ISLAMABAD: Following is the text of budget speech delivered by Federal Finance Minister Senator Ishaq Dar in the
National Assembly here on Friday:-
1. Once again, as I have the honour of presenting the Budget 2015- 16, I bow my head before Allah Almighty for untold and immeasurable blessings He has bestowed on this nation and the singular distinction He has conferred on Mohammad Nawaz Sharif, Prime Minister of Pakistan and his Government in restoring the health of a broken economy. The economic performance we have rendered in two years is unparalleled in the history of democratic governments. This has been made possible by the design of sound economic policies, first announced in PML (N) Manifesto for Elections 2013 and then incorporated and implemented in the Budget 2013-14 and since then faithfully and steadfastly observed and followed by the Government.
2. This august House is well aware that when we took office, the most vicious rumour taking rounds in the local and international financial circles was the imminent default that Pakistan was set to make in June 2014. This was a clever guess based as it was on the level of available reserves and the payments falling due until that date. In the backdrop of completely dried-up foreign flows, as IFIs had declined to work with Pakistan, the reserves were destined only to travel south. However, we were determined to prove these economic pundits wrong and the country saw that not only we proved them utterly wrong but have steered the economy of Pakistan to safer shores.
3. In June 2013 we had a clear road-map of three objectives:
(a) Preventing Pakistan from default in 2014;
(b) Achieving macroeconomic stability by June 2015; and,
(c) Promoting inclusive economic growth for creation of job opportunities and providing resources to alleviate poverty from 3rd year onward.
4. We formulated policies and programs to achieve these objectives and we never hesitated in taking difficult decisions, no matter how unpopular, so long as they were critical for the revival of the economy. Accordingly, the economy of Pakistan has been stabilized and poised to grow at an accelerating rate.
Review of Economic Performance 2013-14
5. I would like to place before this august House the following key economic indicators, based largely on 9 or 10 months data for the current fiscal year:
(a) Economic Growth during 2014-15 has been provisionally recorded at 4.24% compared to the revised estimate of 4.03% last year, showing a rising growth trajectory. During 2008-13, the growth rate had averaged around 3% and hence this is the highest growth rate in seven years. The growth target for the year was 5.1%, which could not be achieved for the following reasons:
- Massive floods in September 2014
- Economic disruption during August-December 2014 due political agitation
- The massive decline in international commodity prices, particularly oil affecting the output of these and associated sectors
- The unusually long and cold winter weather had a negative impact on the Rabi crops, including wheat
- The output of large-scale manufacturing has been affected due to shortages in gas and electricity, despite improvements in their supplies.
- Credit to private sector has grown at a slower pace as commercial banks continued to lend to the Government.
(b) Per Capita Income, which stood at $1384 last year has increased to increase to $1512, showing a growth of 9.3%.
(c) Inflation, which had averaged around 12% during 2008-13 before our government, was recorded at 4.6% for Jul-May 2014-15, which is lowest in 11 years.
(d) FBR Revenues, which had registered only 3% growth in 2012-13, were up by 16.4% during 2013-14 and have risen by another nearly 13% in the first 11 months of 2014-15 and are expected to close at 15% increase
(e) Fiscal Deficit, in June 2013 was at 8.8%, which was brought down to 8.2% within weeks. In. 2013-14, this was brought down to 5.5% of GDP. In the current fiscal year we are on course to achieve the target of 5%.
(f) Credit to Private Sector, grew by 11% during 2013-14. It is projected to further grow at 7% during the year. The share of fixed investment in credit has significantly increased compared to last year.
(g) Policy Rate of SBP was 10% in November 2013, which has now been cut to 7% during the current fiscal year. This is the lowest policy rate in decades. The commercial lending rates are determined by the policy rate and have been declining in line with the policy rate. It will help spur investment, as the cost of capital will decline significantly.
(h) Exports were $20.18 billion during Jul-Apr 2014-15 compared to $20.83 billion last year, showing a decline of 3%%, largely due to negative price effect in the global commodity markets. Even though we have exported larger quantities but because of lower international prices, we have realized lower values.
(i) Imports were recorded at $34.65 billion during Jul-Apr 2013-14 compared to $34.09 billion for same period in the current year, showing a marginal decline of 1.61%. More notably, imports of machinery have increased by an impressive 10.3% an indication of rising investment in the economy.
