Fiscal stimulus for investment By M. Iqbal Patel

THE federal budget 2010-11 has failed to address serious problems such as issues in industrialisation, rising unemployment and rampant corruption. It appears to be a routine exercise with the hands of the policymakers tied behind their backs under the Stand-by Agreement (SBA) with the IMF.

The VAT has been deferred till October 1. The GST will continue for the interim period July-September with increased rate of 17 per cent, from 16 per cent. The burden of additional taxes will fall on the impoverished masses.

In addition to one per cent increase in the GST rate across the board, the government has also raised excise duty by 100 per cent to Rs10 per mmbtu of natural gas, from Rs5.

Both of these measures would have multiple adverse effects on ordinary citizens. But the matter does not end here and the Nepra has approved an increase in KESC tariff from 0.6 paisa to Rs1.70 with retrospective effect from July 2009 to March 2010 which will make the life of the consumers miserable.

The budget proposals will have negative effect on the socio-economic conditions. The development budget for education and Higher Education Commission (HEC) has been reduced from Rs21.3 billion to Rs20.8 billion. The Economic Survey 2010 has recognised that public expenditure on education as percentage to GDP is the lowest compared to other countries of South Asia. The current budget has cut Rs7 billion from allocation for the Higher Education Commission which is bound to devastate the infrastructural and academic development of the public sector universities across the country.

Similarly the allocation for health has been slashed by 27 per cent to Rs16.94bn from Rs23.15 billion in 2009-10 The finance minister has defended the low allocation for education and health by saying “these are provincial subjects”.

Besides the above, the budget has not mentioned of steps to be taken to eliminate circular debt which is affecting the performance of energy sector and is the main reason behind the power crisis, resulting in industrial slowdown and high unemployment rate.

One may safely conclude that the budget has failed to fix the right direction for revival of the economy, alleviation of poverty, creating job opportunities, elimination of corruption, financial indiscipline in the state-run units and resolving energy crisis.

However, the budget has some appreciable features as it provides tax incentives on foreign and domestic investment. Foreign lenders would enjoy tax-free repatriation of profits earned on foreign industrial loans. The rate of withholding tax has been reduced from 30 to 20 per cent on non-specified payments to non-residents.

Besides, tax-free payment to non-residents on profit on debt will be allowed 10 per cent tax credit for BMR, five per cent tax credit to a company in the tax year of its enlistment. It has enhanced the ceiling of the income tax exemptions for the salaried and non-salaried class to Rs300,000.

After a long period of 36 years since 1974, the capital gains on sale of securities have been brought into tax net which is a welcome step on the part of policymakers as well as the stock exchanges.

Withholding tax at the rate of 0.3 per cent is applied on cash withdrawal from a bank exceeding Rs25,000 in a day is now extended to all banking transactions. This measure is not necessary as the withholding tax was initially imposed to curb cash transactions to encourage documentation but taxing the payment made through any mode such as Pay Order etc., would result in change of banking culture and will promote parallel economy.

It is not clear whether the tax will be imposed on payment through crossed cheque though FBR Member has stated in the press statement that it wouldn’t apply to crossed cheques transactions but this should be required to be notified by the FBR to avoid the confusion.

In any case, this step would have adverse effect on the banking culture and needs review.

The taxation measures include harsh penalties for the taxpayers who failed to comply with the provisions of the tax statute which requires reconsideration to create taxpayers-tax collectors friendly environment.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/fiscal-stimulus-for-investment-460