Tuesday, 16 June 2009 – Hotel Regent Plaza, Khi IMPACT OFBUDGET ON ECONOMY The Income Tax Bar...

Tuesday, 16 June 2009 – Hotel Regent Tuesday, 16 June 2009 – Hotel Regent Plaza, Khi Plaza, Khi

IMPACT OFBUDGET ON IMPACT OFBUDGET ON ECONOMYECONOMY

The Income Tax Bar Association - KhiThe Income Tax Bar Association - Khi

Budget 2009-2010 at a glanceBudget 2009-2010 at a glance

(Rupees in Billions)

REVENUE

Budget Estimat

e 2008-

09

Revised Estimate 2008-

09

Budget Estimate 2009-

10

Tax Revenue

Direct Taxes

Income tax 477.0 443.3 536.2

Others 19.0 17.7 21.1

496.0 461.0 557.3

Indirect Taxes

Customs 170.0 145.0 167.2

Sales tax 472.0 457.0 515.6

Federal excise 112.0 116.0 137.4

Carbon Surcharge on POL/CNG

- - 134.0

Others 1.4 1.4 1.5

755.4 719.4 955.7

1,251.4 1,180.4 1,513.0

1



REVENUEBudget Estimate 2008-

09

Revised Estimate 2008-

09


10

Non Tax Revenue 427.8 603.2 955.7

1,679.2 1,783,6 1,513.0

Less Provincial Share 568.3 559.9 655.2

1,110.9 1,223.7 1,371.5

Net Capital Receipts 221.3 187.2 190.5

External Receipts 300.2 367.4 510.4

Self Financing of PSDP by Provinces

124.2 123.7 173.0

Change in Provincial cash balance

78.9 37.7 72.9

Privatisation Proceeds 25.1 1.3 19.3

Bank Borrowings 149.0 146.0 144.7

2,009.8 2,087.0 2,482.3

2



EXPENDITUREBudget

Estimate 2008-09

Revised Estimate 2008-09


10

Current Expenditure

General Public Services

Debt Servicing 619.4 751.6 779.6

Others 310.1 381.0 409.5

929.5 1,132.6 1,189.1

Defence Affairs & Services

296.1 311.3 342.9

Economic Affairs 201.1 136.7 84.9

Others 66.5 68.6 82.3

1,493.2 1,649.2 1,699.2

Developmental Expenditure

PSDP 472.7 378.9 646.0

Others 43.9 58.9 137.1

516.6 437.8 783.1

Total Expenditure 2,009.8 2.087.0 2.482.3

3

Key objectives for the Budget 2008-09Key objectives for the Budget 2008-09

Restore Restore economic economic stability through:stability through:

Reduction in Fiscal and Current Account deficits

- Fiscal 7.6 – 4.3 - Current 8.5 – 5.1 - Trade 9.3 – 6.5 Rationalization of subsidies

Budget 295 billion to 252 billion

Building Foreign exchange reserves US$ 12 billion to US$ 11 billion

Protect vulnerable groups through targeted program of cash transfers BISF – High inflation

Focus on Agriculture and Manufacturing sectors to enhance productivity and competitiveness

Agri = no major change Manufacturing = Declined Restore Investors confidence Declined

Remove key bottlenecks in supportive infrastructure for spurring growth Little progress

Increase social sector allocations to improve social indicators

PSDP produced by about 100 bill.