(j) Remittances were recorded at $12.89 billion during Jul-Apr 2013-14, rose to $14.97 billion for the same period this year, showing an increase of 16.14%, which is remarkable and for which I once again salute my expatriate Pakistanis for playing such a critical role in country's economy.
(k) Exchange Rate has shown remarkable stability in the last more than a year, except for a brief period during August-September due to political instability. Presently, the rate is hovering around Rs.102/$ in the inter-bank market. For an economy like Pakistan, Exchange Rate has a pivotal position, as it impacts pervasively on all other variables. Accordingly, a competitive and market determined stable exchange rate reduces uncertainty and boosts confidence of investors and consumers alike. The exchange rate stability we have achieved has not been witnessed in recent years and is source of rebuilding the credibility of our economy.
(l) Foreign Exchange Reserves were in a precarious state in June 2013. The State Bank reserves were at $6 billion, of which $2 billion were due to a swap that was payable in August and nearly $3.2 billion were falling due for repayments to IMF during the year, bulk of which in the first half. On 10th February 2014, SBP's reserves had further declined to $2.7 billion. Resultantly, the overall reserves, including those held by commercial banks, were $7.7 billion. It looked as if the notorious rumors were finally becoming reality. However, Alhamdulillah, we have strengthened the economy against fluctuations in external markets. Today country's foreign exchange reserves have climbed to about $17 billion, of which the SBP reserves are around $12 billion, showing that all the increase in reserves has come in SBP reserves. We are poised to take the reserves level to a historic high of nearly $19.0 billion during the year.
(m) Karachi Stock Exchange (KSE) Index stood at 19,916 on 11 May 2013, the day the elections, has now surged to around 34,000, showing an increase of 70%. Also, this increase meant an increase of about 40% in market capitalization.
(n) Incorporation of New Companies was recorded at 3664 during Jul-Apr last year while during the period in 2014-15, this number has increased to 4100, showing an increase of 11.9%.
6. In addition to above, we have accomplished a number of other successes in different areas, some of which are noted below:
(a) International Sukuk: We entered the international Sukuk market, after 8 years, in November 2014, by issuing a five year Sukuk aiming to raise $500 million, but we received $2.3 billion, nearly five times the subscription and decided to take $1 billion. The proceeds of Euro Bonds and Sukuk have gone to retire an equivalent amount of domestic debt in the SBP and hence there is no increase in Public Debt due to this borrowing.
(b) Eligibility for IBRD: In the last budget I had informed this House about the resumption of policy lending from the World Bank and Asian Development Bank, which was suspended for lack of a stable macroeconomic framework before June 2013. After achieving macroeconomic stability and the requisite increase in foreign reserves, in February 2015, Pakistan is declared eligible again for IBRD facilities.
7. The above review of economic indicators and policy initiatives fully demonstrates the fact that the country has achieved macroeconomic stability. It clearly shows an economy that is moving in the right direction. The expert assessments I will be citing shortly are reflective of the rising confidence of our development partners as well as investors. Pakistan is offering such investment opportunities, which few countries in the region can match. Accordingly, as we enter the third year we are confident that the year would bring even better economic results.
8. The picture painted above is not based exclusively on our own views. The international analysts and observers are all praise for our performance and potential for future growth. Some of these are worth bringing to the knowledge of this august House: Japan External Trade Organization (JETRO) has declared Pakistan as likely to be second choicest place for FDI.
Goldman Sach's Jim O'Neill has forecast that Pakistan would be world's 18th largest economy by 2050 from its present 44th position; Overseas Investors' Chamber of Commerce and Industry (OICCI) has found that Business Confidence Index amongst its members, which stood at -34 has climbed to as high as +18.
Moody's and Standard and Poor's have both improved Pakistan's outlook from negative to stable and recently from stable to positive; Nielsen's Global Survey of Consumer Confidence rose to 99 in the 1st quarter of 2014 from the lowest level of 86 in 3rd quarter of 2011.
David Darst, Chief Investment Strategist, Morgan Stanley, has said `Pakistan is set to take-off, it is a matter of time'.
Bloomberg News says that despite challenges:
(a) corporate earnings in Pakistan are soaring and (b) stocks have surged. The Economist London in its 2nd May 2015 issue has praised Pakistan's economic recovery.
