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The Original Article By Amir Jahangir was Published in the Narratives Magazine
The Financial Act for 2023-24 presents an ambitious plan for the Pakistani economy, demonstrating optimism for growth in revenue generation and spending. However, it also foresees an enlarged budget deficit, indicative of the challenging economic situation the country is currently facing.
Firstly, the Act projects a substantial increase in total receipts, expecting them to rise from the revised figure of Rs 8,429 billion in 2022-2023 to Rs 12,170 billion. This impressive increase seems to be reliant largely on the growth of tax and non-tax revenues, signaling an effort to enhance the effectiveness of tax collection systems and explore other sources of income.
However, while revenue growth is expected, the Act also forecasts a considerable rise in the provincial share in federal taxes, implying a growing focus on empowering provincial governments and supporting their development projects. This leads to an expected net revenue of Rs 6,894 billion, up from Rs 4,300 billion the previous year, demonstrating a noteworthy increase.
On the expenditure side, there is a significant rise in both current and developmental spending. Current expenditure is projected to grow from Rs 13,947 billion to Rs 17,928 billion, a substantial increase that could reflect higher costs in public service delivery or increased debt servicing. Developmental expenditure, on the other hand, sees a modest rise, demonstrating a continued commitment to infrastructure and other development projects.
Unfortunately, despite the expected rise in revenues, the Act projects an enlarged budget deficit of Rs 12,643 billion, an increase from Rs 10,694 billion the previous year. The gap between government revenue and spending represents the primary challenge for the Pakistani economy. The financial plan outlines a combination of domestic and foreign borrowing, as well as nominal privatization proceeds and surplus from provinces to bridge this gap.
The Financial Act 2023-24 envisions an ambitious plan for fiscal management in Pakistan, aiming to increase revenue significantly, support provincial governments, and maintain development projects. However, the projection of a larger budget deficit, necessitating greater borrowing, highlights the economic challenges that lie ahead.
It is important to remember that these projections are only planned figures. The actual outcomes will depend on a variety of factors including global economic conditions, domestic political stability, effective execution of the plan, and unexpected crises. As such, the final verdict on the success of the Financial Act 2023-24 can only be assessed post-implementation.
The sector-wise budget allocations for Pakistan in 2023-2024:
The federal budget for the fiscal year 2023-24 in Pakistan has been unveiled, outlining the allocation of resources and planned expenditures. This budget plays a crucial role in shaping the country's economic landscape and reflects the government's priorities for development and growth. The breakdown of resources and expenditures provides insights into the financial plans for the upcoming year.
A Comparative Table for Pakistan's Finance Act Budget 2022-23 Vs. 2023-24:
As the total revenue and expenditure for the upcoming fiscal year 2023-24 are projected to be higher than the previous year. This is due to a number of factors, including the expected increase in tax revenue and the government's commitment to increasing development spending. However, the budget deficit is also projected to be higher, which means that the government will need to borrow more money to finance its spending.
The debt-to-GDP ratio is also projected to increase, which is a cause for concern. However, the government is hoping that the economic growth rate will be higher in the upcoming year, which will help to reduce the debt burden.
The defense sector received the largest allocation, followed by civil administration and pension. The development budget is the highest it has ever been, with an allocation of Rs. 1,150 billion.
Pakistan's Budget 2023-24: Key Highlights and Implications:
Pakistan's Budget for 2023-24 presents a mixed picture with notable gains, setbacks, and missed opportunities. While the government has taken steps to promote industrial growth, support agriculture, and encourage energy efficiency, challenges remain in areas such as stock exchange implications, non-filer management, and the textile sector. Implementing essential reforms and fostering a favorable business environment will be crucial for Pakistan's economic revitalization. It is essential to address the severity of the economic crisis, expand the tax base, and manage the fiscal deficit effectively to ensure sustainable growth and development.
The Money Flow in the Pakistani Economy:
The money flow into and out of the Pakistani economy is a complex system encompassing various income streams and expenditure lines.
On the income side, the majority of the inflow (51%) comes from borrowings. This includes foreign debts/grants (55%), domestic debts from non-banks (20%), and banks (20%). Surplus from provinces, a minor source, contributes 5%. This dependence on borrowings, particularly foreign debts/grants, suggests that the country is heavily reliant on external and internal lenders to finance its spending and implies a need to repay these loans in the future.
