Discussion on Taxes Imposed in Budget 2013-14

DISCUSSION ON TAXES IMPOSED IN BUDGET 2013-14

JAHANZEB HUSSAIN QURESHI - 23409 ADIL PARVEZ - 23

SUBMITTED TO: DR. ALAM RAZA

ECONOMIC ANLAYSIS FOR MANAGERS (MBA)

Karachi, Pakistan 9th JULY, 2013

Discussion on Taxes Imposed in Budget 2013-14

TABLE OF CONTENT
S.NO. 1. 2. 3. INTRODUCTION METHODOLOGY DATA COLLECTION DESCRIPTION

4. 5. 6.

ANALYSIS CONCLUSION/ RECOMMENDATION REFERENCES

Discussion on Taxes Imposed in Budget 2013-14

1. INTRODUCTION A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms. Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include:

To control resources To communicate plans to various responsibility center managers. To motivate managers to strive to achieve budget goals. To evaluate the performance of managers To provide visibility into the company's performance For accountability

Redistribution of income and wealth or redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare and charity. The desirability and effects of redistribution are actively debated on ethical and economic grounds. The subject includes analysis of its rationales, objectives, means, and policy effectiveness. Two common types of governmental redistribution of wealth are subsidies and vouchers. The PigouDalton principle is that redistribution of wealth from a rich person to a poor person reduces inequality, so long as the order is not switched (the initially richer person is not made poorer than the initially poorer person: they are brought together and not switched). Hugh Dalton suggested further that, assuming no effects other than transfer, such transfers increase collective welfare, because the marginal utility of income or wealth to a rich person is less than that to a poor person. Maximal welfare is achieved if all have equal wealth or income. Dalton's

Discussion on Taxes Imposed in Budget 2013-14

analysis sets aside questions of economic efficiency: redistribution may increase or decrease overall output it may grow or shrink the pie, not simply change how it is divided. Budget 2013-14 The Budget in Brief presents a summary of the Federal Budget 2013-14. It is designed to provide, in a very concise way, essential information on revenues and expenditures budgeted for Financial Year 2013-14 in Just a position with budget estimates and revised estimates for the outgoing Financial Year 2012-13. As in the case of the previous four financial years, indicative ceilings for the current and development budgets were issued to all Principal Accounting Officers of the Federal Government for a three-year Medium Term Budgetary Framework (MTBF), which was introduced in Financial Year 2009-10. The budget estimates for Financial Year 2013-14 were then finalized in consultation with various Federal Ministries as well as Provincial Governments. The budgeting and accounting classification system used in the budget remains the same which was adopted under the New Accounting Model introduced in Financial Year 2004-05. Moreover, from Financial Year 2009-10 onwards, the Government of Pakistan is following a system of Output Based Budgeting. In conformity with this approach, the budget is formulated in terms of service delivery (outputs) expected from budgetary allocations and the projected effects of these services on target populations (outcomes) over the Medium Term. Performance of Federal Government Ministries is then evaluated against precisely defined key performance indicators. After approval by the Parliament, all budget books including the Budget in Brief will be uploaded on the website of the Ministry of Finance.

By just tinkering with tax rates here and there and imposing or enhancing regressive taxes fixing revenue collection target at Rs 2598 billion for fiscal year 2013-14 - the new government has confirmed that like its predecessors it has no political will to tax the rich and tap the real tax potential of Pakistan, which is not less than Rs 8 trillion. The Finance Minister, Ishaq Dar, has shown no intention to bridge the huge tax gap and punish tax evaders. He has relied more on imaginary figures to restrict fiscal deficit to 6.3 percent of GDP. The revised estimate of fiscal deficit for the current year is 8.8 percent - measures like reducing Prime Minister's House expenditure may have political appeal but substantial economic impact is not there. No solution is offered for the Pakistan's real malady that is open and blatant

Discussion on Taxes Imposed in Budget 2013-14

non-compliance of tax laws by the powerful segments of society and existence of a large untaxed economy. The businessmen were expecting the reduction in sales tax rate, which has been increased to further one percent. The burden will be shifted to the end consumers. Nawaz Shareef has requested international monetary institutions and donor agencies to extend maximum co-operation to find a solution to energy crisis, population control and development of health and other sectors. The budget instead of raising revenue to the extent of Rs 8 trillion by taxing the rich and mighty, is eyeing the $1.4 billion reimbursement from the United States under the Coalition Support Fund (CSF), over $1 billion in fees through the auction of 3G (third generation) technology and some other sectors.