World Trade Organization (WTO) Trade Policy Review, April 2015 has praised economic performance of Pakistan
Financial Action Task Force (FATF), the international body for monitoring anti-money laundering and terrorist financing had included Pakistan in its “Grey List” in 2012. After Government's actions including changes in laws, Pakistan has been included in the “White List” in February 2015.
9. The goals we have set are our guide in the economic journey. Our actions have been guided by these goals. The brief description of our performance, given above, and what will be highlighted later in this speech, exemplifies the faithfulness and seriousness with which we are working to realize this vision.
A democratic government is answerable to Parliament and people and it would be held accountable on its promises made to both of them. While moving on to the third year of our Government, we continue to remain faithful to this vision and the third budget will fully reflect its application in our proposals.
Main Elements of Budget Strategy
10. The main elements of our budget strategy are as follows:
(1) Reduction of fiscal deficit: We will continue to consolidate the gains we have made in reducing fiscal deficit. In 2015-16 we will target a deficit to 4.3% compared to 5% in 2014-15.
(2) Raising Tax Revenues: Part-II of the speech will deal with tax proposals. At this stage, however, I would say that the proposed reduction in deficit will be achieved through a combination of better tax collection and tight expenditure controls.
(3) Continued Focus on Energy: Energy is one of our key priorities. This can be judged by the fact that the Prime Minister is devoting considerable type to oversee developments in the sector. A Cabinet Committee on Energy has been constituted, which is headed by the Prime Minister himself. Keeping in view the current gap in demand-supply of power in the face of high GDP target, we plan to bring 7000 MW on stream besides setting up 3600 MW LNG-based projects. By December 2017, we will bring 10600 MW in the system. Beyond December 2017, other projects such as Dasu, Diamer-Bhasha, Karachi Civil Nuclear Energy and many other projects will also be completed.
(4) Exports Promotion: In this budget, we would be announcing additional measures to incentivize exports and taking other measures to ease the cost of doing business and improving the overall regulatory regime to facilitate exporters.
(5) Investment to GDP Ratio: The Investment-to-GDP ratio, which was registered at 12.4% during 2012-13, improved to 13.4% during 2013-14 and is provisionally estimated at 13.5% for the current fiscal year. The combined effect of increased public sector investments has also played a role in reversing the declining trend. We are projecting this ratio to rise to 16.5% during 2015-16.
(6) Public Debt Management: Debt management has received special attention in our overall efforts for fiscal management. The fiscal consolidation we have achieved has paved the way for a reduction in public debt, which fell from 63.9% in 2012-13 to a now projected level of 62.9% at the close of current fiscal year. In the next three years, Debt to GDP ratio will be brought down to less than 60% in accordance with the provisions of the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005, InshaAllah.
(7) Benazir Income Support Program (BISP): This program is an effort to provide relief to the poor and vulnerable people of society as a matter of our responsibility and their right. The following have been the main achievements in this program:
i. From Rs.40 billion in June 2013, we have increased the size of the program to Rs.97 billion during the current year. We are further enhancing this allocation to Rs.102 billion, representing more than 155% increase since 2012-13.
ii. Until 2012-13, the cash transfer program was covering 4.1 million families, which would be taken to 5.0 million during the current year. By end of next financial year the number of beneficiary families would increase to 5.3 million, showing an increase of 29% since 2012-13.
Besides the above program, we are providing an additional Rs.2 billion to Bait-ul-Maal for supporting its welfare activities, notably the hospitalization costs for the vulnerable people.
The allocation has been increased by to Rs.4 billion for 2015-16, which is 100% increase.
(8) Development & Promotion of ICT Sector:
A number of initiatives were announced in the last budget for the development of promotion Information and Communication Technology (ICT).
These initiatives have been operationalized with the following key features:
Universal e-telecasters: A project for Universal e-telecasters with an investment of Rs.12.0 billion has been approved. In the first phase 500 telecentres would be established in all provinces including FATA.
For this purpose, 217 land sites across Pakistan have been selected. Program is at advance stage of implementation and would soon be rolled out.
Improved Connectivity for Remote Areas: For connectivity of remote area the Government has decided to invest Rs.2.8 billion laying optic fiber cables. Work on this program is going on at fast track basis. In consultation with Provincial Governments 128 tehsils and towns have been identified nationwide, which do not have optic fiber connectivity. Rural telecommunication is another program, which envisages investing Rs.3.6 billion on connectivity of rural un-served areas with the rest of country.
