, capital
gains and rental incomes.

The government aims to generate Rs10bn from all these three measures.

The export proceeds of services, to be taxed at 1pc, and another Rs20 bn from streamlining
procedures and automation of business process for monitoring of withholding tax.

It proposed to levy 7.5pc withholding tax on domestic electricity bill above Rs25,000 per month.
However, no tax will be charged in case of existing on taxpayers list.

Minimum tax rates reduced from 1.5pc to 1.25pc for all person, 0.75pc to 0.5pc refineries,
1.25pc to 0.25pc fast moving goods sold by retailers and exempted for SEZ/TEZ.

225pc increase in subsidies at Rs682bn

By Our Staff Reporter  2021-06-12
ISLAMABAD: Allocation for subsidies has been increased by a staggering 225 per cent in the
upcoming fiscal year with the bulk of it going to the energy sector, including Rs136 billion in
terms of tariff differentials to independent power producers (IPPs).

While there has not been any increase in the food subsidies, the power sector subsidies have been
enhanced significantly.While Rs378.35bn has so far been spent against budgetary allocation of
Rs149.5bn in the outgoing fiscal year, the government has proposed Rs616bn subsidies for the
overall energy sector in 2021-22.

The budget documents revealed that the government has allocated Rs682bn in terms of subsidies
for next fiscal year against Rs209bn projected for the outgoing 2020-21.

There was no subsidy for the IPPs in 202021, whereas Rs136bn has been allocated for FY22,
while Rs118bn has been allocated for Power Holding Private Ltd (PHPL), while Rs40bn was
spent over it in the outgoing fiscal without any allocation at the start of 2020-21.

A sum of Rs15bn has been allocated in terms of power subsidy of `Industrial Support Package`,
and Rs22bn will be given to the KESC under the same package, Rs26bn as electricity subsidy for
the zero rated industries.

While, Rs56bn is allocated to the KESC in terms of tariff differentials, Rs184bn is allocated in
terms of inter-disco tariff differential, and Rs11.4bn for tariff differential for agri tubewells in
Balochistan.

The government has allocated Rs25.6bn in terms of Wapda receivables from the former Fata
districts that have been merged with the Khyber Pakhtunkhwa.

Incidentally the government has allocated only Rs2bn for electricity tariff differential for the
Azad Jammu & Kashmir in FY22, but the actual spending in the same head was Rs64bn in the
outgoing fiscal 2020-21.Besides, the government has allocated Rs10bn in terms of liabilities to
the oil marketing companies, Rs10bn subsidy to the LNG for providing gas on lower rates to the
industrial units, and Rs6bn subsidy has been allocated for the fertilisers plants.

In the non-energy sector Rs30bn subsidy has been allocated to Naya Pakistan Housing Authority
and Rs3bn in terms of markup for the Naya Pakistan.

Wheat subsidy to Gilgit-Baltistan will remain at Rs2bn and Rs7bn has been allocated for
purchase of wheat stocks and maintaining its reserved stocks. The allocation for Ramazan
Package through the utility stores is Rs6bn.

The federal government has reduced the subsidy for the metro bus service Islamabad f rom
Rs2bn to Rsibn in 2021-22.
 Govt earmarks Rs3.06tr for debt servicing
By Malik Asad  2021-06-12
ISLAMABAD: The government has allocated Rs3.060 trillion for debt servicing (including
interest payments) in the next fiscal year 2021-22.

During the current fiscal year, Rs2.94tr had been earmarked for the same.

The federal government allocated a sum of Rs1.6tr for foreign loans repayment, short-term loans
and other advances in FY22.

Rs1.49tr has been allocated for debt servicing in the current fiscal year, however, revised
estimates placed it at Rs1.06tr.

Foreign Loans repayment for FY22 will be Rs1.42tr against Rs841 million for the current
fiscalyear. For short-term foreign credits, Rs74.4bn has been allocated for the next fiscal year.
This year, revised estimates for short-term foreign credits are at Rs121.9bn.

According to the Pakistan Economic Survey of 2020-21, total public debt was recorded at
Rs38,006bn at end March 2021, registering an increase of Rs1,607bn during first nine months of
current fiscal year (9MFY21) which was much less when compared with the increase of
Rs2,499bn witnessed during the same period last year.

The increase in total public debt during 9MFY21 was even lower than the federal government
borrowing of Rs2,065bn for financing the fiscal deficit. The dif ferentialis primarily attributable
to apprecia-tion of the Pak rupee against the US dollar by around nine per cent which led to a
decrease in the value of external public debt when converted into the local currency.

Debt from multilateral and bilateral sources cumulatively constituted over 80pc of external
public debt portfolio at end March 2021. A set of reforms initiated by the government to improve
the economy has brought strong support from multilateral development partners during the last
two years. This is expected to strengthen confidence and catalyse additional support from
development partners` public debt in the coming years which will also help in reducing the
pressure on domestic sources.

Pakistan is availing the G-20 Debt Service Suspension Initiative(DSSI) for a period of 20-
months (May 2020-December 2021) which will help defer the debt servicing impact to the tune
of around US$3.7bn during this period.

The government remained within the benchmarks and thresholds defined in the Medium-Term
Debt Management Strategy (MTDS) at the end of December 2020.

The Economic Survey claims that Pakistan has witnessed one of the smallest increases in its
public debt during the Covid-19 pandemic. Global public debt to GDP ratio increased by 13
percentage points from 84pc in 2019 to 97pc in 2020 whereas Pakistan`s Debtto-GDP ratio
witnessed a minimal increase of 1.7 percentage points and stood at 87.6pc at end June2020
compared with 85.9pc at end June 2019.
Interest servicing was recorded at Rs2,104bn during 9MFY21 against the annual budgeted
estimate of Rs2,946bn. Domestic interest payments were recorded at Rs1,934bn and constituted
around 92pc of total interest servicing during9MFY21whichismainlyattributable to higher
volume of domestic debt in total public debt portfolio.

On a full year basis (2020-21), interest servicing is expected to remain below the budgeted
estimates primarily due to extension of DSSI from January to June 2021, appreciation of Pak
rupee against the US dollar and lower interest servicing on account of National Savings Schemes
due to withdrawals against discontinued prize bonds.