Direct revenue streams comprise income tax (15%), sales tax (14%), customs duty (6%), and Federal Excise Duty (FED) (2%). This indicates a multi-faceted revenue collection system where different forms of taxes are collected from individuals and businesses. Non-tax revenue contributes another 12%, which could come from sources like profits from state-owned enterprises, fees, and charges.
Turning to the expenditure side, debt servicing, and foreign loan repayments consume a significant share of the budget at 30% and 18% respectively. This implies a substantial portion of government revenue goes towards meeting past borrowing commitments, leaving less room for developmental and operational expenditure.
The provincial share in federal taxes accounts for 21% of expenditure. This is part of federal revenue that is distributed among the provinces, and it signifies a mechanism of financial resource redistribution across the country. Federal Government expenses, including pensions, account for another 12% of the spending, reflecting the cost of running the government and serving its employees and retirees.
Development expenditure and defense affairs and services consume 6% and 7% of the outflow respectively. While the development expenditure signifies the budget for growth and infrastructure projects, the defense outflow represents the cost of ensuring national security. Grants and transfers also make up 6% of the expenditure, which could include foreign aid, support to local governments, or welfare payments.
The money inflow and outflow in the Pakistani economy reflect a challenging fiscal situation with heavy reliance on borrowings to finance its budget, and substantial amounts of revenue going towards debt servicing and loan repayments. The allocations towards development expenditure and defense also reveal the government's dual commitment to economic growth and national security.
The Flow of Money in Pakistan:
The Tax Breakup of the Country:
The Finance Act 2023-24 provides an interesting insight into the country's tax policy and its trajectory. It sheds light on the country's dependency on both direct and indirect taxes and the need for substantial and progressive shifts to mitigate income disparities and alleviate the burden of indirect taxes on the common man.
Starting with direct taxes, which are usually charged directly to individuals and organizations based on their income or profits, there is no significant change in their contribution to the overall tax collection. This suggests a lack of policy adjustments geared towards increasing the share of direct taxes in the overall tax base. The Income Tax, the major contributor to this category, is expected to generate Rs 3,714 billion in FY 23-24, up from Rs 2,817 billion in FY 22-23 (Revised). The Workers' Welfare Fund (WWF), Workers' Profit Participation Fund (WPPF), and other such sources are anticipated to contribute Rs 45 billion, slightly up from the previous fiscal year's Rs 34 billion. Altogether, direct taxes are expected to yield Rs 3,759 billion, a sizeable increase from the Rs 2,851 billion collected in the revised estimates of FY 22-23.
Turning to indirect taxes, which are levied on goods and services rather than income or profits, make up a considerable portion of Pakistan's tax revenue. The FY 23-24 projections for Customs Duty, Sales Tax, and Federal Excise Duty are Rs 1,178 billion, Rs 3,538 billion, and Rs 725 billion, respectively. In comparison, the revised figures for these taxes in FY 22-23 were Rs 1,084 billion, Rs 2,808 billion, and Rs 457 billion. These figures show a significant increase in each category, totaling Rs 5,441 billion, a noticeable rise from the previous year's Rs 4,349 billion.
The breakdown of tax revenue in percentages:
When breaking down the tax revenue, it's evident that the largest share is contributed by Income Tax (41%), followed by Sales Tax (38%), Customs Duties (13%), and Federal Excise Duty (8%).
These numbers illustrate Pakistan's fiscal strategy in the face of current economic challenges. However, the heavy reliance on indirect taxes, which are often regressive in nature, underscores the urgent need for a significant policy shift. It is crucial for the Pakistani government to consider reevaluating its tax structure to achieve a more equitable distribution of the tax burden, particularly by increasing the share of direct taxes.
The Tax Breakup Comparison Between 2023-24 Vs. 2022-23:
Budget 2023-24 from a Citizen’s Perspective:
The Finance Bill 2023-24, from the perspective of an average citizen’s point of view, leaves much to be desired. The Budget has made no significant changes to the overall tax policy, as the majority of its revenue measures continue to disproportionately affect already taxed sectors and big businesses. The bill does not appear to address the tax gap resulting from undocumented sectors and could, in fact, exacerbate it by potentially encouraging an undocumented economy.