Rationalization of International Clearing House (ICH): In October 2012, a new policy for International Clearing House (ICH) was initiated. There have been several problems with the policy as it resulted in losses to users and increase in grey traffic. Since government intends to provide relief to people, therefore, we have reformed this policy and rationalized the rates of international calls. This is benefiting expatriate Pakistanis and promoting legal traffic, which has increased from 367 million minutes per month in November 2014 to 1,100 million minutes per month by now – a three fold increase.
Prime Minister's National ICT Scholarship Program: As announced in the last budget, 500 IT scholarships with a total cost of Rs.125 million will be provided to the talented students from rural/non-metropolitan areas. The program provides fully funded 4 years undergraduate degree scholarships in ICT related disciplines in the leading ICT universities of Pakistan. Under the program 480 students availed the scholarship by joining in 21 top Pakistani universities.
The program will be continued in the future.
Medium-term macroeconomic framework
11. As always, our budget strategy is embedded in a three year medium term macroeconomic framework spanning the period 2015-16 to 2017-18, the main features of which are as follows:
(a) GDP growth to gradually rise to 7% by FY 2017-18.
(b) Inflation will be contained to single digit.
(c) Investment to GDP ratio will rise to 20% at the end of medium term.
(d) Fiscal deficit would be brought to down to 3.5% of GDP.
(e) Tax to GDP ratio will be increased to 13%.
(f) Foreign exchange reserves would be maintained above $20 billion, inshaAllah.
12. In view of the performance we have registered in the first two years in office, we are confident to achieve the goals set out in the medium-term framework. We have no doubt that we would remain on course while pursuing the above framework.
14. The current Five Year Plan 2013-18 is a comprehensive roadmap and sets timelines for achieving high growth rate. The outlook for 2015-16 is positive with a significant recovery in growth momentum. The growth of GDP for 2015-16 is targeted at 5.5% and gradually steering it to over 7 per cent by 2017-18. In order to achieve the targeted growth rate of 5.5 per cent, the sectoral contributions are agriculture (3.9%), industry (6.4%) and services (5.7%).
15. The plan is geared towards developing human and social capital of the country by enabling universal access to education and health facilities, empowering women and eradicating poverty; thereby capitalizing the demographic dividend and increasing the total factor productivity.
16. Strategies have been devised to encourage public-private partnerships in the development process. Transport, communications, financial, industrial, and services sectors have been identified as important areas with high growth potential. Consequently, comprehensive action plans have been outlined to improve growth rates for these sectors and increase their respective contributions to the GDP.
17. National Development Program of worth Rs.1,513 billion is being earmarked for 2015-16. The development program 2015-16 includes Rs.700 billion as federal PSDP. In addition to increasing the public Investment, concerted efforts are being made to entice the private investment through a variety of mechanisms such as promoting public private partnerships, FDI, creating special economic zones with fiscal incentives.
18. These measures are expected to boost economic growth for key sectors and increase their respective contributions to the GDP.
19. I would now present some highlights of the development budget, focusing mainly on the sectors that will contribute most to economic development.
20. The most important sub-sector claiming resources in our development plan is the water sector, where we are investing Rs.31 billion for projects in various parts of the country. A project that will be the future lifeline of Pakistan is the Diamir Bhasha Dam, which will store 4.7 MAF of water and generate electricity of 4500 MW. We have provided Rs.15 billion for land acquisition during the year and have kept a provision of Rs.6 billion for construction of lot 1 out of 3. In addition, another important hydropower project is Dasu, which will have the capacity to generate 2160 MW. We are committed to make these two dams a reality and preparatory works has already started.
21. Water projects in Baluchistan are the second most important focus of water sector investments comprising construction of delay action dams, flood dispersal structures, canals and small storage dams. Main focus will be on the existing projects that can be completed within the next 1 – 2 years. In this regards, work is in advanced stages on projects such as Kachhi Canal (DeraBugti and Nasirabad), Naulong Storage Dam (JhalMagsi), extension of Pat Feeder Canal to DeraBugti and ShadiKaur Dam (Gawadar). Besides these large projects, we will also invest in building small dams in the province. This year we will start work on Basool Dam in Gawadar.
