Hassan Ali Qureshi

Roll # 13833
CTBE

Assignment 2:
Discuss the Fiscal Policy of Pakistan for the Year 2022-2023 as
per the budget presented by the federal government. Comment
on the priorities and focus.

Let’s have a Glance at the Budget 22-23

• Federal budget with outlay of Rs9.5tr presented
• Govt employees’ salaries up 15pc, no tax on those earning up to
Rs100,000/month
• Subsidies on sugar, wheat flour proposed
• Taxes on cars over 1,600cc to be increased
• Pensioner tax reduced to 5pc from 10pc
• Advance withholding tax to be collected from those sending
remittances abroad
• Tax on banking sector increases to 42pc
• Families with income below Rs40,000 to be given Rs2,000
• Households using fewer than 200 units of electricity to be offered
loans on easy instalments to buy solar panels
• Tax-to-GDP ratio set at 9.2pc
• Rs699bn on targeted subsidies in new fiscal
• Defence expenditure at Rs1.52tr
• FBR target set at Rs7tr
• 2pc additional tax for those with Rs30m annual income
• Average inflation forecast at 11.5pc
With an ongoing negotiation to convince the International Monetary Fund
(IMF) to release bailout payments, the PML-N-led coalition government on
Friday presented a federal budget with a mix of real stabilization measures
sugar-coated with feel-good sentiment — the revival of petroleum levy with a
bang, withdrawal of incentives for construction coupled with taxation on real
estate and candies for government employees, income tax payers, industries
and solar energy — and additional taxes of Rs355 billion to be collected by the
Federal Board of Revenue (FBR).

“Economic stability is our foremost priority … we have to set strong

foundations of economic development that is based on sustainable growth,”
said Finance Minister Miftah Ismail while presenting the next year’s budget in
the National Assembly, adding that economic development would be derived
through from exports, particularly of agriculture, information technology and
industrial products.

The most critical moves coming out of the IMF programme in the budget
relate to an almost negligible change in subsidies (Rs699bn next year against
Rs682bn in the current year) and a reduction in power sector subsidies.

That would mean the national average electricity tariffs would go up by more
than 20pc with a cumulative financial impact of almost Rs1.5 trillion. The
allocation for power sector subsidies for the next year is kept at Rs570bn
against Rs596bn during the current year, a decrease of 4.4pc.

On top of that, a non-tax revenue target of Rs750bn has been set for the
petroleum development levy (PDL), up almost 455pc from an estimated
collection of about Rs135bn during the current year.

In the previous year’s budget, the PTI government set a Rs610bn target for
PDL but later gradually scaled it down as global oil prices surged.

This means the current government would not only end the ongoing Rs10-23
per-litre subsidy on petroleum products but also start collecting PDL over the
next year — a requirement to revive the IMF programme.

A key objective required under the Fund’s loan programme was to provide for
Rs152bn (0.2pc of GDP) primary budget surplus (i.e. financial gap other than
interest payments) next year from a deficit of Rs360bn (0.7pc of GDP) during
the current fiscal year.
In his budget speech, Mr Ismail said the government preferred national
interest over political capital and started taking tough decisions to bring the
country back on track.

“The series of difficult decisions is not complete yet,” the minister said
extempore while reading out of written speech, adding that “the primary
deficit will be converted into primary surplus”.

The minister conceded that an increase in energy and fuel prices would stoke
up inflation but said the government had no other option to reverse the
“devastation caused by mismanagement of last four years”.

Another key step in the budget appeared to be a reversal of tax and subsidy-
related incentives to the construction and real estate sector — pet programmes
of the PTI government.

The budget 2022-23 earmarks only Rs500 million each for Naya Pakistan
Housing Authority and mark-up subsidy on Naya Pakistan against Rs30bn
and Rs3bn, respectively, in the current fiscal year.

The finance minister said it was one of the five top tax policy principles to
impose a tax on non-productive assets and wealthy people to encourage
entrepreneurship and investments.

He said Pakistan’s tax system had resulted in an artificial price hike in real
estate, taking housing facilities out of the reach of the middle class.

