The government has announced the budget for the year 2015-16 which is being met with mixed reviews. Some believe that the budget will increase inflation there by squeezing the middle class while others have their own opinion on each of the economic sectors. In addition, this year’s tax has brought in some of new sectors under the tax net. Summary of the budget for 2014-15 and key features with impact on each sector is as follows:
Taxes on income and salaries
- With respect to government servants, sales have been increased by 7.5 per cent on basic. No government employee seems to be pleased with this measure since actual rise translates into few hundred rupees. The government employees were expecting a rise of 15 per cent to 20 per cent in this budget.
- Medical allowance has been increased by 25 per cent, which is seen as a positive. The same measure has been implemented for retired federal government employees. The budget also recommends for this income to be distributed to widow or divorced daughters until they remarry.
- Minimum wage level has been increased to PKR 13,000. A positive for the poor, however, not something which will likely increase cost of doing business and running household.
- Adjustable advance income tax for non-filers has been proposed at 0.6 per cent on all banking instruments and fund transfer through banks. This measure has been implemented to discourage the informal sector, however, an immediate impact will encouraging more and more people not to open bank accounts.
- The government has introduced 10 per cent withholding tax on rented machinery for or industrial equipment.
- Advance income tax on use of electricity has 7.5 per cent is in place. However, slab on which this tax will be implemented will be reduced from PKR 100,000 to PKR 75,000
- Salaries individuals who earn between PKR 400,000 to PKR 500,000 , tax has been reduced from 5 per cent to 2 per cent. Non-salaried individuals earning in the same band , tax is being reduced from 10 per cent to 7 per cent.
- Corporate tax has been reduced from 33 per cent to 32 per cent.
- The rate of Federal Excise Duty aerated waters is being enhanced from 9 to 12 per cent of retail price.
- Measures under the agriculture sector are seen as positive development and will assist in boosting of the sector:
- Income Tax Holiday for 3 years is being introduced for new industrial undertakings engaged in (i) setting up and operating cold chain facilities, and (ii) setting up and operating warehousing facilities for storage of agriculture produce.
- The exemption for 4 year for Halal’ Meat Production Companies which set up ‘halal’ meat production plant and obtain ‘halal’ certification by 31st December 2016
- Relief to Rice Mills: In order to provide relief to Rice Mills suffering from low global demand, exemption from minimum tax for the Tax Year 2015 is being granted.
- Exemption on Supply of Fish: Exemption from withholding tax on supply of agricultural produce is to be extended to supply of fish.
- Import and Local Supply of Agricultural Machinery and Equipment: In order to promote farm mechanization and enhance productivity non-adjustable sales tax at reduced rate of 7 per cent, instead of existing rate of 17 per cent.
- Import of Agricultural Machinery: At present Customs duty, Sales Tax and withholding tax on import of agricultural machinery in aggregate ranges from 28 per cent to 43 per cent. Customs Duty, Sales Tax and
- Withholding Income Tax are being cumulatively reduced to 9 per cent as under:
- Customs duty from existing rate of 5 per cent-20 per cent to 2 per cent;
- Sales Tax from 17 per cent to non-adjustable Sales Tax at 7 per cent; and
- WHT from 6 per cent to 0 per cent.
- Interest Free Loans for Solar Tube Wells: In order to facilitate the small growers and to reduce heavy expenditure incurred on diesel/electricity tube wells interest free loans of upto PKR 1 million for setting up new solar tube wells or replacing the existing tube wells with solar tube wells.
- Budget for the contraction and REIT management is seen as a positive. Features as proposed in the budget are as follows:
- Mark-up on housing loans obtained by individuals from banks and other institutional lenders for construction or buying a house to be allowed as a deduction against income up to 50% of taxable income or Rs 1 million.
- The minimum tax on builders leviable for the business of construction and sale of residential and other buildings is being suspended for a period of three years.
- Real Estate Investment Trust (REIT) Development Schemes:
- Capital Gains of any person who sells a property to a REIT development scheme formed for the development of housing sector will be exempt from Income Tax up to 30-Jun-2018.
- If a development REIT Scheme for the development of housing sector is set up by 30-6-2018, for the first three years the rate of Income tax chargeable on dividend income of such REIT shall be reduced by 50 per cent.
- Supply of bricks and crushed stone will be exempted from Sales Tax for three years up to 30-Jun-2018.
- On import of construction machinery in used condition by the Construction Companies registered with Pakistan Engineering Council and SECP, the Customs Duty is reduced to 10 per cent.
- If a company, being a manufacturer, set up during next three years and employs more than 50 employees duly registered with Social Security and Employees Old Age Benefit Institution an employment tax credit equal to 1 per cent of the income tax payable for every 50 employees shall be provided to the company, subject to a maximum of 10 per cent.
- On demand of various investors and business community, this exemption is being extended up to 30th June, 2017.
- Exemption from income tax for 5 years is being granted to industrial undertaking engaged in the manufacturing of equipment, plant and items required to produce solar and wind energy.