22. Similarly, in Sindh, projects that are advancing gradually are Rainee Canal (Ghotki and Sukkur), extension of Right Bank Outfall Drain from Sehwan to sea, and Darwat Dam. In addition, this year we will start the work on MakhiFarash Link Canal project. In Punjab work on channelization of NullahDeg and Ghabir Dam (Chakwal) will commence. In Khyber Pakhtunkhwa, other than Dasu, funds will be provided for Keyal Khawar hydropower project, and other small dams. In FATA funding for Kurram Tangi in North Waziristan, and Gomal Zam Dam in South Waziristan will continue.
23. Besides, numerous schemes of lining of water-courses will be undertaken in Khyber Pakhtunkhwa, Sindh and Punjab to reduce water wastage together with flood protection and drainage schemes all over the country.
24. I have already stated the focus we have on the energy sector. We have taken a number of steps to address structural problems of the sector including reduction in system losses, improvement in recoveries, elimination of theft and settlement of inter corporate circular debt. However, our real focus is on developing additional resources of energy so as to permanently overcome energy shortages.
25. As in the past, we have allocated the largest amount of resources to add new and economical capacity in the country. During the current year a sum of Rs.248 billion will be invested in this sector up from Rs.200 billion allocated in last year's budget. Of this, Rs.73 billion will come from the PSDP. The government is aiming to almost end load shedding by December 2017.
26. Large projects that are part of this year's allocation are:
Rs.52 billion have been allocated for Stage 1 of Dasu Hydro Power Project which will produce 2160 MW of power.
Rs.21 billion have been allocated for land acquisition and construction of Lot 1-5 for Diamir-Bhasha Dam and Hydropower Project having a reservoir of 8 MAF and 4500 MW of power.
Rs.11 billion have been allocated for Neelum Jhelum Hydro Power Project having a capacity of 969 MW.
Rs.11 billion have been allocated for completion of Tarbela-IV Extension Hydro Power Project with a capacity of 1410 MW.
Rs.5 billion have been allocated for Up-gradation of Guddu Power Project having a capacity of 747 MW of highly economical power.
51. I have already noted somewhat weak performance of the exports during the year. The main reason behind this is the major decline in global commodity prices, particularly those of cotton and rice. Even though a small country cannot affect global prices, we need to look at some of the irritants that may be impeding our exports competitiveness. The following measures are being adopted for promotion of exports:
(1) EXIM Bank of Pakistan (Specialized DFI) will be helpful in enhancing export credit and reducing cost of borrowing for exporting sectors on long term basis and help reduce their risks through export credit guarantees and insurance facilities. The Bank will start operations in 2015-16.
(2) Exports Refinance Facility (ERF): In the last budget, the Government, through the State Bank of Pakistan, had arranged to reduce its mark-up rate on exports finance from 9.4% to 7.5%, This rate was reduced in February 2015 to 6.0%, and it will be further brought down to 4.5% from 1st July 2015.
(3) Long Term Finance Facility: In the last budget, the Government, through the State Bank of Pakistan had arranged to reduce its mark-up rate on long term financing facility for 3-10 years duration from around 11.4% to 9.0% to allow export sector industries to make investments on competitive basis. This was further reduced to 7.5% in February 2015 and will be further brought down to 6.0%.
(4) Removing Anti-exports bias in Imports: A series of measures being announced in this Budget relating to rationalization of tariff and taxes having bearing on the export industries will gradually remove the anti-export bias in country's tariff policy and make exports more competitive.
(5) Export Development Initiatives: Ministry of Commerce is formulating initiatives for
(a) production diversification.
(b) value addition.
(c) trade facilitation.
(d) enhanced market access.
(e) institutional strengthening.
An allocation of Rs.6 billion has been made to support initiatives. The Export Development Fund (EDF) Board has been reconstituted to also support this program.
(6) Establishment of Pakistan Land Port Authority: The initiative for establishing the Land Port Authority of Pakistan was announced in the last budget. We have completed the requisite formalities for its formal launching. In the meanwhile we have invested Rs.352 million for the establishment of infrastructure at the Torkham Border to enable it to operate under the conditions of a modern port environment.
52. Textiles Industry is the mainstay of Pakistan's economy. It accounts for more than 50% of our exports value and is the single largest employment provider in the manufacturing sector. It has a very long production chain from cotton picking to ginning, spinning, weaving, knitting, processing and stitching, whereupon considerable value-addition is done at each step.
In recognition of its significance, the government had announced a special package for Textiles Sector in the Budget 2014-15.
