Below is the remaining text of budget speech.

of achieving revenue targets by arbitrarily altering the tax rate only and failure to recognize the importance of enhancing the tax base in order to establish a more efficient, equitable and robust tax system has led to calamitous results.

The consequence; today out of a population of 220 million people only 1.9 million are filers of income tax return, and out of these only 183 thousand paid tax with their annual returns. Equally alarming are numbers of sales tax filers which are 141 thousand, out of which only 43 thousand are paid taxes with their returns. Pakistan’s tax to GDP ratio is 12% which is amongst the lowest not only in the region but also in the world whereas the current expenditure layout necessitates a tax to GDP ratio should be 20%.

It is in this backdrop that this government has chosen a tax reform agenda which has mandated tough choices, which are proposed to be made not only to ensure macroeconomic stability but also national integrity for future generations.

To start with I shall briefly put forth before the august house the broad principles of the proposed taxation measures for FY 2019-20 which are embodied in the Medium Term Policy Framework envisioned by this government. The framework is pivoted around bridging the tax gap in revenue collection and actual potential in medium term. Pakistan’s tax expenditure has been estimated at Rs. 972.4 for fiscal year 2018-2019.

This expenditure is a consequence of the multiple tax exemptions and concessions provided to various sectors of economy. Where these exemptions and concessions serve as an incentive on one hand, at the same time they tend to distort market competition and result in forfeiture of a large quantum of tax revenue. Besides enhanced revenue generation, an allied outcome of scaling down these exemptions and concessions would be the broadening of tax net.

Two pronged efforts are proposed to be made to  minimize the tax gap: (1) phasing out tax exemptions and concessions (2) gradual uniformity in VAT rate and review of special procedures. Our focus shall be to ensure effective and harassment free taxpayer compliance.

IT based interface between taxpayer and tax collector shall be introduced to minimize point of contacts between the two by employing virtual platforms.

This would reduce the trust deficit between the taxpayer and the tax department and also minimize the cost of tax compliance. Steps are proposed to be taken to reduce the quotient of regression in our tax system by taxation of real income instead of presumptive taxation and by eliminating unnecessary withholding taxes, a natural corollary of which would be visible in Pakistan’s ranking on the Ease of Doing Business Index.

Documentation of economy shall be the main thrust in upcoming years to broaden the tax base by the extensive use of data analytics of the data bases existing with government organizations and by generating pre populated returns.

The Government introduced a reform package by  promulgating the Assets Declaration Ordinance, 2019 to allow the non- documented economy’s inclusion into the taxation system and serve the purposes of economic revival and growth by encouraging a tax compliant country.

Now I shall place before the House relief and tax measures that are proposed to be introduced in the current Budget starting with the Customs Duty.

Customs

(1) In the past, due to lower revenues from domestic taxes, customs tariffs were harshly used to enhance revenues from imports. At present, Pakistan has the highest average customs tariffs and import stage revenues in the region.

While the revenues from imports increased steeply, costs of imported raw materials and intermediary goods also increased, negatively impacting competitiveness of both domestic and export industries. The government strongly believes that customs tariffs rationalization is a key requirement to boost exports and domestic manufacturing.

For this purpose, duty on more than 1600 tariff lines, being raw materials and intermediaries in principle, is being exempted in this budget. This measure will cause a revenue loss of around Rs. 20 billion but much higher gains are expected in return from industrial growth. The government is finalizing a customs tariff reforms plan which will be implemented in phased manner.

(2) Textile sector is important, and government’s policy is to support this sector with exemption of duty on various accessories and parts of textile machinery. Similarly, duty on Elastomeric yarn and non- woven fabric is to be reduced.

 (3) Paper plays a very important role in country’s education sector as its prices affect overall cost of education. Basic raw material for paper production i.e. wood pulp and paper scrap, may be exempted from customs duty and duty on different types of paper may be reduced from 20% to 16%.

This will reduce prices of paper and books in the country and encourage printing industry. Special considerations are being given for Quran publication.

(4) To promote non-traditional exports, duty on some of the inputs of wooden furniture and razor manufacturing may also be reduced, from 3% to 0% on wood and from 11% to 3% on wooden veneering panels to save local forests and to encourage furniture manufacturers. Decrease in duty from 11% to 5% on steel strip for razor exporters is also being proposed.

(5) To reduce input costs of domestic home appliance industry, printing plate industry, solar panel assemblers and chemical industry, duties on their inputs like parts/components of home appliance, aluminum plates, metal surface agents and Ascetic acid may also be reduced.

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In  order to encourage investment in large scale manufacturing, exemption of duty is also being proposed on import of plant & machinery for setting up Hydrocracker plants for oil refining.