The money generated from this dead investment was a major source of
inflation and social disharmony, he said: “We don’t want to discourage the real
estate sector, but we want to steer this sector in a direction where it can
become the engine of growth for cities. Our proposals aim at encouraging
construction and vertical growth and discouraging speculative investment in
open plots.”

Therefore, people who have more than one immovable property priced above
Rs25m and situated in Pakistan shall be deemed to have received a rent equal
to 5pc of the fair market value of the immovable property and shall pay tax at
the rate of 1pc of the fair market value of the said property.

Likewise, the tax on transactions of immovable properties has been changed.

As such, capital gain on all classes of assets is now proposed to be taxed at
15pc in case the holding period of such property is one year or less.
The capital gain payable on such assets will reduce to zero after a holding
period of six years, reducing tax liability by 2.5pc with each subsequent year.

Furthermore, the advance tax rate on buying and selling property for filers has
been raised to 2pc from the current 1pc. Moreover, the advance tax rate for
buyers of immovable property who are non-filers has also been increased to
5pc.

While providing partial relief to hard-pressed salaried people facing higher

fuel and electricity prices, the finance minister doubled the basic threshold of
taxable salary to Rs1.2m a year.

In the same direction, the basic threshold of exemption for business

individuals and the Association of Persons (AOPs) was also enhanced from
Rs400,000 to Rs600,000.

The government has also reduced the tax rate on profit from investment in
Behbood savings certificates, pensioners’ benefit accounts and Shuhada family
welfare accounts to a maximum of 5pc instead of 10pc at present.

For small retailers, the budget also provided a fixed income and sales tax
regime that ranges from Rs3000 to Rs10,000 as the final settlement.

The finance bill facilitated the industrial sector by allowing 100pc depreciation
for tax adjustment besides also allowing advance income tax adjustment on
the import stage on goods into plant and machinery, raw materials, and
finished goods.

Further relief has also been provided to the textile, pharmaceutical and film
industries.

On the other hand, the finance minister also doubled advance tax to 200pc for
non-filers on vehicles above 1600cc and increased windfall gain tax for banks
from 39pc to 42pc that were earning secure profits because of huge
investments in government securities.

Also, non-resident Pakistanis would also be required to become a taxpayer in

Pakistan unless they were tax-resident elsewhere.

The budget also removed a 17pc general sales tax on the import of solar panels
and their local supply and promised to provide easy banking facility to
households for installing solar panels.
Likewise, the budget also withdraws GST on the supply of tractors,
agricultural implements and various seeds, including wheat, rice, maize,
sunflowers, canola, and rice.

The overall size of the next year’s budget is estimated at Rs9.5tr, up from
Rs8.487tr for the current year, showing an increase of about 12pc.

The minister said the biggest challenge for the government was to achieve a
5pc economic growth rate without an unmanageable current account deficit.
The current expenditure for the next year is estimated at about Rs8.7tr,
including the largest chunk of Rs3.95tr for interest payments.

A sour point of the expenditure was the combination of the expenditure of

running the civil government (Rs550bn) and pensions (Rs530bn) at about
Rs1.08tr for a few million compared to just Rs800bn development budget.

The defence budget, on the other hand, increased by almost 11pc to Rs1.523tr
against Rs1.37tr.

The revenue target for the next year has been set at Rs7tr against Rs5.829tr of
the current year, showing an increase of 20pc. About Rs973bn would
automatically accrue because of the almost 17pc impact of inflation (11pc) and
GDP growth (5pc), while the remaining Rs355bn would be generated through
additional tax measures.

At the same time, the budget projects next year’s consolidated fiscal deficit at
4.9pc of GDP or Rs3.798tr against Rs3.42tr (or 6.3pc of GDP).

However, the deficit at 4.9pc would be achieved with provincial governments

together providing a cash surplus of Rs800bn. Otherwise, the federal budget
deficit is projected at almost 4.6tr when compared to Rs4tr this year.

Non-tax revenue for the next year is targeted at Rs2tr, slightly lower than the
current year and for the first time, after a long gap, about Rs96bn proceeds are
targeted to be generated through privatisation.

The End