The following facilities announced in the package shall remain available for the textile sector during the FY 2015-16:
(1) Under Textiles Policy 2014-19 financial package of Rs.64.15 billion has been approved in order to double the textiles exports and create 3 million additional jobs by the year 2019.
(2) To resolve the various issues pertaining to textile sector and for implementation of Textiles Policy 2014-19, the government has restructured the Federal Textile Board with majority members from the private sector.
(3) The benefit of Drawback of Local Taxes & Levies Scheme shall remain available for the textile exporter in the FY 2015-16 under which they shall be entitled to the drawback on FOB values of their enhanced exports if increased beyond 10% of their previous year's exports, as per following rates:
a. Garments = 4%,
b. Made-ups = 2%;
c. Processed fabric = 1%
(4) Since 1st July 2015, Export Refinance Facility and Long Term Finance Facility will be available for textile-exporters at the most reasonable rates of the history i.e. at 4.5% and 6% respectively.
(5) The Custom Duty on import of textile machinery under SRO 809 is zero for the Year 2015-16 as well.
(6) In order to facilitate and incentivize the investments in plants and machinery, Technology Up-gradation Fund Scheme will be launched in the FY 2015-16, as per the provisions of Textiles Policy 2014-19.
(7) Government is committed to introduce latest seed technology. To this end, amendments in Seed Act have been passed by the National Assembly, whereas Plants Breeders Right Act will be also be promulgated on priority basis.
(8) Spadework has been completed on a mega project worth Rs 4.4 billion for training of 120,000 unskilled men and women over a period of 5 year. This scheme shall be launched in FY 2015-16.
53. Agriculture remains a major focus of our government despite the devolution of much of the operational responsibilities to the provinces. It is on the agenda of the government to take requisite measures to give positive price signals to farmers, protect them from vagaries of market fluctuations and support them in the face of natural calamities.
54. A number of tax incentives are provided to help agriculture sector, which be discussed in Part-II. Here I give an account of measures we had announced last year:
a. Credit Guarantee Scheme for Small and Marginalized Farmers:
The Credit Guarantee Scheme announced in the last budget has been made operational. Under the scheme, the Government, through the State Bank of Pakistan, will provide guarantee to commercial, specialized and micro finance banks for up to 50% loss sharing. The scheme will cover farmers having up to 5 acres irrigated and 10 acres non-irrigated land holdings.
It will benefit 300,000 farmer households/families with a loan size up to Rs.100,000. Total disbursement under this scheme will be Rs.30 billion while the government will have a contingent budget cost of Rs.5 billion.
b. Crop Loan Insurance Scheme (CLIS): Crop loan insurance scheme is already in operation and will continue in the future.
c. Livestock Insurance Scheme: Livestock is contributing more to agriculture than the major crops. Recently, significant investment has been made in this sector.
To encourage more investments and to incentivize farmers to engage in livestock development, last year we announced a scheme for reimbursement of premium for livestock insurance to mitigate the risk of losses of small livestock farmers. This scheme is now operational and allows small farmers having 10 cattle to get this support. The scheme will cover livestock insurance in case of calamity and disease.
58. A key challenge for development is lack of an effective performance management and aligned compensation system in public sector resulting in large gaps in effective delivery of public services.
Therefore, the most important single theme for reform across all areas is promotion of institutional efficiency through Performance Management and Compensation System at an individual, departmental or collective level.
In this regard, the Prime Minister of Pakistan has constituted a Performance Based Remuneration Committee. On initial recommendations of the said Committee, a lump sum amount of Rs. 1.0 billion is being allocated in the Budget 2015- 16 for compensating high performance Ministries / Divisions and individuals for achieving pre-determined results.
59. Now I turn towards the estimates of revenues and expenditures for the next fiscal year.
60. Gross revenue receipts of the federal government for 2015-16 are estimated at Rs.4,313 billion compared to the revised figures of Rs.3,952 billion for 2014-15, showing an increase of 9.1%. We have set an ambitious target for tax collections, as without collecting more taxes we cannot hope to increase development spending that is crucial for economic growth. I shall share more details of this in Part-II of my speech.
61. The share of provincial governments out of these taxes will be Rs.1,849 billion compared to Rs.1,575 billion revised estimates for 2014-15, showing an increase of about 17.4%. For the year 2015-16, net resources left with the federal government will be Rs.2,463 billion compared to the revised estimates of Rs.2,378 billion for 2014-15, showing an increase of 3.6%. Federal Government recognizes that the provincial governments have increased responsibilities of social sector service delivery under the new arrangements. Therefore, we are consistently raising the level of provincial transfers to enable them to improve the social services and law and order for the people of Pakistan.