A key point of concern is the perpetuation of higher tax rates for businesses, in the form of a 'super tax', which now extends to all sectors with an income exceeding Rs 500 million. This could significantly increase the overall tax costs for businesses. Moreover, the re-introduction of a 10% final tax on bonus shares issued by companies further burdens these entities.
The Act brings in a novel concept of 'additional tax on income, profits, and gains, with a capped rate of 50% for extraordinary incomes. However, this clause might face legal challenges due to its potential conflict with the principles upheld by Higher Courts. If not, underreporting of economic activities will definitely by an emerging phenomenon in the coming days.
Another troubling feature is the enhancement of withholding income tax rates for suppliers, service providers, contractors, and commercial importers. This, coupled with the increased sales tax rate on retailers of textile and leather products from 12% to 15%, could increase the cost of goods and services, thereby affecting lower-income consumers.
The withdrawal of the sales tax exemption on edible products sold in bulk under brand names or trademarks could also lead to an increase in food costs, which would disproportionately impact lower-income groups. Meanwhile, the reintroduction of a 0.6% advance tax on cash withdrawals by non-filers seems to target those who are already outside the tax net rather than widening the tax base. Non-branded edible oils and possible adulteration in this sector might impact the quality of edible oil and a large population could move to the gray market to explore the lower-cost options, with compromised quality controls and standards.
On the brighter side, the special tax regime for Small & Medium Enterprises (SMEs) has been extended to IT and IT-enabled services. Turnover thresholds have been enhanced from Rs 250 million to Rs 800 million, and a five-year income tax holiday has been introduced for certain Agro-based SMEs. This could encourage SME growth and employment opportunities.
However, no major tax relief is apparent for the salaried class and lower-income groups. While the bill proposes a 50% reduction in tax liability for three years for youth entrepreneurship, such measures seem sparse and may not sufficiently ease the tax burden on lower-income groups.
The Finance ACT - Budget 2023-24 has tried to incorporate some progressive steps, but it doesn't appear to prioritize tax relief for lower-income groups or salaried individuals. The reliance on indirect taxation seems to persist, which could exacerbate existing economic disparities. The Budget may need to be critically reevaluated to address these concerns and ensure an equitable and growth-supportive fiscal environment.
Defending the Nation:
The Pakistan Defense Expenditure for the Budget 2023-24 has been allocated a significant amount of Rs1.804 trillion, representing a 13% increase compared to the revised allocation of Rs1.59 trillion in the previous year. This allocation demonstrates the government's commitment to ensuring national security and safeguarding the country's interests. The largest portion of the budget is allocated to the army, with Rs. 824.6 billion, followed by the Pakistan Air Force with Rs368.5 billion, and the Pakistan Navy with Rs. 188.2 billion. Additionally, the pension of retired military officials has seen a substantial increase, rising by 26% to Rs. 563 billion. The government's focus on defense expenditure highlights the importance of maintaining a strong defense capability in a region with geopolitical complexities and security challenges. By allocating a significant budget for defense, Pakistan aims to equip its armed forces with modern capabilities, enhance deterrence against potential threats, and contribute to regional stability. This investment in defense plays a crucial role in supporting Pakistan's geoeconomic aspirations, providing a secure environment for sustainable development and economic growth.
The Defence Expenditure holds significant importance for a country like Pakistan, which is transitioning from a primarily geostrategic focus to a more geoeconomic approach. While geoeconomics emphasizes the economic aspects of international relations and regional connectivity, national security remains a crucial pillar for sustainable economic growth and development. Pakistan, being located in a region with geopolitical complexities and security challenges, recognizes the need to ensure a strong defense capability to safeguard its territorial integrity, protect its national interests, and maintain regional stability.
By allocating a substantial budget for defense, the government aims to equip its armed forces with modern capabilities, enhance deterrence against potential threats, and contribute to the overall security environment. This, suggests a more integral role of the defense services in ensuring and providing a conducive environment for promoting trade, investment, and economic activities. With the shift in Pakistan’s playbook from geostrategic to geoeconomics, stability, and security becomes prerequisites for attracting foreign investments, facilitating regional connectivity, and fostering economic growth. The defense expenditure, therefore, plays a crucial role in supporting Pakistan's geoeconomic aspirations by ensuring a secure and stable environment for sustainable development.The allocated defense budget announced is RS. 1828.7 billion, however, if we look at the total budget allocation for Defense in the Budget 2023-24, the figures looks around Rs. 3,752.7 billion, accounting for 100% of the Defense budget.
