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pakistan-economy-32The newly elected Government of Pakistan has announced the Budget for the Fiscal Year 2013/2014 on 12 June, 2013. The total size of the budget has swelled to almost PKR.3.5 trillion as compared to PKR .2.7-2.9 trillion last year, which is considerably higher in comparison with the avenues of revenue available to the Government. Notwithstanding the Government is aware of this situation and is already taking provision of a Fiscal Deficit to the tune of PKR 1.6 trillion. The financing of this deficit is expected from the pending receipt from Etisalat for privatization of Pakistan Telecommunications Limited, auction of 3G license, grant funds from USA under Kerry Lugar Bill, IMF and Tax reforms.

Under the tax reforms the Government has not introduced any new formula. Like in the previous budgets the middle class has been targeted for squeezing out additional amounts from their pockets so that the Government can meet its fiscal requirements. However this time around the middle class has been pressurized from both sides. From one side the Government has decided not to increase their salaries  while from the other they have increased the applicable direct and indirect taxes.

The income tax slabs set in the budget of FY 2013/2014 for the salaried class are as follows;

(All amounts in PKR, unless stated)
Slab No Annual Income Fixed Tax Amount Tax Rate Rate Applicable on Amount exceeding
Min  Max
1 0 400,000 0 0.00% 0
2 400,000 500,000 0 5.00% 400,000
3 500,001 800,000 5,000 7.50% 500,001
4 800,001 1,300,000 27,500 10.00% 800,001
5 1,300,001 1,800,000 77,500 12.50% 1,300,001
6 1,800,001 2,200,000 140,000 15.00% 1,800,001
7 2,200,001 2,600,000 200,000 17.50% 2,200,001
8 2,600,001 3,000,000 270,000 20.00% 2,600,001
9 3,000,001 3,500,000 350,000 22.50% 3,000,001
10 3,500,001 4,000,000 462,500 25.00% 3,500,001
11 4,000,001 7,000,000 587,500 27.50% 4,000,001
12 7,000,001  Above 1,412,500 30.00% 7,000,001

The following workings would help you assess the increase or decrease in your tax liability after the application of the above given salary slabs;

Gross Salary Tax Liability Increase/(Decrease)
FY 2012/2013 FY 2013/2014 Amount %age
400,000 - - - -
500,000 5,000 5,000 - -
600,000 10,000 125,000 2,500 25
800,000 22,500 27,500 5,000 22.2
1,000,000 42,500 47,500 5,000 11.8
1,500,000 92,500 102,500 10,000 10.8
2,000,000 170,000 170,000 - 0
2,500,000 262,500 252,500 (10,000) (3.8)
3,000,000 512,500 350,000 (162,500) (31.7)
3,500,000 620,000 462,500 (157,500) (25.4)
4,000,000 720,000 587,500 (132,500) (18.4)
7,000,000 1,320,000 1,412,500 (92,500) 7
8,000,000 1,520,000 1,712,500 (192,500) 12.7

Apart from the increase in Income Tax, other taxes which will burden the salaried class include the increase in General Sales Tax rate to 17% from 16%, increase in Federal Excise duties, increase motor vehicle purchase and road tax and various other indirect taxes.

Overall my general opinion on the latest budget is that the policy of shielding the Businesses and Farming sector from the tax reforms continues to remain in practice. The promise of the incumbents prior to the elections to broaden the tax base would not be possible if the traditional way of thinking is not changed when formulating budgets. Given such a strong mandate has been secured by the Government it had the opportunity to courageously dig into the deep pockets of such sects which should lead with their contributions towards the national exchequer. Instead the Government has very cowardly resorted to further taxing the salaried middle class which has never shown resistance towards the tax reforms that in most part of the history have never been in their favor. With no increase in salaries the deterioration in purchasing power of the middle class is imminent.

Economies grow on consumerism, that is why we have seen the western economies slashing down their interest rates to kick start their industries and spin the wheel that encourages monetary flows between the Industry and Consumers, to fight off recession. It was vital that the Government should have at least maintained, if not enhanced, the purchasing power of the middle class which represents a significant portion of the population. It is the purchasing power of this class which drives the demand for the output of local industries. Hence if the demand factor has been ignored then what is the point of providing relief to the supply side. Like its said a clap warrants a pair of hands.

Further the budget speech also revealed the future plans of the Government. Infrastructural Development appears to be the highlight of their agenda. We have to commend the PML (N) leadership for some of the infrastructural projects they have initiated/completed during their earlier tenors. However the most crucial question that comes to mind is that if in the prevailing circumstance  increase in the budget is justified to finance various schemes such as laptop giveaways and develop new motorways and railway links. The incumbents firmly believe that infrastructural development is the key to stimulate economic activity, which is in fact true. Building new assets would create job opportunities, ignite industrial activity and open new opportunities. However given the current circumstances of the Country the main emphasis should to bring about urgent and strict reforms to the prevalent structural problems and rehabilitate existing infrastructures to bring about their optimum utilization rather than adding additional assets.

As we are witnessing in the energy sector, the strategy of the previous Government to resolve the energy crises was to add more capacity rather than making effective use of the existing power infrastructure and bring online the idle capacity. Therefore, with the addition of new power plants, what that Country has ended up with is the higher amount of idle capacity than before while the energy crises continues to persist. The cost of such ineffective or irrational decisions has to be paid by the nation because unlike the oil rich countries Pakistan has to arrange capital from local and international sources to finance the development of infrastructure, and such capital bears cost which is weighing down upon the financial stability of the Country.

Exuberant Infrastructures and give away schemes are suited to such nations which have excelled at their core and have achieved sustained macroeconomic stability. When our Government decides to undergo such lavish expenditure it creates an image of a family having a Mercedes Benz parked in its garage while inside the house they are deprived of food, education and basic amenities. However given that historically the leadership of our Country has comprised of industrialist elite, the concept of investing on the people rather than the infrastructure has remained far fetched. Presumably the emphasis has always been to develop infrastructure that complements their living standard rather than that of the vast majority of population.

My expectation  from the newly elected Government was that given their previous experience, lessons from exile, change in global economic parameters, critical observation from the more competitive opposition and greater awareness of the issues at hand from the highly independent and pessimistic media , the new budget would differ significantly from its earlier versions.  Unfortunately it appears not to be the case. Though the budget is ambitious and growth oriented however the structural problems of the country provide for a very weak foundation for any project, which if not resolved would turn every project into a failure, an idle asset whose cost would have to be borne by the nation.

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