Discussion on Taxes Imposed in Budget 2013-14

2. METHODOLOGY The optimism reflected in the budget forecasts a GDP growth rate of 4.4% from the present 3.6% and going up to 7% in 2015-16. Without a drastic improvement in the energy situation this is unlikely. Inflation currently at 7.6% is expected to remain in single digits possibly 8% but this flies in the face of reduced subsidies, increased tariffs, raise in salaries and pensions and the increase in GST, withholding taxes and other measures that directly hit the lower income groups. The projected figures for an increased tax to GDP ratio, investment to GDP ratio and reduction of fiscal debtall look too good to be true given the deteriorating internal security environment. Most welcome steps are the focus on infrastructure projects including health and education projects, the trend setting drastic cut in the PMs office expenditure and the elimination of discretionary and secret funds coupled with the cut in government spending. No wonder then that the Karachi Stock Exchange is making record strides! The significant increase in development expenditure is another welcome step and hopefully the major part will go to the railways and the energy sector. If the losses from the Public Sector Enterprises can be eliminated then the optimism will start becoming understandable. Proposed Revenue Collections & Tax Measures: The claim is that focus of the budget 2013-14 is to improve tax-to-GDP ratio, which will ultimately be increased to 15 percent by 2018. The broad themes of government's taxation policy are (i) (ii) (iii) (iv) (v) (vi) (vii) Taxing those who are not paying any tax Enhancing efficiency of the tax machinery Removing anomalies and distortions in the tax system Simplifying the tax procedures Broadening of the tax base Rationalization of tax rates and exemptions Encouraging corporatization and documentation

(viii) Taxpayers facilitation and (ix) To eradicate maladministration and corruption in FBR.

Finance Bill 2013 proposes a number of new taxes, increased sales tax, more withholding tax on many items and many changes in excise duties. Tax measures like increasing rate on cash withdrawals from banks have been announced. On the contrary only cosmetic measures like exemption from import duty for 1200CC hybrid cars or withholding tax on wedding ceremonies held at commercial venues have been proposed.

Discussion on Taxes Imposed in Budget 2013-14

3. DATA COLLECTION Pakistan has one of the lowest tax-to-GDP ratios in the world The Economic Survey notes that for the first 10 months of the current fiscal year, Rs 1505.2 billion was collected in tax with a target of Rs2,381 billion for the whole year, meaning that in the remaining two months over Rs775 billion was to be collected a tall order. How the new government tackles this and other pressing issues highlighted is something that 2013-14 will now bear out for us. Increase in Federal Excise Duty on few sectors. A 2% WHT on the product value to be charged if sold to unregistered buyers. Withdrawal of tax holiday on income taxes from companies operating in wartorn KPK and Baluchistan provinces. Increase of income tax slabs to increase direct tax collection .While the rest of this target is to be managed through nontax revenues which include: PKR120bn (USD1.2bn) from 3G auction PKR79bn (USD800mn) from Etisalat PKR357bn through project loans and aids PKR99bn through China Safe Deposits Of this total projected revenue, PKR1.5trn will be disbursed to provinces under NFC award leaving federal government with PKR1.9trn.

Spending Of Taxes Resolution of circular debt within 60 days. New energy policy, to be announced later, coupled with direct government investment for the power sector. Recommencement of Nandipur project on war footing. Bidding for 3G services in telecommunication and recovery of USD 800 million, outstanding since long, relating to PTCLs privatization. Reforms and restructuring of State Owned Enterprises under professional management and/or privatization. Enhancing the Income Support Program outlay by Rs 35 billion. Roads construction and specifically connecting Gwadar and enhancing the motorway network.

Discussion on Taxes Imposed in Budget 2013-14

Construction of low cost housing across the country. Major initiatives in Pakistan Railways. PIA was conspicuous by its absence. Schemes for youth including development training, financing at subsidized rates and laptops. All in all over a trillion to be spent on development. The funds for this outlay to be met from enhanced revenues envisaged from direct and indirect taxes broadly highlighted below.