Possible Impact of the Finance Act 2023-24 on Formal vs Informal Sectors:
The Finance Act 2023-24 will have a significant impact on both the formal and informal (non-formal) economies in Pakistan, with varying implications for each sector.
For the formal economy, several measures proposed in the Act may add strain to businesses and dampen economic growth. The introduction of a 'super tax' on sectors earning income above Rs 500 million, along with the reinstatement of a 10% final tax on bonus shares issued by companies, could increase the financial burden on large businesses. These changes could also stifle investment and hamper the growth of these sectors. However, tax incentives for Small and Medium Enterprises (SMEs), such as the five-year tax holiday for certain Agro-based SMEs, could stimulate growth and innovation in these sectors. The Budget's focus on extending the special tax regime to IT and IT-enabled services could boost the digital economy and potentially increase formal employment opportunities.
As for the informal economy, the Act has mixed implications. The reintroduction of a 0.6% advance tax on cash withdrawals for non-filers could discourage people in the informal sector from engaging with the formal banking system. This measure, coupled with the threshold enhancement for immunity from probes into sources of foreign remittances, may inadvertently encourage the proliferation of the undocumented economy.
Moreover, the Act's increased reliance on indirect taxation, including heightened withholding tax rates for suppliers, service providers, contractors, and commercial importers, could negatively impact the cost of living for those reliant on the informal economy. This could also disincentivize the formalization of these sectors.
On the other hand, the Budget offers a special status for the freelance exporter of IT and IT-enabled services as a cottage industry, exempting them from certain registration and filing requirements. This could potentially bring a part of the informal sector into the formal economy by encouraging freelancers to regularize their operations. Additionally, the provision for a three-year, 50% reduction in tax liability for youth entrepreneurship could stimulate formal economic activity among younger demographics. However, trust in the system is still a fragile sentiment, which the government needs to work on and ensure the continuity of its policies for the coming years as well.
The Possible Impacts of the Budget 2023-24 on the Formal Vs. Informal Economy in Pakistan:
While the Budget incorporates measures that may promote certain aspects of the formal economy and formalization of some non-formal sectors, its increased reliance on indirect taxation and potential encouragement of the undocumented economy can exacerbate economic disparities and discourage the transition from the informal to the formal sector. A more balanced and equitable approach might involve measures to incentivize formalization and provide a safety net for the lower-income groups while ensuring that the taxation system is not regressive.
The Good, Bad, and the Ugly of the New Tax Regime:
The New Tax Regimes for the Baking Companies:
As citizens and clients of banking companies, the new income tax regime brings forth various implications:
One positive aspect of the new regime is the reduced tax rate on income from additional advances to certain sectors. This is encouraging for citizens who may require micro or SME loans, low-cost housing financing, or farm credit. The lowered tax rate of 20% incentivizes banking companies to provide financial support to these sectors, potentially improving access to credit and fostering economic growth.
The reduced tax rate on income from additional advances to the IT sector is also promising. This provision signals the government's recognition of the importance of the IT industry and its potential for growth. By offering a lower tax rate of 20%, banking companies are encouraged to invest in the IT sector, which can lead to technological advancements, job creation, and overall economic development.
However, there are concerns regarding the higher tax rate on income from government securities. If banking companies experience reduced profitability due to this tax, it may indirectly impact citizens. This could manifest in changes to interest rates on banking products, affecting savings accounts, fixed deposits, and loan offerings. Citizens must remain vigilant to any potential changes that could influence their financial well-being.
The reintroduction of advance tax on cash withdrawals from non-filers is aimed at promoting tax compliance. While it may inconvenience non-filers, it also serves as an incentive for them to become tax filers, contributing to the country's tax base. As taxpayers who fulfill our tax obligations, we view this as a step toward creating a more equitable and transparent tax system. However, this is also a dangerous slope, where citizens can move towards embracing a more cash-based economy and a decline in the use of formal banking channels.
The reduction in the standard rate of minimum tax on turnover for listed companies is a positive development. This reduction from 1.25% to 1% alleviates the tax burden on these companies and can potentially lead to improved services and offerings from the banking sector. As citizens, the gesture will be appreciated by measures that support the growth and profitability of businesses, ultimately benefitting the economy as a whole.