(6) Prohibitive regulatory duties to save forex reserves succeeded in creating import compression but some of these items shifted to transit trade and were smuggled back. It is proposed that duty structure on tyres, varnishes and food preparations for food industry may be rationalized to discourage their shifting to smuggling and realize the lost revenues on this account.

(7) Increasing costs of living has made the life of common man very difficult. To reduce cost of medicines for general public, 19 items of raw materials and essential items of medicinal use are being proposed to be exempted from 3% import duties.

Similarly, medicines for rare diseases like Wilson’s disease and Cystinosis disease are proposed to be exempted from import duties. Hemodialyzer is used in hydrolysis equipment for patients suffering from kidney failure. It is proposed that its raw materials and components may be allowed duty free import for local manufacturers.

(8) To promote exports different export facilitation schemes are being simplified and automated to minimize human interaction and expedite processing in a transparent manner. It is pertinent tocmention that during first eleven (11) months of the current fiscal year, duty free concessions worth more than Rs. 124 billion were allowed on the imports of inputs and raw materials by the prospective exporters under different Export Facilitation Schemes.

In order to further reduce time lag for exporters, their input/ output ratios are being proposed to be accepted provisionally subject to final determination, without causing any delay in fulfilling export orders.

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 (9) One administrative tier is being reduced by making the Additional Collector as regulatory authority of certain export facilitation schemes. At present, plant, machinery and equipment, brought duty free under different export facilitation schemes, cannot be disposed off without payment of duty/taxes before ten (10) years of their import.

In order to encourage exporters to upgrade to new machinery and technology, it is being proposed that this period may be reduced to five (5) years. For disposal before five years, the option to pay duty and taxes at different depreciated rates is also being proposed.

(10) Money laundering is a menace and source of bad publicity and economic cost, a completely new regime is being proposed to curb the practice of trade-based money laundering.

A new separate Directorate of Cross Border Currency Movement has also been established for focused enforcement against money laundering and currency smuggling to reflect Pakistan’s commitment towards fulfilling FATF’s action plan.

In order to further strengthen drive against smuggling in the border areas, separate preventive collectorates have been established in Karachi, Peshawar and Quetta. (11) Pakistan customs, like other modern customs administrations, has been using risk management system to expeditiously clear cargo through an automated system.

In order toc provide a more comprehensive legal cover to the use of risk management as a tool throughout customs controls, detailed legal provisions are being proposed to be added in the Customs Act. (12) The government has to take some tough decisions to meet its expenditures.

Realizing the fact that any increase in duty and taxes at import stage is passed on to the consumer, effort has been made to keep revenue measures from import stage at a bare minimum.

It is being proposed that the rate of additional customs duty may be enhanced from existing rate of 2% to 4% and 7% on tariff slabs of 16% and 20%, respectively, which in principle, are finished  products, including luxury items. Presently, LNG is exempted from customs duty. Since LNG has replaced Furnace oil which was subjected to 7% customs duty, it is being proposed to levy 5% customs duty on the import of LNG.

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Sales Tax

In the interest of poor people at large the Government has not adopted the easier option of collecting revenue by increasing the general sales tax rate of 17%.

RELIEF MEASURES

Fixed Sales Tax on Brick Kilns Presently, brick kilns are being taxed at standard rate of 17%. It is proposed to decrease the rate of sales tax from 17% to a fixed rate based on location. The industry pertains to rural area, where it is difficult to fulfil the requirement of documentation.

Therefore, this measure shall ensure improved compliance at a lower cost. Reduced Rate of Sales Tax on Food Supplied By Restaurants and Bakeries Food related inputs such as meat, vegetables, flour etc are difficult to document and resultantly require increased cost of enforcement.

Therefore, in order to encourage compliance at a minimal cost of enforcement for the tax authorities, it is proposed to reduce the sales tax rate from 17% to 7.5% against which input tax adjustment will not be allowed.

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Reduction of Rate of Sales Tax on Concentrated Milk (Powder) Presently, the sales tax regime on various forms of milk powder is not uniform. Similar products are subject to varied tax rates. Therefore in order to remove this anomaly it is proposed to tax both milk and cream, concentrated, and unsweetened / unflavoured at 10% instead of current 17%.

Removal Of Bar On Export of PMC and PVC to Afghanistan Removal of bar on export of PMC and PVC is proposed by zero rating export of these items to Afghanistan and Central Asian Republics.

This measure would encourage local manufacturing of the aforementioned materials in the country and at the same time shall also promote exports. Reforming Extra Tax Regime Currently extra tax of 2%, in addition to standard sales tax, is payable on many items such as electric and gas appliances, foam, confectionary, armsc and ammunition, lubricants, batteries, auto parts, tyres / tubes etc. In order to realise full revenue potential it is proposed that these items (auto parts and arms & ammunition) be moved to Third Schedule (retail price taxation) of the Sales Tax Act, 1990.