Significant addition to low cost housing for low income groups

Little progress

4

Composition of Sector GDP GrowthComposition of Sector GDP Growth

2007-08 2008-09

Economic Survey

07-08 08-09

GDP (FC) 5.8 4.1 2.0

GNP (FC) 6.1 4.1 2.6

Commodities Producing Sector 3.2 1.4 0.2

Agriculture 1.5 1.1 4.7

Major Crops (3.0) (6.4) 7.7

Minor Crops 4.9 10.9 3.6

Livestock 3.8 4.2 3.7

Manufacturing 5.4 4.8 (3.3)

Large Scale Manufacturing 4.8 4.0 (7.7)

Small Scale 7.5 7.5 7.5

Construction 15.2 (3.9) (10.8)

Electricity, Gas Distribution (14.7) (22.0) (3.7)

Service Sector 8.2 6.6 3.6

Finance and Insurance 17.0 12.9 (1.2)

5

Sectoral Contribution to GDP GrowthSectoral Contribution to GDP Growth

Sectoral Contributions to the GDP growth (Percent Point)

2006-07 2007-08 2008-09

Agriculture 0.9 0.24 1.00

Industry 2.3 0.45 -0.92

Services 3.6 3.41 1.92

Real GDP 6.8 4.10 2.00

6

InflationInflation

2007-08 2007-08(Jul-Apr)

2008-09(Jul-Apr)

Overall inflation 12.0 10.2 22.4

Food inflation 17.6 15.0 26.6

Non-food inflation 7.9 6.8 19.0

Core inflation 8.4 7.5 17.8

SPI (Sensitive Price Index) 16.8 14.1 26.3

WPI (Wholesale Price Index) 16.6 13.7 21.4

7

Savings & InvestmentSavings & Investment

(Percent of GDP)

Description 2005-06 2006-07 2007-08 2008-09

Total investment 22.1 22.5 22.0 19.7

Changes in stock 1.6 1.6 1.6 1.6

Gross fixed investment 20.5 20.9 20.4 18.1

- Public Investment 4.8 5.6 6.9 4.9

- Private Investment 15.7 15.9 15.2 13.2

Foreign Savings 3.9 5.1 8.5 5.3

National Savings 18.2 17.4 13.5 14.3

Domestic Savings 16.3 15.6 11.5 11.2

8

SubsidiesSubsidies9


Budget 2008-09

Revised Estimates 2008-

09Budget 2009-10

Current

WAPDA 75 93 63

KESC 14 19 4

TCP (Wheat & Sugar) 26 27 30

USC 3 4 4

Oil Refineries / OMC / Others 140 70 15

Others 2 7 4

260 220 120

Development

Import of Fertilizers 35 32 10

Benazir Track Support Program - - 2

Total Subsidies: 295 252 132

Key objectives for the Budget 2009-10Key objectives for the Budget 2009-10 10

Provide protection to poor and vulnerable against the current economic downturn.

Key Objectives

Revive manufacturing and industry, especially export oriented industry.

Broaden tax base, instead of overburdening the existing tax payer.

Restrain unnecessary imports to improve the Balance of payments position.

Budget for a Common ManBudget for a Common Man

Key Drivers

11

Welfare of the people

Reduce unemployment and

creation of jobs

Reduce inequity of distribution of

Target reductionof Poverty

Focus on Agriculture value addition,

productivity and research

Rationalize subsidies

Skills development

Induce growth of manufacturing

sector and productivity improvement

Skills DevelopmentAnd Training

Improve Tax GDP ratio

Enhance social sector allocations

Provide quality health and other

services at affordable costs

Direct cash transfers

Micro-finance reach

Access to basic needs

Inflation target

Common Man’s Perception of Common Man’s Perception of Economic DevelopmentEconomic Development

Food at affordable prices

Health support on efficient basis Housing and shelter

Access to utilities (water, power, gas, telephone) on consistent basis at affordable cost

Education

Good quality at low costs

Aligned to required skills and vocational development demand

Employment opportunities – Massive investment in human capital

Freedom of access to information

Value for contribution to federal, provincial and local revenue

Good governance

Potential for vertical migration in terms of quality of life and a mechanism to balance consumption and savings

12

Common Man’s Perception of Common Man’s Perception of Economic DevelopmentEconomic Development