Furthermore, the proposed increase in the threshold of immunity on foreign remittances may not directly impact individual citizens. However, it aims to facilitate overseas Pakistanis, encouraging more remittances and contributing to the country's economic stability. It is crucial, however, to ensure that this provision is not misused, as it could undermine efforts to combat money laundering and tax evasion.
The new income tax regime for banking companies presents a mix of opportunities and concerns. While the reduced tax rates on specific advances and turnover for listed companies are positive, potential impacts on interest rates and the immunity on foreign remittances require careful consideration. Overall, we hope that these changes will foster a fair and prosperous environment for both banking companies and individual citizens, promoting economic growth and financial well-being for all.
An analysis of the new income tax regime for banking companies, categorized as good, bad, or neutral for the end taxpayers:
The Sales Tax Evolution:
The sales tax provisions of the Federal Budget 2023-24 have several implications for various sectors. Analyzing them, and how these changes may impact businesses gives more perspective:
- Production, transmission, and distribution of electricity: The restoration of the earlier definition, which excludes the transmission of electricity from sales tax, brings clarity to the taxation of this sector. It resolves the legal controversy regarding the federal government's right to tax electricity transmission. This change ensures consistency and facilitates smooth operations for electricity companies.
- Tier-1 retailer: The exclusion of certain retailers, such as those operating in larger shops and jewelers, from the definition of Tier-1 retailer relieves them from the obligation of integrating their outlets with the FBR's real-time sales reporting system. This change reduces administrative burdens for these retailers and allows them to focus on their core business activities.
- Penalty for non-compliance: The expansion of penalties to all persons required to affix tax stamps, banderoles, stickers, labels, or barcodes on taxable goods increases accountability and aims to deter non-compliance. This provision intends to curb the sale of counterfeit goods and ensure proper tax collection.
- Zero-rating and exemptions: The budget introduces various changes to zero-rating and exemptions. For example, the extension of zero-rating to additional items under the PCT heading 9017.2000, such as "other drawing, marking out, or mathematical calculating instruments," benefits businesses involved in their manufacturing and supply chains. Additionally, the withdrawal of exemptions for certain goods under brand names/trademarks expands the tax base and increases revenue collection.
- Exemptions for specific goods: The budget proposes new exemptions for goods like contraceptives, bovine semen, saplings, agricultural machinery, and software exports. These exemptions aim to support specific sectors and incentivize their growth. They can reduce the tax burden on businesses engaged in these activities and promote investment and development.
- Changes in rates: The rate increase from 12% to 15% for textile and leather retailers may impact their profitability. It raises the cost of supplies and could affect their competitiveness in both the local and international markets. Similarly, the reduced rate of 1% for the pharma sector, with certain exceptions, supports the industry's growth by reducing the tax burden on specific drugs and APIs.
New Sales Tax Provisions - Impact on Growth and Inflation:
Explanation:
Production, transmission, and distribution of electricity:
- Impact on Growth: Positive - Clarity regarding taxation benefits the electricity sector, ensuring smoother operations.
- Impact on Inflation: Neutral - No direct impact on inflation.
Tier-1 retailer:
- Impact on Growth: Positive - Exemption from integrating outlets with the FBR's system reduces administrative burdens.
- Impact on Inflation: Neutral - No direct impact on inflation.
Penalty for non-compliance:
- Impact on Growth: Positive - Penalties discourage non-compliance and ensure proper tax collection.
- Impact on Inflation: Neutral - No direct impact on inflation.
Zero-rating and exemptions:
- Impact on Growth: Mixed - The extension of zero-rating benefits some sectors, while the withdrawal of exemptions broadens the tax base.
- Impact on Inflation: Mixed - Changes in tax rates and exemptions can have indirect effects on prices, but the overall impact is uncertain.
Exemptions for specific goods:
- Impact on Growth: Positive - Exemptions for specific goods can support their respective sectors and encourage investment.
- Impact on Inflation: Neutral - No direct impact on inflation.
Changes in rates:
- Impact on Growth: Mixed - Rate increases for textile and leather retailers may impact their profitability, potentially affecting growth.
- Impact on Inflation: Mixed - Changes in tax rates can have indirect effects on prices, but the overall impact is uncertain.
