Budget FY21 - What it means for different industries

The Pakistan Tehreek-e-Insaf (PTI) government on Friday unveiled a coronavirus-influenced Rs7.13 trillion “tax-free” budget for the fiscal year 2020-21 in a special session of the National Assembly (NA) on Friday amid protest by the opposition parties.

As per experts, the Federal Budget 2020-21 has been proposed in an extraordinary, unusual and unpredictable economic circumstances due to a prevalent COVID 19 pandemic which clearly means that a difficult journey lies ahead of us. It is the first time in the recent history that major economic activities throughout the world are effectively closed since February/March, 2020. At this stage, there cannot be any certainty for the resumption of economic activities in the financial year 2020-21.

The total Budgeted outlay for FY21 is set at PKR 7,295Bn, down by 11% compared to FY20 estimates of PKR 8,238Bn. Tax revenues are estimated at PKR 6,573Bn (28% growth expected in indirect tax and 26% in direct taxes), 19% higher than the FY20R target of PKR 5,504Bn. As per experts, the revenue target along with various other assumptions and projections will require reconsideration after the end of the first quarter.

The government announced that it’ll be presenting a “tax free” budget where no new taxes will be introduced.This is being seen as a positive announcement because tax collections for the fiscal year 2020-21 will be directly related with the timing of resumption of economic activities. In these circumstances, a positive approach of not levying any new tax without substantially reducing the development expenditure is correct. This growth oriented strategy appears to be the only solution in these circumstances. The effect of this policy will be an increase in the budget deficit, which may escalate inflationary pressure. It is, therefore, proposed that targeted subsidies via Utility Stores and supports in the form of Government’s Social Security Programmes “Ehsas Program and BISP” be provided to the common man and the underprivileged.

If we analyse the budget’s impact on some of the major sectors. There’s a mixture of positive and neutral feedback.

Capital Markets :

In this year’s budget, contrary to demands and expectations, no direct incentives have been introduced for equities. However, slight relief has been provided for REITs with the extension on taxation from profit realised from the sale of immovable property with the objective of development of REIT. Moreover, withholding tax on dividend from a company where no tax is payable by such company, due to exemption of income or carry forward of business losses has been enhanced from 15% to 25%, in-line with the applicable rate of tax on dividends. Samiullah Tariq who’s a Capital Markets expert and is currently the Head Of Research and Development at PKIC spoke to Businesses Recorder and gave his expert opinion on the Budget in regards to Capital Markets. According to him, “ The Budget was obviously prepared in a Covid19 background in which economic activity has been negatively affected therefore the government didn’t have a bigger envelope as it couldn’t raise more resources”.

Overall, the budget is seen as a non-event for the capital market .

Construction :

The Prime Minister announced a set of incentives in the form of tax and regulatory relaxations back in April to revive the construction industry which was welcomed by the stakeholders. The government has further incentivised the construction industry in this year’s budget. The new incentives are mainly introduced by giving incentives to the cement sector. The new incentives include: • Subsidy of PKR 30Bn has been earmarked for the Naya Pakistan Housing Authority. Given the government’s focus on low cost housing, this allocation is expected to help in providing a kick-start for construction of houses for the lower income group.

• Federal PSDP at PKR 650Bn in FY21 is 15% higher than revised FY20 estimate of PKR 564Bn

• FED on cement to be cut to PKR 1.75/kg from PKR 2.00/kg currently. Federal excise duty (FED) on cement at present amounts to PKR 2,000/ton i.e.: PKR 1.75/kg. It has been proposed to lessen it by PKR 12.5/bag (post tax impact PKR 14.63/bag). This is a window of opportunity for the cost of construction to come down if the benefit is passed on to the consumers. While speaking to Business Recorder, Osama Ashaqeen who’s a major cement distributor in the country gave his view on this and said that, “although this measure of decreasing the FED is a positive for the cement sector and it can be beneficial for the construction industry as well if the cost is passed on to the consumers but due to the sector bearing losses ,local players will most probably retain the impact which will compensate for their losses.” According to a research report by AHL, this measure will improve the profitability of cement companies by 0.5 – 1% in FY21 so capital market investors who have bought shares of cement companies can definitely benefit from it as the government has recommended to cut the additional customs duty (ACD) of 2% on coal, bringing the total duty on import to 3% from 5% earlier. This will have positive bearings for earnings of cement companies to the tune of 2-3% in FY21.

