Some stabilization achieved

The first half of Ishaq Dar's long budget speech was to claim "I am the best", and the rest was to assure that right steps are taken to enhance growth and improve fiscal operations. The blame of all the poor performance went to the unanticipated or exogenous factors such as floods, dharna, prolonged winter, commodity prices decline and low private sector off-take. That's a classic example of how political mileage is gained and Dar is at least best at it!
It's his third budget speech since PML-N won the elections in May 2013, and according to him, the first year was crisis management, second was aimed at achieving stability, and the third will be focusing on growth. Two years are behind us and some stabilization has been achieved thanks to low oil prices, expensive foreign loans and selling high dividend yielding blue chip companies. Thus, inflation is down and forex reserves have piled up to a comfortable level.
But is FY16 budget really growth inducing? What are the advantages for existing businesses? None! Apart from already announced 1 percent reduction in corporate tax. Why didn't he announce any incentive for BMR? Instead, there is a disadvantage for big companies in the form of one-off super tax of 3 percent on non-banking and 4 percent on banks making profit over Rs200 million. Most of the banks fall in it and may contribute Rs9-10 billion additional tax revenues in it. Almost all the KSE-listed firms in cement, chemical, fertilizer, auto, power, E&P and OMC companies a host of other sectors fall in this category. Even small stocks like Balochistan Glass fall in this category. Nonetheless, it's one-time tax and amount raised is claimed to be spent for newly coined term TDP (temporarily displaced persons).
The proposals are too heavy for banks and will hurt their profitability badly. The tax on all sources of income of banks will be uniformly taxed at 35 percent. The benefit they accrued by high equity portfolio and capital gains on PIBs will be considerably washed away; the government had given from one hand in the last two years and is going to take back from the other this year. In order to keep their high profitability intact banks ought to lend to private sector. Well done Dar, for pushing banks to chase their mandate of commercial banking. And any uptick in private sector credit will help in the objective of enhancing growth.
The promise to clear the refund of exporters by August end is a right step and may help in boosting working capital credit for textiles in second quarter. The export refinance facility is generously reduced to 4.5 percent - higher than their demand of 5 percent. It was 9.4 percent two years back and in a staged manner reduced by more than half. Falling interest rates will keep the subsidy part to it from rising too much, and exporters will surely benefit from it. They need such steps when the currency is overvalued and competitors are not only depreciating their currencies but also giving fiscal incentives at the time of shrinking trade pie.
Similarly, other steps are proposed such as reduction in long term finance facility to 6 percent, measures in removing anti-export bias in imports, export development initiative, marinating zero rated duty on import of textile machinery and some other steps for investment in plants and technology up gradation. The chances are that it will help in regaining global market share by textile exporters.
In agriculture value added sector, there are some incentives for businesses to establish especially in livestock sector. Relief measures have been introduced for rice mills as the poor chaps got badly hit by the fall in international prices. That should help allay some concerns of rice exporters, though it's another thing as to why should the government provide one-way capitalism to an established industry.
There will be 3-year tax holiday for setting up and operating cold chain and warehousing facilities. That's good as it's a growing sector and more investment may come in the dairy sector. Similarly, in Halal meat production, income tax exemption is allowed for 4 years from the set up time given that the Halal certificate is obtained by December 2016. The crop and livestock insurance schemes are already in operation. In a nutshell, if anyone has the right knowledge and a knack for agriculture, it's a right time to enter into agri value added business.
The exemption for investment in green field projects continues. However, it has not really reaped fruits yet. Let's hope that with lower interest rates and improved confidence some new projects may kick start in FY16. The target for investment-to-GDP ratio has been raised to 16.5 percent of GDP in FY16. It's imperative for both domestic and foreign investment to spur to achieve growth target of 5.5 percent in FY16 and 7 percent in FY18.
The government has to do its role by ensuring that it does not compromise on development spending - the national development budget is set at Rs1513 billion with Rs700 billion as federal PSDP. In order to spend this sum, the tax revenues targets have to be achieved, which are unrealistic. The FBR revenues target was also short of Rs200 billion in the outgoing year, and the biggest cut is to be faced by development; PSDP is slashed and provinces are incentivized to show surpluses by cutting development expenditure.
The FBR taxes are expected to grow at 20 percent whereas this year growth was mere 14.5 percent. For yet another year, the government has been unable to introduce some meaningful measures to broaden tax base or enhance direct taxation. All the steps are to either to withdraw the exemptions (which is the right thing to do) or to impose withholding taxes on non-filers.
In the first two years, Dar had increased the withholding tax on both filers and non-filers with latter at higher rate to increase the gap with an objective for enticing businesses and individuals to file returns. In FY16, the proposals are to increase the rate for various sectors by 2-3 percent for non-filers with no change for filers.
Is this a right policy? The numbers suggests otherwise, as there is not much increase in people filing return but government is pocketing taxes by imposition of higher rates as advance income tax. When non-filers see that the filers are finding it hard to claim their refunds, they would rather continue to pay whatever is charged by passing the price impact to the consumer.
Thus WHT behaves like an indirect tax with the consumers bearing the entire burden and businesses margins remain unaffected. The government is seemingly happy as it is getting revenues no matter what is the policy objective on paper. Dar should do away with this obsession of WHT and rather make FBR proactive to identify industries, businesses and individuals who are not giving their share of taxes. The continuation of this regressive taxation regime will not only hurt growth potential but might also incentivize the documented sector to evade taxes, if their refund problems are not resolved!