Please note that the impacts mentioned above are based on general assessments and actual outcomes may vary depending on specific market dynamics and individual business circumstances.
The sales tax provisions of the Federal Budget 2023-24 aim to streamline taxation, broaden the tax base, and incentivize specific sectors. While some changes may provide relief or promote growth, others could impact profitability and competitiveness. It is crucial for businesses to carefully assess the impact of these provisions and adapt their strategies to navigate the evolving tax landscape effectively.
The Federal Excise Duty (FED) and the Proposed Changes - Impact Analysis
The Federal Budget 2023-24 introduces changes to the Federal Excise Duty (FED) with the aim of streamlining its chargeability and expanding its scope. The impact of these changes has been examined below:
Clarification of Chargeability:
Impact: The proposed addition of a new clause to further elaborate the chargeability of FED on goods and services aims to provide clarity. However, the wording of the clause may inadvertently create ambiguity and potential litigation. If interpreted broadly, it could result in FED being imposed on the supply of excisable items even by distributors, dealers, or retailers. This unintended consequence could have a negative impact by increasing compliance costs and creating uncertainty for businesses. The Federal Government should reconsider this amendment to avoid potential complications.
Publication of Rules and Instructions:
Impact: The proposal to align the publication procedure of FED Rules, general orders, departmental instructions, and rulings with the Sales Tax Act is a procedural change. It aims to ensure transparency and accessibility of these documents by making them available for sale to the public at a reasonable price or on the official website of the Federal Board of Revenue (FBR). This change promotes ease of access to relevant information and fosters transparency in tax administration.
Dutiable Goods:
Impact: The introduction of FED on certain energy-inefficient appliances and incandescent bulbs aims to discourage their use and promote energy conservation. By imposing a duty on imported and locally manufactured energy-inefficient fans and incandescent bulbs, the government seeks to incentivize the adoption of more energy-efficient alternatives. This change aligns with environmental objectives and can contribute to reducing energy consumption and greenhouse gas emissions.
Impact: The extension of the scope of FED to include franchise services, royalties, and fees for technical services at a rate of 10% aims to broaden the tax base and increase revenue collection. This change brings these services under the purview of the FED, similar to other taxable services. It may have a positive impact on revenue generation for the government but could potentially increase costs for businesses availing of these services.
The changes to the Federal Excise Duty in the Federal Budget 2023-24 seek to streamline its chargeability, promote energy conservation, and broaden the tax base. While some changes aim to provide clarity and improve tax administration procedures, there is a need to ensure that amendments are carefully crafted to avoid unintended consequences and potential litigation. The impact on businesses will depend on their specific operations and compliance requirements in relation to the revised FED provisions.
Impact of FED Provisions on the Economy and Taxpayers:
Note: The table provides a comparative analysis of the positive and negative impacts of the FED provisions on the economy and taxpayers. The "N/A" indicates that the specific aspect does not have a direct positive or negative impact.
Customs ACT
Analysis of Pakistan Customs Act's new provisions in the Federal Budget 2023-24. The Pakistan Customs Act plays a crucial role in regulating international trade and collecting revenue for the country. The Federal Budget 2023-24 introduces several amendments and suggestions to the Act to streamline customs services and enhance revenue generation. An analysis of the key provisions is as follows:
- Definition of Smuggling: The proposed amendment to the definition of 'smuggle' aims to empower Customs authorities to conduct anti-smuggling operations anywhere within Pakistan's territorial jurisdiction. This change provides Customs officials with greater authority to combat smuggling activities effectively. It can positively impact revenue collection by curbing illegal trade and ensuring compliance with customs regulations.
- Assistance to Customs Officers: The addition of 'Provincial Levies and Khasadar Force' to the list of government agencies required to assist Customs officers in Khyber Pakhtunkhwa and Balochistan further strengthens anti-smuggling operations. This collaboration enhances the enforcement capabilities of Customs and promotes inter-agency coordination, leading to improved border security and revenue protection.
- Power to Exempt Goods: The proposal to extend the powers of the Federal Government to grant exemptions for implementing agreements aims to facilitate trade and investment. By providing flexibility in customs duties, the government can incentivize specific industries and attract foreign investment. This measure can stimulate economic growth and promote international cooperation.