In respect of two remaining items i.e. auto parts and arms & ammunitions, it is proposed to withdraw extra tax on the same to reduce the cost of production of local industry.c  Expansion of Exemption to Tribal Areas After the merger of FATA and PATA exemptions were extended for five years in respect of supplies to promote economic activity.

It is proposed to extend exemption to tax on import of industrial raw materials and plant and machinery also. Additionally, exemption is also proposed for supply of electricity to all residential and commercial consumers and to industries set before 31-5-2018 excluding steel and ghee sector in these areas. Withdrawal of 3% value Addition on Import of Mobile Phones

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Currently commercial imports are subject to 3% value addition tax which has unnecessarily increased the tax burden. Therefore, it is proposed that 3% value addition tax on import of mobile phones maybe withdrawn.

This measure would also ensure rationalization of tax on import of mobiles. Reforming 3% Value Addition Tax – Petroleum Products Exclusion of VAT is only available on those products imported by OMCs where prices are regulated. It is proposed that exclusion be provided to all Petroleum products like furnace oil, imported by the OMCs.

Simplification of Law and Reduction in Rules and Procedures Through the years the Sales Tax law has become a complex phenomenon by insertion of multi tiered taxation and subordinate legislation. After thorough study the Special Procedures Rules are being abolished and made part of the Sales Tax Act. All redundant SROs are also being rescinded

REVENUE MEASURES

Streamlining SRO 1125(I)/2011 Regime SRO 1125(I)/2011 provides for zero-rate of sales tax on inputs and products of five export-oriented sectors i.e. textile, leather, carpets, sports goods and surgical goods.

The objective was to resolve delay in refund payments. However, zero-rating has created loophole and the benefit is being availed by unintended beneficiaries / non-exporters. Reduced rates for finished goods are also harming revenues. To streamline and prevent revenue leakage following measures are proposed:

• SRO 1125 be rescinded, thus restoring standard rate of 17%

• The rate of sales tax on local supplies of finished articles of textile and leather and finished fabric may be raised to 17%.

However, retailers opting for real time reporting shall be given a relaxation of rate which shall then be charges @

15%.

• Zero-rating of utilities be withdrawn.

• Refund of sales tax to these sectors be automated, thus ensuring that the sales tax paid on inputs is immediately refunded. Refund Payment Orders (RPOs) shall be immediately sent to SBP for payment.

• Ginned cotton which is presently exempt is proposed to be subjected to reduced rate of 10% Restoration of Normal Regime for Steel Sector Currently sales tax from steel sector is collected through electricity bills at Rs. 13 per KWH. Imported scrap used in making billets is subject to sales tax at Rs. 5,600 / MT which is adjustable.

For ship-breakers, ships imported for breaking are exempt from payment of sales tax. However, for ship-plates obtained from breaking of ship, sales tax is payable at Rs. 9300 per MT. Further, steel industry set up in tribal areas is exempt from payment of sales tax and steel units in other areas are not able to compete with them. In order to do away with this complex regime and realise the actual revenue potential of this sector, it is proposed:

1. The special procedure may be scrapped and these items be brought in normal tax regime.

2. Billets, ingots, bars, ship plates and other long profiles may be subjected to FED at 17% in sales tax mode in lieu of sales tax for the reason that there is no exemption from FED for tribal areas.

3. Minimum benchmarks are also being set of electricity consumption and production.

Increase in Fixed Value of Gas Supplied To CNG Dealers Since the deregulation of CNG prices by OGRA, CNG prices have risen. However, tax rates have not be rationalised proportionately.

Therefore it is proposed that but government the value for the CNG dealers may be increase in respect of Region I from Rs 64.80 per kg to Rs 74.04 per kg and in respect of Region II from Rs 57.69 per kg to Rs 69.57 per kg.

Change in the Retailers Regime Retailers have been divided in tiers to pay sales tax .Tier-I retailers: Standard regime or 2% turnover. Tier-II taxed through electricity. Turnover tax is proposed to be abolished .Tier-I retailers shall be linked with FBR’s online system. Incentive to buyers to buy from integrated and demand invoices shall be refund of sales tax up to 5% of the tax amount.

Shop with size of 1000 sq ft or more will also be included in Tier-I retailers. Increase in Rate of Tax on Sugar Presently Sugar is subject to sales tax at 8%. This sector has huge economic potential but the tax collection from this sector is Rs 18 billion which is much lower than its actual potential.

To minimize this tax gap and to harmonize its rate with other items, it is proposed that the sales tax rate on sugar may be enhanced to 17 %.

