With eye on elections, government presents Rs2.96 trillion budget


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Govt to borrow Rs971 bn from banks and non-banking sector; 20pc raise in salaries, pensions of govt employees; duty and taxes on Hybrid Electric Vehicles, batteries reduced by 25pc; allocation for BISP up by Rs10 bn; Rs2 bn earmarked for Benazir tractor scheme; Rs209 bn set aside for subsidies; gross federal revenues estimated at Rs3.234 trillion; income tax exemption limit increased to Rs400,000; sales tax on black tea reduced from 16pc to 5pc; FED abolished on 10 more items; tax on CNG sector increased; 100 youth to get technical training; Rs10 bn for citizen compensation programme; highest tariff rates reduced from 35pc to 30pc; FED on cement reduced

By Khalid Mustafa

ISLAMABAD: Fittingly, the unprecedented fifth budget session of a democratically elected government was an extraordinary one. With earphones firmly plugged in to keep out the raucous jeers and sloganeering from the opposition benches, Finance Minister Dr Hafeez Shaikh gamely kept reading his prepared speech in his distinctive monotone. That the PPP MNAs were trading blows with the PML-N MNAs seeking to break through their cordon around the finance minister is something that didn’t reflect on either the face of the minister or his pace.

As expected, the minister laid out ‘a people-friendly’ budget with many goodies for the electorate. And analysts across Pakistan are already challenging its feasibility and the ability of the government to finance the promised treats. While traders in Lahore have scoffed at the budget speech as the launch of the PPP’s election campaign, economic experts are expecting it to fuel a dangerous inflationary spiral.

The total proposed outlay of the federal budget 2012-13 has been pegged at Rs.2.96 trillion and the government has set the target for the fiscal deficit at 4.7 percent or Rs.1.1 trillion. Of the budget pie, the biggest chunk – a whopping 1.876 trillion – has been given to General Public Service; Rs.545.38 billion for defence; Rs.7.84 billion for health and Rs.47.8 bn for education. The proposed outlay on the Public Sector Development Programme is another Rs.360 billion while Rs.154 billion set aside for ‘other development expenditures’.

To finance this party, the government is hoping to realise some Rs.3.234 trillion in gross federal revenues, up 18.3 percent from Rs.2.732 trillion in FY 12. Of these, the government is hoping to net Rs.2.504 trillion as tax revenues – which would amount to a tax-to-GDP ratio of more than 10 percent – and another Rs.730 billion in non-tax revenues. Privatisation proceeds are expected to yield some 74 billion while external receipts have been estimated at Rs.135 billion. Meanwhile, the government is planning to hit the ever-dependable banking sector for loans worth Rs.484 billion with another Rs.487 billion expected from the non-banking sector.

The continued reliance on domestic borrowings is expected to crowd out the private sector, fear analysts, which will further impact growth. Meanwhile, others say the meagre size of external inflows for budgetary support suggests that Pakistan is planning for reduced support from the IFIs in the wake of the tension with the US over the resumption of NATO supplies.

Of the federal revenue collection, a sum of Rs.1.459 billion is to be transferred to the provinces under the 7th NFC award, as compared to the current fiscal year’s disbursement of Rs.1.203 billion – an increase of over 21.3 percent.


Among the toys and whistles promised to the electorate are a 20 percent raise in salaries and pensions of federal employees, which are expected to have an impact of less than Rs.30 billion per annum. (Finance Secretary Wajid Rana has further clarified that the raise will be calculated on basic pay and the total impact will be between Rs.25 billion and Rs 30 billion.)

The allocation for the Benazir Income Support Programme has been upped by Rs.10 billion to Rs.60 billion against the previous year’s allocation of Rs.50 billion. The government has also allocated another Rs.10 billion under the head of citizen’s compensation programme. An allocation of Rs.9.7 billion has been made for loans to the poor to reduce poverty and another Rs.25 billion in miscellaneous grants are to be used for the betterment of people. An additional Rs.3 billion are intended for the poverty alleviation fund; Rs.2 billion are for the Benazir Tractor Scheme, up from the previous year’s Rs 917 million. For the upcoming fiscal year, some Rs 209 billion have been set aside as subsidies for various sectors of economy as compared to last year’s initial allocation of Rs.166.448, which swelled to Rs.515.292 billion by the end of the fiscal year.

Revenue mobilisation

That said, the government is trying to raise revenues in innovative ways. The Gas Development Surcharge (GDS) in five sectors has been increased, due to which the price of CNG is expected to increase by Rs.15 per kg from July 1, 2012. With this imposition, the surcharge on CNG in KP, Balochistan and Pothohar region would have to surge by Rs.159 per MMBTU and in Sindh and Punjab Rs.121 per MMBTU. The gas development surcharge on gas to fertilizer sector will increase by up to Rs.103 per MMBTU, on gas to the industrial sector Rs.87 per MMBTU, on gas supply to KESC and Wapda power plants Rs.73 per MMBTU and to IPP Rs.30 per MMBTU. The government is hoping to collect Rs.55 billion in additional revenue under this head, which is to be used in laying down the Iran-Pakistan and TAPI (Turkmenistan-Afghanistan-Pakistan-India) gas pipelines.

