Budget Commentary Azal Ahsan

Azal Ahsan Qadir

Budget Commentary

21st June 2015

The federal budget of a country aims to balance expenditures between various expenses in the upcoming year. Its aim in 2015-2016 like every year was to to pursue sound and equitable economic policies that put Pakistan on the path of sustained economic development and macroeconomic stability.

Budget ’16 has a clear focal point on reinvigorating increment after two years of economic consolidation . Fiscal incentives for businesses of Pakistan including tax incentives for new industrial units have been announced. This is in parallel with concrete steps for increasing the tax net. Benefit of the reduction in the corporate tax rate by 1% was widely expected and has likely already been priced in while the implementation of a one-time levy at 4% of income for banks and 3 % for all others will be a slight negative. At present Customs duty, Sales Tax and withholding tax on import of agricultural machinery in aggregate ranges from 28% to 43%. Customs Duty, Sales Tax and Withholding Income Tax are being cumulatively reduced to 9%.Taking a deep look with respect to Karachi Stock Exchange, increase in capital gain tax (CGT) by 2 .5 % to 15% was widely expected but the government decided against it. At the same time, increase in tax on dividend by 2.5% for both filer (12.5%) and non-filer (17.5%) has surprised and might be slightly negative. Federal Budget also brings positive signs for the real estate sector of Pakistan. With relief measures for developers and builders as well as reduction in taxes for people engaging in real estate investment trusts (REITs). An enhancement of rates of Federal Excise Duty on locally produced cigarettes has been levied. Also  average tax incidence is set to increase from 58% to 63%”The markup on housing loans obtained by individuals for construction or buying of a house can now be deducted up to 50 percent of the taxable income. The supply of bricks and crushed stone will also be exempted from sales tax for up to three years till 30th June 2018. The customs duty on the import of construction machinery has also been reduced to ten percent.”

From the bankers perspective the announcement of efforts in reducing the fiscal deficit from 5% to 4.3% in the years 2015-2016 may create additional money supply in the economy. Since government expenditures might exceed government revenues to finance the debt the loans may be taken by the reserve bank or other economic institutions. The supply of money in the economy is increased as the reserve bank may be ordered to print more currency notes. Hence the private banks of Pakistan may benefit as the supply of money decreases the interest rate. As a result borrowing from banks may increase resulting in increased spending.

Super tax has been imposed by the government in this years budget, apparently for the restoration of dislodged individuals. This duty is payable by banking companies at the rate of 4% and by all other tax payers at the rate of 3% of the wage.Also income of banks including the revenue gained from dividends and capital is proposed to be taxed at a constant rate of 35% while the corporate tax rate proposed for companies other than banks is reduced to 32%.

As far as sales tax and federal excise is concerned an increase in the sales tax of mobile phones is clearly visible. Rate of sales tax has increased to “Rs. 300, 500 and 1000, from Rs. 150, 250 and 500, respectively, depending on features in the mobile set. This may mean that since banks have started providing cell phones on easy installment plans with zero markup the customer base for such products may decline due to increase in prices.

The Benazir Income Support Program (BISP) is an effort to provide relief to the poor and vulnerable people of society. According to the federal budget “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”.The implications of this step are quite straightforward. Distribution of money among the society and especially the lower sections of the society might see lower savings and more spending in the years to come.By powering growth the banks may enjoy greater number of accounts opening in rural and semi-rural areas. Also new small and medium enterprises may receive a boost meaning more loans being approved and taken up from banks.

Gwadar can potentially play an all new role in strengthening the economy of Pakistan. Development in Gwadar and the budget policies pertaining to the area may directly and indirectly affect the banks of Pakistan. Development and growth in the sector may give birth to all new local and international clients.Balochistan and its coastal areas remain an untapped market as far as banking and its branches are concerned. Reasons behind this also include the lack of population. However the development of the Gwadar port  may mean another port city in the making like Karachi. As a result in the federal budget Rs.3 billion are being allocated in 2015-16 for New Gwadar International Airport. Also a provision of Rs.2 billion has been made for Gwadar Development Authority. In the next budget Rs 3 billion are also being allocated for the distribution of water in the region.

Taxing has a strong connection with banks. A bank tax is a tax on banks. It is primarily  a tax on financial institutions’ balance sheets (most probably on their liabilities or possibly on their assets) whose proceeds would most likely be used to create an insurance fund to bail them out in any future crisis rather than making taxpayers pay for bailouts. A levy of 0.6% tax on every banking transaction, including bank withdrawals, cheque transfers, intra-bank transfers or anything that involves cash and bank has been placed by the government in the budget. While a minimum threshold is placed it is seen as nothing but a desperate step to raise money at the expense of the banks. According to senator Talha Mehmood,” People have started withdrawing cash from banks and converting into gold to avoid taxes”. This step by the government may have serious negative implications for the bank. As mentioned above “bank run” is being caused by this policy. A bank run happens in a fractional reserve banking system when an expansive number of clients withdraw their money from a monetary establishment in the meantime and either request money or move those trusts into government securities, valuable metals or stones, or a more secure organization in light of the fact that they accept that the budgetary foundation is, or may get to be, indebted. As a bank run advances, it produces its own momentum, in a sort of self-fulfilling prophecy as more individuals withdraw their money, the probability of default expands, hence activating further withdrawals. This can destabilize the bank to the point where it comes up short on money and accordingly confronts sudden insolvency.