Tax Implementations: Tax rate for companies, other than banking companies, reduced to 34%. Withholding tax on dividend income of companies to be considered as final tax. Tax rates on income from property proposed to be increased through fresh slabs. Beyond Rs 4 million these will be taxed at Rs 432,500 (Rs 440,000 if recipient is a company) plus 17.5% on the amount in excess Rs 4 million. Withholding tax rates to be accordingly enhanced. Advance tax rates on imports, and withholding taxes in the case of goods and services increased for other than companies. Facility of exemption certificate reintroduced for manufacturing sector provided tax was paid in any of the preceding 2 years. Withholding tax on cash withdrawals from banks once again increased to 0.3%. Withholding tax at 10% imposed through NCCPL on income earned by member, margin financer or securities lender. Changes in withholding tax rates: at time of vehicle registration (lump sum collection for 10 years), purchase of vehicles and prize bonds - all on the higher side of course. Adjustable advance tax levied on getting married, on foreign produced films and dramas, cable television, on distributors and retailers, educational institutions, dealers, commission agents and arties. Most everything is sought to be brought into this quasi indirect tax net.

Discussion on Taxes Imposed in Budget 2013-14

Sales Taxes: Standard rate of sales tax increased from 16% to 17%. Further tax at 2% imposed on taxable supplies made to a person who has not obtained registration number. In substance the rate is now 19%. Certain exemptions are to be notified. Certain products containing milk were exempt from sales tax. These exemptions now stand withdrawn. Tax exemption on supplies against international tender withdrawn, now taxable at standard rate. Non-registered commercial and industrial consumers to pay additional sales tax at 5% Disturbing Facts: Borrowing from banks and elsewhere is to continue in order to push the nation in a darker 'debt prison'. The budget 2013-14, like all earlier budgets, favors the rich and taxes the poor to the extent of extinction. Reliance on indirect taxes that constitute 75 percent of total collection proves beyond any doubt that the tax system is emphatically contributing to rising poverty as people who earn enormous income and possess immense wealth are not being subjected to income taxation in Pakistan. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. Reduction of duties for cartels possessing enormous money has been extended by using executive authority in the form of SROs. Pakistan is a unique country where the executive authority can conveniently undo laws made by the Parliament under so-called delegated powers which is gross violation of Article 162 of the Constitution of Pakistan, which reads as under: The common man is subjected to exorbitant sales tax and federal excise duty of 16 percent (tax incidence is 35 percent on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities [even salt sold under brand names is subjected to 16 percent sales tax] but the mighty sections of society such as generals, high-raking bureaucrats, judges getting plots from the state are not paying any wealth tax/income tax on their colossal assets/incomes. The same is the case with big industrialists and landed classes that get concessions and exemption through SROs.

Discussion on Taxes Imposed in Budget 2013-14

Pakistan can easily collect Rs 8 trillion to eliminate fiscal deficit. If we have 10 million individuals having annual taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the prevalent tax rates comes to Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure would not be less than Rs 5000 billion. FBR collected only Rs 716 billion as income tax in the last fiscal year. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30 percent of actual potential. Ishaq Dar is a chartered accountant and understands figure work well but he has shown no interest in bridging the tax gap that can increase tax revenues to Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes).

Discussion on Taxes Imposed in Budget 2013-14

4. ANALYSIS OF BUDGET 2013-14 Growth Rate: Pakistan's economy has suffered a lot during the outgoing fiscal year 2012-13 owing to energy crisis, ongoing war on militancy and extremism coupled with political uncertainties due to which the gross domestic product (GDP) growth target of 4.3 percent has been missed and it has been estimated at 3.59 percent for the fiscal year. Looking at how the economy performed sector-wise, large scale manufacturing grew by 2.8 percent, compared to 1.2 per cent during 2011-12, agriculture grew by 3.3 per cent compared to 3.5 per cent the previous year, while the services sector increased by 3.7 per cent compared to 5.3 per cent last fiscal. Agriculture remains the single biggest sector in terms of providing jobs in the economy with a share of 45 per cent of total employment. As for manufacturing, it accounts for 13.2 per cent of GDP and employs 13.8 per cent of the labor force. In it, large-scale manufacturing saw the highest growth during 2012-13, increasing by a very healthy 9.32 per cent compared to minus 1.19 per cent during fiscal 2011-12.

Discussion on Taxes Imposed in Budget 2013-14

Per Capita Income The per capita income in Pakistan is marginally up by 0.2 per cent to $1,256.8 in 2011-12, the slowest growth in recent past, which reflects the dismal performance of the economy. As calculated by Pakistan Bureau of Statistics, this means a jump of $2.8 per capita for 178.91 million population in 2011-12. The per capita income in 2010-11 was reported at $1,254.