62. Total expenditure for 2015-16, is budgeted at Rs.4,089 billion compared to the revised estimates of Rs.3,902 billion for 2014-15, showing meager increase of 4.8% which is lower than the target inflation rate for 2015-16. Viewed within the overall increase, the government expenditure in real terms is actually contracting instead of expanding. This approach of gradually increasing the revenues and reducing the expenditures in real terms will make us self-reliant and sustainable.
63. The current Expenditure is estimated at Rs.3,128 billion for 2015-16 against a revised estimate of Rs.3,151 billion for 2014-15, showing an actual decrease in expenditure in nominal terms. However, we have catered for the needs of the Armed Forces keeping in view the security challenges. The defense budget is being increased from the Rs.700 billion for 2014-15 to Rs.780 billion for 2015-15, which is an increase of about 11%.
64. The development budget has been adequately funded in order to meet the investment requirements of a growing economy. Against a revised estimate of Rs.542 billion for PSDP during 2014-15, and for 2015-16 we have budgeted Rs.700 billion showing an increase of nearly 29%. This also includes the Special Development Program for security enhancement as well as for rehabilitation and resettlement of TDPs as I have explained earlier.
65. As I said earlier, we have brought down fiscal deficit to 5% in 2014-15. We are targeting to reduce it further to 4.3% in 2015- 16. The federal deficit is projected at Rs.1,625 billion for 2015-16 compared to the revised estimate of Rs.1,524 billion for 2014-15. With surplus contribution from provinces of Rs.297 billion from the provinces, compared to a revised deficit of Rs.142 billion in 2014- 15, we have projected an overall fiscal deficit of Rs.1328 billion for 2015-16, compared to the revised estimate of Rs.1383 billion in 2014-15.
Now I present Part-II of the speech which consists of tax proposals.
1. The country needs adequate fiscal space for spending more on development and welfare of its people. Our government believes in taxation in a growth paradigm. We have to enhance our efforts for resource mobilization and for having an equitable and just tax system. Like last year, this time again we have made conscious efforts so that the burden of our tax proposals should not affect unprivileged and poor. Our proposals will ensure that affluent classes and specially those who do not pay taxes should come forward and contribute towards this national cause. Mr. Speaker, Broad Principles of Taxation Proposals
2. The proposals for the budget 2015-16 are mainly based on the following principles:-
i. Second phase of withdrawal of exemptions to further eliminate the discriminatory tax exemptions and concessions.
ii. Expand the scheme of differential taxation for filers and non- filers for penalizing non-compliance without adding any further burden on the compliant. iii. Customs tariff be rationalized to reduce both the number of slabs and the maximum duty rate.
iv. Reviewing tax laws and procedures to cut down on discretion.
v. Removal of sectoral distortions in domestic taxes.
vi. Measures for broadening of the tax base and documentation of economy.
vii. Increasing the share of the direct taxes.
3. I will now give a brief summary of the Revenue measures proposed in the budget:
a. Change in Rate of Tax and Taxable Holding Period for Securities:
Rate of Capital Gains Tax for Tax Year 2015 was increased to 12.5% for securities held up to 1 year and 10% for securities held for a period between 1 and 2 years. In line with the policy of increasing rates in phased manner, it is proposed to increase the rates from 12.5% and 10% to 15% and 12.5% respectively. In addition, it is proposed that securities held for a period of more than 2 years and less than 4 years be also taxed, though, at a reduced rate of 7.5%.
b. Increasing Cost of Non-Compliance with Tax Laws:
In order to promote tax culture, to discourage non-compliance with tax laws and to address the concerns of citizens paying due taxes and resultantly having higher cost of doing business than tax evaders, a distinction was created between a compliant and non- compliant taxpayer by prescribing higher withholding tax rates for those not filing their Returns through Budget 2014-15. That measure has shown good results. Continuing with the same policy, the regime of different rates for Filer and Non-Filer is proposed to be extended on certain other transactions.
Accordingly, it is proposed that the rate of tax in the case of Non-filers be increased in the case of contractors by 3%, in the case of suppliers by 2% and in case of commission agents by 3%. The rate of tax on non-filer transporters is also proposed to be enhanced by various percentages.