Supply side planning and reforms

Balance between consumption and savings

Inflation

Strengthening of direct government intervention

Import Substitution

Social Sector

Inequality

Growth to be inclusive

Ensuring efficiency and productive utilization of PSDP

Accelerated focus on Social sector

Reallocation of resources from general administration, defence; etc. Raise revenue from Financial Services and other Profitable Sector like trading etc. for direct transfer to social sector to be managed by an independent representative body

MDG’s to be real goals rather than compliance of commitments. These goals should be dynamic and progressive

13

Pakistan Economy – SWOT AnalysisPakistan Economy – SWOT Analysis

• Intensity of war against terror• Issues in Balochistan and Northern Areas• Worsening of situation on Western borders• Anti Pakistan attitude in Afghanistan• Level of corruption• Broadening gap between Rich and Poor• Social unrest• Public discontent with the policies which may threaten reform process• Increasing trend of terrorist activities• Pressure on exchange rates• Soaring core and food inflation• Worsening law and order situation• Large number of IDPs• Increasing oil prices

Threats

Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability Strong large population base with potential to be a sizeable market Medium term Development framework IMF stabilization stand by arrangement Consensus on major political issues including fight against insurgency and extremism Sustainable external and domestic debt Most liberal foreign investment regime Tariff barriers are being reduced

Strengths

• Credibility of statistics• Quality of governance• Low Tax / GDP ratio• Incompatible contribution of various sectors of Economy in tax revenue• Inefficiency in utilization of development expenditure• High unproductive non development expenditure• Continued trade and fiscal deficits• Low level of Foreign Currency reserves• Economy vulnerable to external shocks• Dependence on aid and loans from multilateral institutions and bilateral parties • Potential impact of global recession on exports and expats remittances• High cost of doing business• Poor HDI indicators• Decline in trend of Foreign investment• Continued subsidies for loss making public sector enterprises• Inequality in distribution of income• Continued increase in poverty• Fragile political system

Weaknesses

• Capacity constraints with India in IT sector• BPO’s potential• Telecom and Media revolution• Geo political situation• Foreign Direct Investment• Investment in education and health • Lapsing of WTO multi-fibre agreement• Global financial crisis• Focused skills development to secure dividend from

demographic advantage• Global intent and support in our fight against extremism• IMF stabilization program• Friends of Pakistan Forum

Opportunities

14



Strengths

15


Credibility of statistics Quality of governance Low Tax / GDP ratio Incompatible contribution of various sectors of Economy in tax revenue Inefficiency in utilization of development expenditure High unproductive non development expenditure Continued trade and fiscal deficits Low level of Foreign Currency reserves Economy vulnerable to external shocks Dependence on aid and loans from multilateral institutions and bilateral parties Potential impact of global recession on exports and expats remittances High cost of doing business Poor HDI indicators Decline in trend of Foreign investment Continued subsidies for loss making public sector enterprises Inequality in distribution of income Continued increase in poverty Fragile political system

Weaknesses

16


Capacity constraints with India in IT sector BPO’s potential Telecom and Media revolution Geo political situation Foreign Direct Investment Investment in education and health Lapsing of WTO multi-fibre agreement Global financial crisis Focused skills development to secure dividend from demographic advantage Global intent and support in our fight against extremism IMF stabilization program Friends of Pakistan Forum

Opportunities

17


Intensity of war against terror Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process Increasing trend of terrorist activities Pressure on exchange rates Soaring core and food inflation Worsening law and order situation

Large number of IDPs Increasing oil prices

Threats

18


Sustainability of growth momentum Addressing structural problems in energy, agriculture and exports sector Job creation Poverty alleviation Improving social indicators and enhancement of safety nets Strengthening of physical infrastructure Converting the demographic transitions into demographic dividend Leverage the current strategic role in achieving meaningful economic dividends