Fiscal Policy All four provinces registered a deficit of Rs 39.1 billion against targeted surplus of Rs 125 billion, leaving a significant shortfall in non-tax revenues for the fiscal year 2011-12. Despite transferring the functions of 17 ministries to provinces, federal expenditure did not register any reduction because majority of the employees of the devolved ministries preferred to stay on the federal payroll rather than opting for the provinces. So much so, that despite a budget surplus of

Discussion on Taxes Imposed in Budget 2013-14

Rs 19.1 billion in Balochistan, the overall provincial balance was in deficit because of Sindh and Punjab.

Discussion on Taxes Imposed in Budget 2013-14

5. CONCLUSION & RECOMMENDATIONS

The Budget 2013-14 were presented at the best of the efforts as said by the ruling government. The people of Pakistan were expecting released and relaxation from this budget but it was not as per the expectations of the people as it imposed more sales taxes on the utility items as discussed earlier for example increase in electricity bills, increase in the petroleum rates and basic utility items like wheat, rice, sugar etc. Most economists and analysts termed the budget for the fiscal -2014 as totally against the welfare and expectations of the people. The Finance Minister concluding the budget debate said that they would have to be realistic and pragmatic and it would take two to three years to set the economy of the country in the right direction. "We have to take tough decision to put the economy back on track," he stressed. The economists and civil society activists while in their critical review have termed PML-N governments first budget neither pro-people nor pro-business. Senior economist Dr Kaiser Bengali said that federal government is directionless and visionless. He proposed the government to convene a national economic conference to evolve a national policy on future economic destiny. The federal budget of PML-N government is the most damaging part of revenue raising exercise is the increase in GST rate from 16pc to 17pc as industry is already reeling under high cost of production on a variety of fronts and this increase is yet another nail in its coffin. The people expected the power crisis to be resolved and jobs to be created on a sustainable basis. Unfortunately, the budget addresses none of the above. The budget claims to reduce the budget deficit down to the 6-percentage range. If the government desired to raise revenues in an equitable manner, it should have reintroduced Wealth Tax and targeted the 700,000 plus families that have been identified by NADRA and FBR as being wealthy and avoiding taxes. There is primary reliance on withholding taxes, most of which are adjustable. As such, revenue growth from these taxes cannot be expected to be high. Moreover, studies have shown that the bulk of withholding tax burden is passed on to consumers. The most damaging part of revenue

Discussion on Taxes Imposed in Budget 2013-14

raising exercise is the increase in GST rate from 16% to 17%. The decline of industry will kill jobs and the export potential. The government expenditure and subsidies will be reduced by significantly more than 4%. How these objectives will be achieved remains vague. The stress on housing and highways in the development budget is welcome; however, questions arise as to how they will be financed. They are offering laptops to free and subsidized loans. All these offerings will cost money; however, they have not been included in the non-development expenditure calculations. In the event, reducing the budget deficit appears to be a distant possibility. The move to rehabilitate railways is welcome. The basic cause is that railways have been deprived of goods business by the trucking industry and no amount of investment in railways or in railway management can work until its goods traffic is restored. The budget speech was eloquent on relief for the corporate sector, but silent on employment and labor welfare. The higher burden of taxation on industry is likely to kill jobs, rather than create new ones. And no word was also spared on health and safety in factories and relief for workers that are killed or maimed in increasing number of industry accidents, they claimed. The budget was expected to provide a vision and lead the economy out of crisis, adding that the people expected a push towards a more equitable society but it was a disappointment on all counts.

Discussion on Taxes Imposed in Budget 2013-14

REFERENCES: Pakistan Federal Budget FY14: A New Beginning Difficult Times BUDGET RED-EYE 2013-14 Unexpected Inflation and Redistribution of Wealth in Canada (Csaire A. Meh, Canadian Economic Analysis, and Yaz Terajima, Financial Stability) http://www.pakistantoday.com.pk/2013/06/13/news/national/budget-2013-14-subsidies-downby-35/ http://en.wikipedia.org/wiki/Redistribution_of_wealth http://www.brecorder.com/articles-a-letters/187/1198581/ http://jaago.tv/detail/773/economic-and-social-analysis-of-pakistan-2006-2013