The overall impact on the construction industry is being regarded as neutral-positive.

Retail :

The retail sector has been given a substantial relief in this year’s budget. The CNIC condition threshold level has been increased to PKR 100k which was PKR 50K before the Budget was announced. The Government Sales tax(GST) on retailers has also been reduced from 14% to 12%. This reduction in sales tax is applicable for those which are integrated online with FBR through point of sale system. This measure has been welcomed by retailers who are registered with FBR as reductions in the GST was being demanded by them since a long time. By announcing the reduction of GST for only those retailers who are registered with FBR’s point of sale system, Government has tried to increase the documentation of the informal economy as there are many retailers who are unregistered. This measure of incentivising the registered retail sector will encourage companies to integrate their retail sales system with the FBR system to avail relief.

Overall, the budget has been seen as neutral-positive for the retail sector.

Manufacturing :

The Government has tried to help the manufacturing industry by rationalising tariffs in many areas. Some of the major exemptions are :
• Exemption of additional custom duties on those tariff lines which were now at zero per cent customs duty in tariff

• Reduction of custom duty on 40 raw materials of various industries

• Tariff rationalisation under National Tariff Policy 2019, by reducing customs duty on 90 tariff lines from 11 per cent to three per cent and zero per cent

• Exemptions of custom duties and regulatory duty on import of machinery.

These rationalisation Of tariffs have been lauded by the business circles as they say that the reduction in duties and tariffs will help them to decrease their cost of doing business. While commenting on the move of rationalising tariffs, Aadil Nakhoda who’s an Economist and an Assistant Professor at IBA said that , “ The decision to reduce tariffs on imported inputs is an excellent one. Although, we have seen it consistently being stated in previous budgets, the Ministry Of Commerce(MoC)’s involvement in the current initiative looks more obvious. Moving tariff policy from FBR to MoC will be beneficial as it is then less likely to be tied to revenue generation. The goal of reducing tariffs must be to increase the quality of input in Pakistan, necessary to boost exports. With policies being more export-oriented, the manufacturing sector will benefit.”

Energy :

Although the energy supply has generally improved over the last few years, the challenge of rising circular debt continued to haunt the country during current fiscal year.

The Government announced that under this budget, their focus remained on projects of power expansion and improving transmission and distribution system to minimise the circular debt. Projects for supply of power to Special Economic Zones and foreign funded projects have been financed adequately. This year, the government has allocated over Rs. 80 billion. These funds are especially targeted towards bridging the gap between electricity demand and generation.

The government also announced to alter the subsidies for the energy sector in budget 2020-21. Out of the total subsidies kept in this year’s budget, the allocation for subsidies to Wapda/ Pepco form the major component - 59.3 per cent of the total allocation followed by subsidy to KE with a share of 12.2 per cent and Passco with share of 3.35 per cent.

According to budget documents, subsidy to Wapda/Pepco has been slashed to Rs 124Bn for 2020-21, from budgetary allocation of Rs 191Bn and revised allocation of Rs 201Bn for the current fiscal year which indicates a 35 per cent reduction in subsidy from actual allocations and over 38 per cent as compared to revised estimates.

The inter-Disco tariff differential subsidy has been slashed to Rs 110Bn for 2020-21 against budgetary allocations of Rs 162Bn for 2019-20, indicating a reduction of 32 per cent. Tariff differential for agriculture tube wells has been slashed to Rs 3Bn from Rs 8Bn, posting a reduction of 62.5 per cent.

The allocation for subsidy to KE has been slashed to Rs 25.5Bn in 2020-21 from Rs 59.5Bn in 2019-20, indicating a reduction of over 57 per cent. To pick up KE's tariff differential, a subsidy of Rs 10Bn has been estimated for 2020-21, indicating a reduction of 60 per cent. For industrial package, an amount of Rs 5Bn has been earmarked for 2020-21 against Rs 10Bn in 2019-29, showing a cut of 50 per cent. However, tariff differential for agriculture tube wells in Balochistan will continue to be Rs 500Mn.

