This budget is a budget of concessions. Minimum income liable to tax has been raised from Rs 80,000 to Rs 100, 000. Payment of 15% tax for filing of appeal has been withdrawn, written-off loans of the sick units have been exempted from tax, sales upto Rs 50 lakhs have been exempted from the sales tax.
Three rates of sales tax have been withdrawn and now a uniform rate of 15% will be applicable. Such a cornucopia of tax advantages is hard to come by.
This budget has been also a budget of consultation.
Shaukat Aziz was very candid in saying that perhaps this was the first budget in the country's history which has been prepared in extensive consultation with the stakeholders. It is thus also a tribute to the private sector and shows that when its leaders are taken into confidence they can plead their point of view convincingly to the concerned authorities and get concessions. The government did not try to conceal the tax proposals in a shroud of mystery.
Its approach was forthright and transparent. The tax proposals were not secret bargains struck with pressure groups.
The net revenue loss of the tax concessions was estimated at Rs 7 billion.
These concessions are also, in a sense, illustrations of the slogan 'shining Pakistan' of the core postulates of the overall policies of consistency, transparency and good governance, which the government never tires to repeat. And one of the best examples of a progressing Pakistan, quoted by the Finance Minister, has been the smooth functioning of the Karachi Stock Exchange which is considered to be the barometer of the economy.
The Karachi Stock Exchange was quoted as the best performing stock exchange in the region. Its health and well-being was so dear to the government that one of the reasons for announcing the resignation of Jamali on a weekend was that its shocks should be absorbed by the stock market over the weekend holiday.
Had the resignation been given on a weekday, it would have had a calamitous effect.
It is absolutely inexplicable as to why the government acted the way it did in the levy of CVT on the shares traded in stock exchange. In sharp contrast to the policy of openness, it chose not to disclose its intentions in this regard.
Tariq Hassan, chief of SECP, kicked up quite a row, by his indiscreet remarks that he had proposed to the government to impose a holding period for the trading of shares. It sent shock waves and the market plummeted. It was indeed callous of the government to ignore the adverse effects of this irresponsible remark and to say nothing about it.
Tariq Hassan later tried to wriggle out of it by saying that it was only his personal view which would not necessarily be approved in the budget. To add fuel to the fire, a bomb blast occurred in Karachi. Islamabad's grapevine of Jamali's departure added to this charged atmosphere.
The Karachi Stock Exchange, which was being presented as the pride of this region, was reeling under the impact of such stunning blows. And this was thus hardly the time to execute any further blows. This is exactly what was done by levying the CVT.
The KSE exploded and lost more that 170 points in one day, one of the highest in its history.
And perhaps for the first time since Partition many small traders, jobbers and punters demonstrated outside the building of the stock exchange, broke furniture and chanted slogans against the government.
The faith and trust which the government, was so carefully trying to build up, was blown to smithereens. It has been estimated by the experts, that on the first working day after the budget, KSE lost about Rs 2 billion in investment and a irreparable financial damage was done to many small traders.
The CEOs of the three stock exchanges acted promptly. They met the Finance Minister the very next day till 3am and subsequently with the CBR officials and chalked out a formula in just 3-4 days.
The stock exchanges were very erratic until the announcement of an agreed arrangement. Of course it cannot be said that the arrangement is what the CEOs really wanted. It was arrived at under duress because a very damaging CVT levy of 0.1% of shares value had been proposed in the budget speech and unless something was quickly done it would become law. However, the private sector once again proved that it could rise and rise swiftly to save a deteriorating situation.
One interpretation of the government 's action is that it chose to hit a soft target.
Those who matter in the stock exchanges, perhaps do not have the same clout with the powers that be as the big traders, and manufacturers who can make or break govt's economic policies.
Capital gains from trading in shares have been exempted for consistency. The government has extended the exemption on such capital gains from 30.6.2005 to 30.6.2007.
This has been done to ensure a progressive growth of the Karachi Stock Exchange which has almost doubled its points to almost 5400 in a couple of years. More and more big companies are being listed adding depth to the market.
So far so good. If exemption is the hallmark of the policy, why the contradiction of imposing a tax known as the capital value tax? Perhaps it was the tax-collector's appetite for revenue which got the better of him.
The net revenue negative impact of the tax concessions was estimated at Rs 7 billion. And this is exactly the amount which was sought to be collected from the original computation of CVT at the rate of 0.1% of the value of the traded shares. It was stated that if a trader could buy Rs 1 crore worth of shares he could surely afford to give Rs 10,000 to the government.
In most cases, purchase of shares, even of this amount, is not from the resources of the traders. And often the net gain after the sale is a meagre sum. Also losses occur more regularly in such transactions, because of great volatility of markets.
In any case, proceeding on the presumption that business is stock markets is done only by billionaires, is a fallacy. If it were true, there would not have been a demonstration outside the building of the KSE.
There are jobbers and punters, people of small means, who come to the market because they do not have any other reasonable and stable source of income.
They deserved compassionate treatment. On the one hand, the government is increasing the exemption limits as far as income tax and sales tax are concerned and on the other it is taxing all sundry in the business of stock and shares. Had the government engaged the stakeholders before the budget formula's could have devised to tax the rich and exempt the poor.
In the end the government agreed to reduce the CVT from 0.1 to 0.01% alongwith withholding income tax. And it is expected to get Rs 1 to 1.5 billion. In a budget of more than Rs 900 billion, this is peanuts. If the PDSP was reduced by this amount the heavens wont fall and who does not know that all of Rs 202 billion of PDSP would not be spent. The issue of CVT has been much ado about nothing.
(TO BE CONTINUED)
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