Supply side improvement to match growing domestic demand Achieve political stability and institutional strengthening Harmonious relationship amongst Federation and its units Equitable distribution of resources between Federal, Provincial and Local governments Revenue generation by provinces Balanced approach of combination of Fiscal and Monetary Policy measures to

combat inflation Containment of exposure to war on terror

Challenges

19


• Intensity of war against terror• Issues in Balochistan and Northern Areas• Worsening of situation on Western borders• Anti Pakistan attitude in Afghanistan• Level of corruption• Broadening gap between Rich and Poor• Social unrest• Public discontent with the policies which may threaten reform process• Increasing trend of terrorist activities• Pressure on exchange rates• Soaring core and food inflation• Worsening law and order situation• Large number of IDPs• Increasing oil prices

Threats


Strengths

• Credibility of statistics• Quality of governance• Low Tax / GDP ratio• Incompatible contribution of various sectors of Economy in tax revenue• Inefficiency in utilization of development expenditure• High unproductive non development expenditure• Continued trade and fiscal deficits• Low level of Foreign Currency reserves• Economy vulnerable to external shocks• Dependence on aid and loans from multilateral institutions and bilateral parties • Potential impact of global recession on exports and expats remittances• High cost of doing business• Poor HDI indicators• Decline in trend of Foreign investment• Continued subsidies for loss making public sector enterprises• Inequality in distribution of income• Continued increase in poverty• Fragile political system

Weaknesses

• Capacity constraints with India in IT sector• BPO’s potential• Telecom and Media revolution• Geo political situation• Foreign Direct Investment• Investment in education and health • Lapsing of WTO multi-fibre agreement• Global financial crisis• Focused skills development to secure dividend from

demographic advantage• Global intent and support in our fight against extremism• IMF stabilization program• Friends of Pakistan Forum

Opportunities

20

Sustainability of growth momentum Addressing structural problems in energy, agriculture and exports sector Job creation Poverty alleviation Improving social indicators and enhancement of safety nets Strengthening of physical infrastructure Converting the demographic transitions into demographic dividend Leverage the current strategic role in achieving meaningful economic

dividends Supply side improvement to match growing domestic demand Achieve political stability and institutional strengthening Harmonious relationship amongst Federation and its units Equitable distribution of resources between Federal, Provincial and

Local governments Revenue generation by provinces Balanced approach of combination of Fiscal and Monetary Policy

measures to combat inflation Containment of exposure to war on terror

Challenges

THANK

YOU !

Presenter’s contact details

SYED MASOUD ALI NAQVISYED MASOUD ALI NAQVI

Senior PartnerSenior Partner

KPMG Taseer Hadi & Co.KPMG Taseer Hadi & Co.

+92 (21) 568 5847+92 (21) 568 5847

[email protected]@kpmg.com

www.kpmg.com.pkwww.kpmg.com.pk

Macro Economic stability & real sector growth

Real GDP is expected to grow by 3.3 percent in 2009-10 and by 4 and 4.5 percent during Fiscal Years 2010-11 and 2011-12 Sectoral growth rates expected

- Agriculture - 3.8 percent- Manufacturing - 1.8 percent- Services - 3.9 percent

Inflation target for 2009-10 is 9.5 percent and will be brought down to 7 and 6 percent during Fiscal Years 2010-11 and 2011-12 Current expenditure to decline by 15.3 percent of GDP in FY 2009-10 and 14.7 percent of GDP in 2010-11, owing to elimination of unproductive subsidies Measures for documentation of the economy and broadening of the tax base Total revenue to grow by 15.7 percent and FBR collections to grow by 16.8 percent Tax to GDP ratio will be 9.6 percent (9 percent in 2008-09) Revenue as a percentage of GDP at 14.7 percent in 2009-10 and will increase to 15.1 percent in 2010-11

Targeting the poor and vulnerable

Benazir Income Support Programme (BISP)

-Rs. 70 billion from Rs. 22 billion-Social assistance Program – Health Insurance up to Rs. 25,000 per family-Poverty exit strategy, training and employment, social mobilization program-Transparency to be enhanced-Plan to have Social Security Protection Program