The government has also imposed Capital Gains Tax (CGT) on the sale of property within two years of its purchase. A tax rate of 10 percent is to apply to the said property is disposed off after one year and five percent in case of disposal after 2 years. After this period, there is to be no CGT levied on transactions.

In a purported bid to document undocumented sectors, manufacturers will function as withholding agents who will collect one percent adjustable tax on sales made to distributors and dealers and the FBR is hoping to realize additional revenues to the tune of Rs.15 billion under this head. More taxes on cigarettes are expected to yield another Rs.10 billion while an increase in the rate of sales tax on steel sector is supposed to generate another Rs.4 billion.


In a move that will resonate among the unemployed, the government has announced plans to offer internships and technical training to 100,000 unemployed educated youth, which will cost the government Rs.9.5 billion in 2012-13.

With a view to promoting development in Balochistan, FATA and Gilgit-Baltistan, the government has decided to fund the tuition fees of all students from these areas pursuing postgraduate studies in reputable universities within Pakistan. This measure is expected to cost the government Rs.500 million annually.

Income taxes

Keeping with the trend of increasing the income tax exemption limit, the government has raised the limit from last year’s Rs.350,000 per annum to Rs.400,000 for the upcoming fiscal. Similarly, the exemption limit for business individuals and Association of Persons (AOPs) has been enhanced to Rs.400,000.

The number of tax slabs has been reduced from 17 to just five. Significantly, only the portion of income exceeding the tax bracket would be charged at the higher tax rate. This measure will provide relief worth Rs.8 billion and is expected to benefit all existing income tax payers by reducing the effective income tax rate.

Further, the tax applicable on loans availed from employers at concessional rates is now to apply only to amounts above Rs.500,000 and the applicable rate is to be reduced from the existing 13 percent to just 10 percent. Furthermore, pensioners are to get additional relief since the amount received from approved income payment plans or annuity plans invested from any balance of voluntary pension schemes upon retirement will be exempt from tax if invested for a period of ten years.

The finance minister has also announced a ‘taxpayer’s honour card’ which is to entitle ‘honest taxpayers’ to concessions and facilities at various public and private fora such as NADRA, passport offices, airports, customs, immigration, the FBR and other public offices.


To purportedly mitigate the hardships faced by registered businesses, the rate of minimum tax on turnover has been reduced from one percent to 0.5 percent. The government has also announced its desire to phase out the presumptive tax regime in three years. To encourage businesses to move away from the presumptive tax regime, the rates of tax for commercial importers have been reduced from five percent to three percent; from one percent to 0.5 percent for exporters and from 3.5 percent to 2.5 percent for suppliers.

Further, withholding tax on profits paid on intra-group debt is being abolished. Also, the withholding tax on cash withdrawals exceeding Rs.25000 per day has been enhanced to Rs.50,000 per day.

Capital markets

To encourage the capital markets, the exemption on the profit and gains of a venture capital company and fund is being extended up to the year 2024.

To promote investment in securities and insurance, the limit of investment as a proportion of taxable income is being increased from 15 percent to 20 percent and from Rs 500,000 to Rs.1 million, whichever is lower. The required retention period of shares is being reduced from 3 years to 2 years.

To encourage a competitive market for retirement schemes, the transfer of funds between retirement funds will be exempt from tax. Further, retirement funds shall be exempt from withholding tax provisions on Capital Gains Tax.

Dividends received by banks from money markets and income funds will be taxed progressively over a period of two years as normal business income. And in order to eliminate tax arbitrage, dividends will be taxed at 25 percent in tax year 2013 and at 35 percent from tax year 2014 onwards.


To avoid multiplicity of rates and decrease the burden on the consumers, all GST rates above 16 percent have been brought down to 16 percent.

In order to curb smuggling, sales tax on black tea is to be reduced from 16 percent to 5 percent. In line with last year’s abolishment of federal excise duty (FED) on 15 items, the government intends to further eliminate FED on the additional 10 items including base lube oil, lubricating oils, filter rods, skin care products and livestock insurance.

To develop capital markets, FED on services rendered by asset management companies is also being abolished. The FED on cement is being further reduced from Rs.500 to Rs.400 per metric ton.

In order to reduce the prices and to provide relief to general public, the highest tariff rate has been reduced from 35 percent to 30 percent. New tariff headings are being created in the Pakistan Customs Tariff to align Pakistan’s tariff structure with export partner countries such as the US and the EU. This measure is expected to eliminate operational problems faced by exporters, particularly those of textiles.

To ensure availability of medicines at affordable prices, customs duty on 88 pharmaceutical raw materials has been reduced from 10 percent to five percent.

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