- Validation of Notifications: Extending the validity of exemption notifications issued after July 1, 2016, until June 30, 2024, provides clarity and certainty to businesses. This amendment ensures that previously issued notifications remain valid, reducing ambiguity and potential disputes. It promotes stability in the business environment and encourages compliance with customs regulations.
- Power to Determine Customs Value: The proposed amendment to align the Director of Customs Valuation's powers with the 'World Trade Organization Valuation Agreement' enhances consistency and transparency in customs valuation practices. By consulting internationally recognized sources for valuation purposes, customs officers can determine the customs value of goods accurately. This change promotes fairness in trade and reduces the risk of undervaluation or overvaluation.
- Filing of Goods Declaration: Requiring the owner of imported goods to file the Goods Declaration within three days of arrival at the border customs station aims to expedite clearance processes and reduce congestion. This change improves operational efficiency and facilitates trade by streamlining customs procedures.
- Penalties: The proposed abolition of penalties for non-placement of invoices/packing lists inside import containers and the restriction of penalties for failure to attach mandatory documents to Goods Declarations can provide relief to traders. Reducing penalties can encourage compliance and reduce the burden on businesses, especially for minor infractions. However, strict penalties for offenses related to smuggling, contravention of import/export restrictions, and dealing with smuggled goods ensure deterrence and protect revenue.
- Amendments to Duty Structure: Rationalizing customs duties on specific goods, such as liquid paraffin, ultramarine, industrial fatty alcohols, and various others, aims to align duty rates with industry requirements and trade dynamics. These adjustments in the duty structure can have a mixed impact on revenue generation and trade competitiveness, depending on the specific industries affected.
- Exemptions and Reductions in Duty: The proposed exemptions and reductions in customs duty for industries related to renewable energy, pharmaceuticals, and other sectors aim to incentivize domestic production, promote investment, and ensure the availability of essential goods. These measures support industrial growth and contribute to self-sufficiency in critical sectors.
- Advance Ruling: The withdrawal of the option to seek advance rulings on matters involving the interpretation of statutes aligns with the Federal Board of Revenue's domain. This change ensures that matters of legal interpretation remain within the purview of the relevant authorities, maintaining clarity and consistency in decision-making.
The amendments in the Pakistan Customs Act in the Federal Budget 2023-24 aim to enhance customs services, streamline procedures, and promote revenue generation. These changes seek to strike a balance between facilitating trade, protecting revenue, and ensuring compliance with customs regulations. It is important for the government to monitor the implementation of these proposals and assess their impact on revenue collection, trade facilitation, and overall economic growth.
Impact of the New Customs Act Provisions on Business Dynamism and Community Confidence:
The proposed suggestions and amendments in the Pakistan Customs Act can have a significant impact on business dynamism and confidence in the country. Here's how these changes can influence the business environment:
- Streamlined Customs Procedures: The amendments aiming to expedite customs clearance processes, such as the filing of Goods Declaration within a specified time frame, can reduce delays and congestion at border customs stations. This streamlined process enhances business efficiency and facilitates smoother trade operations. It instills confidence in businesses by minimizing unnecessary bureaucratic hurdles and promoting a more business-friendly environment.
- Enhanced Transparency and Clarity: The amendments related to the definition of 'smuggle,' power to determine customs value, and validation of notifications bring greater transparency and clarity to customs regulations. Clear and well-defined rules and procedures build trust among businesses, as they know what to expect and can plan their operations accordingly. This clarity fosters confidence in the fairness and predictability of customs practices.
- Incentives for Domestic Industries: The proposed exemptions and reductions in customs duty for various industries, including renewable energy, pharmaceuticals, and others, can stimulate domestic production and attract investment. These measures encourage business growth, job creation, and technological advancements. They signal the government's support for key sectors, instilling confidence in investors and entrepreneurs to expand their operations and contribute to the country's economic development.
- Inter-Agency Collaboration: The inclusion of Provincial Levies and Khasadar Force in assisting Customs officers with anti-smuggling operations promotes inter-agency coordination and strengthens border security. Such collaboration ensures effective enforcement of customs regulations and protection against illicit trade. It signals the government's commitment to maintaining a secure business environment and enhancing confidence in trade activities.
- Clarity in Penalties and Compliance: The changes in penalties, such as abolishing penalties for minor infractions and introducing minimum thresholds for more significant offenses, bring fairness and proportionality to the penalty system. Clear guidelines on penalties help businesses understand the consequences of non-compliance and ensure a level playing field. This clarity fosters confidence in the system's integrity and encourages voluntary compliance.