People Works Program

Rs. 35 billion to create employment opportunities

Targeting the poor and vulnerable

Workers Welfare

- Rs. 10.8 billion for workers welfare development schemes- Marriage grant enhanced from Rs. 50,000 to Rs. 70,000- Cash back of 9,469 housing units / flats for workers

Microfinance Plan to increase outreach from 2 million to 3 million houses

Housing - Low income population community participation and squatter settlement regulation- Allocation of flats in Islamabad for working journalists- Tax credit for loans increased from Rs. 500,000 to Rs. 750,000

Agriculture–Increasing Productivity and Value Addition

Upgrade existing R&D facilities and set up two world class research institutes for wheat and cotton Development of new technologies Productive use of water through precision land leveling and high efficiency irrigation systems Promote production and export of high value crops Focus on live stock rearing, dairy production, fisheries and horticulture Creating necessary infrastructure Ensure availability of Agriculture credit Common facilitation centers Ten model agricultural union councils for each major crop across country Promotion of model organic farming


Allocation in PSDP increased from Rs. 14.4 billion to Rs. 18 billion Rs. 2.5 billion proposed for food security and productivity enhancement of farmers Plan to treat livestock, Agriculture and fisheries as an industry Agreement with Monsanto of US to introduce genetically modified cotton Farmers will be offered BT cotton hybrids varieties National on Farm Water Management Program implemented Water sector Rs. 60 billion

- 32 small and medium Dams- 12 billion for raising of Mangla Dam including

resettlement- Rs. 10 billion for improvement of water courses- Rs. 15 billion for canal improvement and rehabilitation of

irrigation system Benazir Tractor scheme - Rs. 4 billion over two years A new Agricultural model village programme in 26 villages


Capacity Enhancement of Dairy Products under Public Private Partnership’ a project worth Rs 3.5 billion (Rs.300 million in 2009-10) Poverty Reduction through Small Holders Live Stock and Dairy Development’ worth Rs 3.5 billion (Rs 400 million in 2009-10) More model dairy community, biogas and breeding farms, cooling tanks, rural services providers and pasteurization plants Focus on fisheries

- lifting European Union’s ban on fisheries export by upgrading fishing vessels

- improvement of infrastructure facilities for value added products

- establishing a fisheries training centre at Gawadar

- landing sites along the coastal line- reducing post harvest losses through improved

fish handling along the food chain and marketing

- establishment of shrimp aquaculture in the country

Industry

Export Investment Support Fund of Rs. 40 billion- Government – Rs. 10 billion- Export Development Fund – Rs. 10 billion- Government agencies – Rs. 20 billion

Fund for credit guarantee for SME sector – Private Public partnership (Rs. 2.5 billion from Government in 2009-10) Venture Capital Fund – Private Public partnership Create new DFI for industrial financing Industrial clusters for skill development Allocation of M/o industries from Rs. 2 billion to Rs. 8.7 billion Allocation for science and technology from Rs. 1.5 billion to Rs. 3.1 billion

Industry

Automobile Reduction of 5% FED

Construction FED on cement reduced by Rs. 200 per ton

Textile - Withdrawal of FED on import and supply of Viscose Staple Fiber (VSF)

- Zero rating of chemicals used in manufacture of Fire retardant fabrics

Cellular service providers

- Regulatory Duty of Rs. 250 per set eliminated- Reduction in Customs Duty from Rs. 500 per set to Rs 250 per set- FED reduced from 21 percent to 19 percent- Sim activation charges reduced from Rs. 500 to Rs. 250

Industry

Priority allocation of gas and electricity Cross subsidy in electricity and gas tariffs would be reduced in a phased manner Large Export Houses to be established Special Economic Zones and Special Industrial Zones to

be fast tracked Corporate Rehabilitation Act (CRA) to improve

bankruptcy and insolvency regime Resolution Trust Corporation (RTC) to promote consolidation of industry Transparent privatization policy based on Public Private Partnership National Trade Corridors Improvement Program launched Enhanced allocation for infrastructure development Custom duty reduced on raw materials for poultry, dairy, fish processing and pharmaceuticals