Subsidy meant to pick up Wapda/Pepco receivables from merged districts has been revised down to Rs 10Bn for 2020-21 from Rs 18Bn budgeted in 2019-20, showing a 44.5 per cent reduction. Subsidy to Wapda on account of tariff differential subsidy has been reduced to Rs 1 billion from Rs 3 billion in 2019-20. For bill deferment due to Corona, Rs 10Bn was allocated in revised estimates for 2019-20 but no amount is estimated for 2020-21.

The budget documents further reveal that no subsidy has been earmarked for PSO, ARL and others despite the fact that Rs 23Bn was given to them as subsidy in revised budget for 2019-20. Subsidy to LNG sector for providing gas at lower rates to industry has been slashed by over 58 per cent to Rs 10Bn for 2020-21 from Rs 24Bn in 2019-20.

Textiles :

In the budget for FY2020-21, there is no new substantial incentive announced for Textile, despite the fact that this sector being an export-oriented, faces a double challenge of COVID-19 on both demand and supply side.

Moreover, the withdrawal of zero-rated status has added to the woes of Textile manufactures and would likely hit the textile exports, according to the textile stakeholders .

However, the government has supported the textile industry by exempting 5% customs duty on imports of raw material i.e polyester for button manufacturers which will likely help smaller textile players. Not only this, but the government also reduced customs duty on the import of raw material used in the manufacturing of interlining to reduce the cost of production.

Speaking of tax refunds, the government proposed to expedite the centralised processing system and automatic export rebates disbursement which would improve cashflows of companies, resulting in less reliance on loans to meet working capital requirements.

The subsidy of Rs 10 billion given to the LNG sector in the form of low gas and power tariff would benefit the textile players which rely on RLNG for meeting power requirements.

Thus, the budget impact on the textile sector is neutral as per market analysts.

Agriculture :

When it comes to the agriculture sector in particular, this government has shown a lot of commitment in developing this particular sector by working to boost agriculture productivity and also by working for the welfare of the farmers. In the budget for the FY21, the government has allocated Rs 10 billion to combat locust plague in Agriculture.

The allocation for combating the locust plague is extremely important because the forecasts of crop damage due to locust attack have recently reached at alarmingly high levels. This step is a major positive for the fertiliser sector as not only will it help in ensuring that fertiliser sales remain close to previous years’ average but this will also help in ensuring food security.

This is in addition to the to the Rs 50Bn agriculture package announced earlier. To recall that ECC had approved a package of Rs 50Bn for the agriculture sector, which includes a subsidy of Rs 37 Bn to farmers in the form of Rs 925/bag on DAP and other phosphatic fertilisers and Rs243/bag on urea and other nitrogen fertilisers. Continuation of Subsidy to fertiliser sector would keep the demand of fertiliser products integral in the coming months.

Additionally, government has decided to eliminate advance tax under section 236U on insurance premium. For non-filers it is 0% to 4% for general insurance and 0% to 1% for life insurance if the annual premium exceeds Rs 0.3 million. This is expected to have a positive impact on fertiliser sector as this will result in improved gross premium earned.

The Government has also announced the National Agriculture Emergence Programme which is meant to uplift agriculture and livestock sector. Around PKR 14Bn have been designated for this sector, which includes PKR 12Bn for Food & Agriculture and Food Security. With this the Government intends to boost productivity in agriculture products such as wheat, cotton, sugarcane, rice and oilseed crops.

Ahmed Jamal Pirzada ** who’s a Lecturer in Economics at the **University of Bristol, UK spoke to Business Recorder on this year’s budget and expressed his expert opinion.

According to him, “In a general sense, this budget reflects government's desire to return to where the economy stood before the pandemic. If we look at some of the targets these are not too different from what the government had set last year. I think this alone will be quite an achievement and will increase the probability of entering election year on back of reasonable growth rate. But, without some sort of a miracle, this is increasingly unlikely.

I also think we, as a nation, should stop seeing budget as a transformatory document. Instead, we must start demanding from both federal and provincial governments to start implementing productivity reforms such as reviewing regulations which govern different industries, simplifying tax laws and developing trade linkages with regional countries. Everything else is business as usual.”

In summary, even though the budget has some positives, optimistic targets will continue to present a challenge and will most probably be revised in future. The journey ahead of this budget is difficult especially due to uncertainty surrounding COVID19 outlook. In order to ensure that these challenges are turned into opportunities, the government must also turn attention to implementing well thought-out structural and productivity reforms without which the economy cannot escape repeated cycles of BOP crises.