The rates in the case of non-residents may also be revised accordingly, to provide a level playing field. Any person can avoid payment of this advance tax by filing of return and can also claim adjustment or refund of this tax by filing return after the payment.
c. Adjustable advance income tax on banking instruments and other modes of transfer for Non-Filers:
The existence of a parallel informal economy is a major policy challenge in Pakistan. The informal sector takes benefit of all the services of state but does not contribute to the revenue required to provide these services.
Accordingly it is proposed that adjustable advance income tax at the rate of 0.6% of the amount of transaction may be collected on all banking instruments and other modes of transfer of funds through banks, in the case of persons who do not file Income Tax returns. I would like to reiterate that this provision shall not be applicable on taxpayers.
d. Rationalizing Tax Rates for Various Sources of Banking Companies:
Presently, tax rate of 35% is applicable to banking companies from all sources except income from dividend which is taxed at various rates from 10 to 25% and income from capital gains which is taxed at a rate of 10 and 12.5%. This arrangement discriminates between different sources of income for banks. Accordingly rate differential for different sources is proposed to be removed and income of banks from all sources is proposed to be subjected to income tax @35%.
e. Taxation of Dividend: The present rate of tax of 10% 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%. Consequently, in case of non-filers the rate of tax is proposed to be increased from 15% to 17.5% of which 5% shall continue to be adjustable. For Mutual Funds the existing rate of 10% shall continue.
f. Taxation of Capital Gains from Trading of Futures Contracts: Capital gains derived from trading of commodity future contracts on Pakistan Mercantile Exchange (PMEX) is not exempt from tax. However, the traders are neither filing their returns nor any withholding tax is applicable on these transactions. It is proposed that advance adjustable income tax at the rate of 0.1% on each transaction may be introduced to be collected on every purchase and sale of futures contract.
g. Domestic Electricity Consumption: At present, adjustable advance income tax is collected at a rate of 7.5% on domestic electricity bills above Rs 100,000. Due to reduction in electricity prices it is proposed that the threshold be reduced to Rs. 75,000.
h. Renting Out Machinery and Certain Equipments: 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. For non-residents, 15% final tax is already in place on use or right to use of commercial, industrial and scientific equipment.
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.
i. Dividend from Real Estate Investment Trusts (REIT): Since at present no special regime for unit holders of REIT has been prescribed it is accordingly proposed that unit holders for REIT be treated at par with the unit holders of Mutual Funds and dividend be subjected to same tax rates.
j. Taxation for Not Distributing Dividend:
The government has taken many measures for encouraging corporatization and several measures have been announced in this budget to encourage investment in corporate sector through stock exchanges. However, such measures will be ineffective if small shareholders do not get return on their investments. In order to protect interest of shareholders and to encourage companies to distribute dividend, it is proposed that in the case of a public company other than a scheduled bank or a modaraba, which does not distribute cash dividends within six months of the end of the tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100% of its paid up capital, the excess amount may be taxed at the rate of 10%.
k. Revenue for Rehabilitation of Temporarily Displaced Persons: The terrorism and counter-terrorism efforts have resulted in displacement of hundreds of thousands of people of FATA and Khyber Pakhtunkhwa from their homes. The vulnerable sections of the population, women, children, elderly and sick have suffered the most. The host communities have also taken a toll. The cost of rehabilitation of these displaced persons has been estimated at 80 billion rupees. These direct affectees of the war on terror deserve the full support and facilitation of the Nation. To meet enhanced revenue needs for the rehabilitation of Temporarily Displaced Persons in a dignified and befitting manner, it is proposed to levy a one-time tax on the affluent and rich individuals, association of persons and companies earning income above Rs. 500 million in tax year 2015 at a rate of 4% of income for banking companies and 3% of income for all others. It is expected that the provinces will also contribute their due share in this national cause and the entire receipts from this source shall be utilized for rehabilitation of TDPs.
l. Reduction in Tax Rate for Companies: The government has been encouraging corporate culture and documentation in the economy and has introduced a policy of reducing corporate income tax rate by 1% annually from 35% until the tax rate is reduced to 30%. Accordingly the rate was reduced to 33% in the preceding year. It is proposed that, continuing with the policy, the rate may further be reduced to 32% for Tax Year 2016. This will encourage businesses to join the formal sector.