Industry

PSDP for energy sector increased from Rs. 11.4 billion to Rs. 22.8 billion Circular debt of energy sector being reduced to create liquidity for power sector Projects for transmission and distribution system are being undertaken – 15 IPPS with capacity of 2,921 Megawatts (13 to be completed by 2010) Five rental power projects for 800 Megawatts 16 Hydro power projects with capacity of 4,160 Megawatts initiated Plan for electrification of all villages Conservation measures are also being undertaken Ideal policy mix for hydel, coal, wind and solar power

Human Resource Development

Establishment and operation of basic education and community schools (Rs. 2 billion)

Education for All - through providing missing facilities to primary schools (Rs 2 billion)

Development funding to Higher Education Commission enhanced to Rs 22.5 billion (60% increase) in 2009-10; current budget provision also enhanced by 26% to Rs. 21.5 billion

National Vocational & Technical Education Commission to target one million trainees every year in a phased programme (Rs. 2.2 billion in 2009-10)

Skill development (vocational/technical) programmes aimed for labour export market are being planned

Health

PSDP increased by 66 percent, from Rs. 13.99 billion in 2008-09 to Rs. 23.15 billion in 2009-10

Family Planning and Primary Healthcare and Immunization programmes with allocations of Rs. 7 billion and Rs. 6 billion respectively

The Prime Minster’s Emergency Action Plan for disease launched (Rs. 11 billion in the next five years)

Concessionary import duty rate on 35 raw materials used in pharmaceuticals, medicines and diagnostic kits

Zero rate sales tax on import and supply of wheelchairs for the special people

Tobacco taxation is being increased as per WHO recommendations

Youth Affairs, Culture and Sports

Different programmes for youth motivation, character building, awareness and integration, and establishment of youth activity centers - under the National Youth Policy

Approximately 30,000 educated postgraduates will be offered internships under the National Internship Programme (Rs 3.6 billion in 2009-10)

A Mobile Youth Computer Literacy and Awareness Programme launched

Approximately 15,000 volunteers registered for community development activities and disaster management

Rs 450 million in 2009-10 for cultural development (Rs 186 million over the previous year)

Special focus on the development of sports - Rs 583 million allocated in 2009-10 (Rs 140 million in 2008-09

Governance of Just and Fair system

Establishment of Public Defender and Free Legal Aid System

Establishment of Fast Track and Evening Courts at the federal level and provincial headquarters

Pro-poor legislation and automation of the justice sector Monetizing incentives for civil servants Making public sector ‘Employer of choice’ Improved service delivery Greater transparency and self-accountability Market-based competitive salary structure


An ad-hoc relief allowance of 15% of pay for serving government servants from 1 July 2009

An increase in the allowance of armed forces deployed on the western front equal to one month’s initial basic pay with effect from 1 July 2009

For the remaining armed forces personnel, allowance equal to one month’s initial basic pay will be admissible from 1 January 2010 and in the interim period, an adhoc relief allowance of 15% of pay

The retired government servants and armed forces personnel will also get 15% increase in their net pension from 1 July 2009

Limit for the exemption on Income Tax for salaried male enhanced from Rs 180,000 to Rs 200,000


Limit for the exemption on Income Tax for salaried female enhanced from Rs 240,000 to Rs 260,000

Senior citizens will now enjoy 50 percent relief in their tax liability in case of income upto Rs 750,000; previously this limit was upto Rs 500,000

Reform process for Public sector enterprises including Pakistan Railways, Pakistan Steel Mills, Pakistan International Airlines and the Power Distribution Companies

Corporate status for National Savings Organisation and the Federal Bureau of Statistics

Tuesday, 16 June 2009 – Hotel Regent Plaza, Khi IMPACT OFBUDGET ON ECONOMY The Income Tax Bar...

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