- Measures as detailed below will likely increase cost of travel :
- It is proposed that Customs Duty, sales tax and withholding tax in respect of various items used in Aviation Sector may be reduced to zero subject to certain conditions
- Infrastructure connectivity with major economic hubs is a key to economic development of a region. Some areas of the country having great economic potential are, however, located far from existing major economic routes. In order to open up remote areas through aviation links it is proposed that air routes in Gilgit-Baltistan, Makran Coastal belt, Azad Jammu and Kashmir, Chitral and FATA be exempted from payment of FED and withholding tax.
Review of concessionary regime (SROs):
- Concessionary regime under various SROs and Schedules are being reviewed.
- Minimally utilized concessions are being withdrawn.
- Socially sensitive concessions retained. Remaining concessions either withdrawn or continued on enhanced rates. Total impact of these measures is PKR 132 billion.
Customs Tariff Reforms:
- Maximum general tariff rate of 25 per cent reduced to 20 per cent.
- Substitution of 1 per cent duty slab with 2 per cent customs duty.
- To curb the menace of under invoicing, specific penal provision introduced for ensuring compliance of mandatory condition of invoice and packing list.
- Exemption to Electricity Transmission Projects for a period of 10 years, provided that the project is set up by June, 2018.
- Tax Credit for new investment in shares: To encourage saving and investment in new companies quoted on stock exchange the limit for individual investors is being enhanced to 1.5 million.
- Tax Credit for Enlistment: At present, a 15 per cent tax credit is available to a company, if it opts for enlistment in any registered stock exchange in Pakistan. To encourage enlisting of companies on stock exchange, the credit is being be enhanced to 20 per cent.
- Reduction in Withholding Tax On Token Tax and Transfer of Vehicles.
- Expanding the Scope of Small Company: The limit of capital at PKR 25 million for qualifying as a small company is proposed to be enhanced to PKR 50 million.
- Due to substantial reduction in electricity prices it is proposed that the threshold of deduction of withholding tax on electricity consumption be reduced from PKR 100,000 to PKR 75,000.
- At present there is no withholding tax on either use or right to use of commercial, industrial and scientific equipment or on renting out of machinery. It is proposed that a 10% withholding tax be imposed on renting out machinery and for use or right to use commercial, scientific or industrial equipment, in case of residents also, and be treated as final tax liability.
- To meet enhanced revenue needs for the rehabilitation of Temporarily Displaced Persons, it is proposed to levy a one-time tax on the affluent and rich individuals, association of persons and companies earning income above PKR 500 million in tax year 2015 at a rate of 4 per cent of income for banking companies and 3 percent of income for all others.
- It is proposed that exemption from withholding tax on payments to electronic and print media in respect of the advertising services may be withdrawn.
- Reduced rate for cash withdrawals by exchange companies: It is proposed that on cash withdrawals by exchange companies may be subject to withholding tax at a reduced rate of 0.15 per cent instead of being exempt.
- Rate of tax on commission to advertising agencies: Withholding tax at the rate of 12 per cent as is applicable to commission agents, however, tax on commission of advertising agencies is withheld at a reduced rate of 7.5 per cent. It is proposed that this rate be increased to 10 per cent.
Banking and Financial Sector
- Presently, tax rate of 35 per cent is applicable to banking companies from all sources except income from dividend and income from capital gains. Rate differential for different sources is proposed to be removed.
- The present rate of tax of 10 per cent on dividend income is on the lower side as compared to most other countries. It is proposed that the rate be increased to 12.5 per cent. Consequently, in case of non-filers the rate of tax is proposed to be increased from 15 per cent to 17.5 per cent of which 5 per cent shall continue to be adjustable. For Mutual Funds the existing rate of 10 per cent shall continue.
- Holders of Mutual Funds and dividend be subjected to same tax rates.
- Taxation for Not Distributing Dividend: In order to encourage public listed companies to distribute dividend which would encourage investment in stock markets, it is proposed that in the case of a listed company other than a scheduled bank or a modaraba, which does not distribute cash dividends within six months of the end of the said income year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital, the excess amount may be taxed at the rate of 10%.
- Additional tax of 5 per cent has been implemented on cosmetics.
- Federal excise duty on cigarettes has been increased from 58 per cent to 63 per cent.
- Restricting zero-rating on dairy products to milk only baby formula.
- Exemption of sales tax on local supply of raw hides and skins to be granted as under the existing provisions of law.
- Sales Tax Rules regarding temporary registration are being introduced to facilitate the importers-cum-manufacturers.
- The electronic monitoring system is proposed to be introduced to monitor the production of specified sectors i.e. cigarettes, beverages, cement, fertilizer and sugar and also to monitor the sales of restaurants etc
- The limit of utility bills for cottage industry is being enhanced from 700,000 to 800,000 rupees for the promotion of cottage industry.
- Sales tax on various types of mobile phones has increased from PKR 150 to PKR 1,000 for more expensive range.
Implication on the economy
It is said that the budget will miss the target and will not being in taxation is desired. Through people have mixed reviews, general consensus is an increase in pricing and cost of doing business, which will result in inflation. Further, with rise in commodity prices e.g. fuel, prices will increase. Other development projects e.g. Metrobus for Karachi, road infrastructure, metro train for Lahore , investment in power projects, development of Islamabad airport will result in creation of thousands of direct and indirect jobs, which will help the economy and welfare of the people. Implementation is the key, however, only time will tell how successful these measures will help in economic development.