However, to provide partial relief to the consumer from this rate enhancement, it is proposed that the sugar may be excluded from the items on which further tax at 3% is payable if supplied to unregistered persons. The price increase as a result of this measure is expected @ Rs. 3.60 per kg. Review of Exemptions under Sixth Schedule

Following exemptions is proposed to be moved to be withdrawn, thus subjecting these items to 17%, if sold in retail packing with brand name as the consumers of these goods can bear the burden of taxes:

Sausages,Meat and similar products of prepared frozen or meat offal including poultry, meat and fish.,fat filled milk, in liquid or powdered form and Cereals and flours , other than those of wheat and meslin, falling in PCT Chapter 11

Exemption of Cottage Industry Exemption to cottage industry is being grossly misused it is proposed to redefine it to include:

• Not having an industrial gas/electricity connection

• Located in residential area

• Employing not more than 10 labourers working

• Annual turnover is not more than Rs. 2 million

Insertion of Gold, Silver, Diamond and Jewellery in Eighth

Schedule to the Sales Tax Act, 1990 – Reduced Rate

Based on international best practices and to broaden the tax net, it is proposed to introduce reduced rate/minimal tax rate on gold, silver, diamond and jewellery. Special procedure for Marble Industry Rate of tax is Rs 1.25 per unit of electricity. It is proposed to introduce normal regime in this sector.

Provisions to Be Added in the ICT Law It is proposed that services which have been made liable for tax in the provincial laws and are found absent in the ICT law may be inserted accordingly.

Secondly, services which are already liable for FED shall not be inserted in ICT Law to avoid double jeopardy.

MEASURES FOR EASE

OF DOING BUSINESS

Section 58 of Sales Tax Act, 1990 – Enabling Directors etc to Recover Paid Dues

This measure shall enable the director or a shareholder to recover the tax paid from the Company also.

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Simplification of sales tax registration – Ease of Doing Business Sales tax registration procedure is being simplified so that contact between the tax collectors and tax payers is almost eliminated and verification be made through NADRA Decreasing the Legislative Burden of Federal Government Cabinet On the instructions of the Cabinet Division substantive powers shall remain with Federal Government.

Proposals have been prepared to replace the words “Federal Govt” with that of “the Board” or “the Board with the approval of Minister-in-charge” in relation to procedural matters. De-registration and Blacklisting Rules related to deregistration are being amended to facilitate the taxpayers. Now during the process of deregistration return filing will not be compulsory.

FEDERAL EXCISE

REVENUE MEASURES

Following measures are proposed for Federal Excise Duty: Increase in FED on Aerated Waters In order to harmonize the rates of taxes of different items, rate of FED on aerated waters is proposed to be increased. Restoration of Normal Procedure for / Increase in Fed on Ghee/Cooking Oil Vegetable ghee and cooking oil are subject to FED only.

Manufacturers only pay Rs1 per kg on value addition and Rs .40 per kg on value addition of edible oilseeds imported. Collection of taxes is very less as compared to its actual potential: Rs. 466 million for their value addition and Rs 42 billion at import stage despite the fact that 27% of edible oil production is local.

It is proposed to increase rate of FED to 17% on edible oils / ghee / cooking oil and do away with Rs. 1 / kg tax in lieu of value addition tax and do away with concessional rates on edible seeds.

Ghee cooking / oil which is sold in retail packing under a brand name is proposed to be subject to sales tax at 17% of retail price. It is proposed to restore normal FED regime in sales tax mode under which industry pays FED on actual value addition.

FED on Packaged Non-aerated Sugary / Flavoured Juices, Syrups & Squashes In view of the health hazards FED proposed to be introduced at rate of 5% of RP. Increase in Federal Excise Duty on Cement Cement is chargeable to federal excise duty @ 1.5 per kg. It is proposed to increase federal excise duty on cement to Rs. 2 per kg. FED on LNG Increase in FED on import of LNG from Rs. 17.18 per 100 cu. m to Rs. 10 per MMBTU as for local gas FED on Cars Through Finance Supplementary Second Amendment Act 2019 FED on cars 1700 cc and above was introduced @10%. Now it is proposed to enlarge the scope of FED and following slabs are being introduced as Cars from 0 to 1000cc at 2.5%, Cars from 1001cc to 2000cc at 5% and Cars from 2001cc and above at 7.5 % Increase in FED on Cigarettes

FED on cigarettes is levied on fixed rate basis. The rates need to be increased each year to account for increase in prices. FED is proposed to be increased. Traditionally cigarettes are taxed in two slabs but during 2017 a third tier was introduced to attract low priced illicit market which did not yield desired results.

The upper slab will be taxed from Rs 4500 per 1000 sticks to Rs 5200 per 1000 sticks. For lower slab the existing two slabs will be merged to Rs 1650 per 1000 sticks

The proposal is to collect Rs 147 billion compared to estimated Rs. 114 billion for 2018-19.

Income Tax

International best practices reveal that taxes are the outcome of documentation of economic transactions. The primary theme of this budget is to improve documentation of economy and collect taxes from the people who can afford it instead of collecting taxes from withholding and presumptive tax regime.

(To be continued)