- Trade Facilitation and Competitiveness: The amendments that rationalize customs duties and provide exemptions for certain goods aim to promote trade facilitation and competitiveness. By reducing duty burdens on critical sectors and encouraging domestic production, these measures enhance the competitiveness of local businesses. This can attract foreign investment, boost exports, and contribute to overall economic growth, instilling confidence in the country's business potential.
- Ease of Doing Business: Simplified customs procedures and reduced bureaucratic red tape contribute to improved ease of doing business. When businesses encounter fewer obstacles and experience smoother processes at the customs level, it enhances their overall perception of the business climate. This, in turn, boosts confidence and encourages both local and foreign businesses to invest, expand operations, and engage in cross-border trade.
- Clarity in Valuation and Classification: The amendments related to the determination of customs value and harmonizing them with international standards provide businesses with more clarity on how their goods will be valued. This transparency reduces the risk of arbitrary valuations and disputes, giving businesses greater certainty in their customs obligations. Similarly, having well-defined classifications for goods ensures consistency in tariff rates, enabling businesses to accurately assess costs and plan their import/export strategies.
- Trade Compliance and Anti-Smuggling Measures: The expansion of the definition of "smuggle" and the inclusion of provincial levies and security forces in assisting customs officers strengthen anti-smuggling efforts. This sends a clear message that the government is committed to combating illegal trade activities. By curbing smuggling, businesses can operate on a level playing field, ensuring fair competition and protecting legitimate market participants. Strengthened compliance measures enhance business confidence in the integrity and security of trade operations.
- Investment and Market Access: The proposed exemptions and reduced customs duties for specific industries and goods can attract foreign direct investment (FDI) and foster market access opportunities. Lower import duties on raw materials and machinery incentivize businesses to invest in local production, creating employment opportunities and boosting economic growth. Additionally, reduced duties on specific goods can improve affordability and accessibility, stimulating consumer demand and expanding market opportunities for businesses.
- Predictability and Stability: The proposed amendments, such as extending the validity of exemption notifications and aligning regulations with international standards, contribute to a more predictable and stable customs framework. Businesses thrive in environments where rules and regulations remain consistent over time. This predictability allows companies to make long-term investment decisions, plan their supply chains, and allocate resources with confidence, leading to increased business dynamism and economic stability.
- Collaboration and Stakeholder Engagement: The amendments and proposals indicate the government's willingness to engage with stakeholders, including businesses and industry associations, to understand their needs and address concerns. By actively seeking feedback and considering industry perspectives, the government demonstrates a commitment to inclusive policy-making and fostering an environment conducive to business growth. This collaborative approach fosters trust and confidence among businesses, as they feel heard and supported by the government.
The proposed amendments in the Pakistan Customs Act can positively impact business dynamism and confidence in the country. Streamlined procedures, enhanced transparency, incentives for domestic industries, inter-agency collaboration, clarity in penalties, and trade facilitation measures contribute to a conducive business environment. These changes foster confidence among businesses, attract investment, and promote economic growth, ultimately positioning Pakistan as an attractive destination for trade and commerce.
Sector-wise Impact of the New Customs Act Provisions:
These changes and benefits are expected to have a positive impact on the economy by promoting investment, boosting local industries, creating employment opportunities, enhancing exports, improving energy efficiency, supporting sustainable development, and improving overall economic growth and self-reliance. The sectors mentioned above are likely to experience growth, increased productivity, and improved competitiveness, contributing to a more dynamic and confident business environment in the country. Additionally, these changes align with the government's objectives of economic diversification, sustainability, and inclusive growth.
How the Various Sectors Are Reacting to the Budget 2023-24:
The budget for the fiscal year 2023-24 in Pakistan has sparked varied reactions from different sectors of the economy. While some sectors are appreciative of the government's initiatives and allocations, others express concerns and disappointment.
The industrial sector welcomes the reduction in customs duties, which is expected to boost industrial growth and attract investments. The agricultural sector applauds the exemptions on customs duties for vital inputs, aiming to enhance agricultural productivity and food security. The IT sector celebrates the tax exemptions on IT equipment imports, supporting the growth of the industry. However, the textile sector raises concerns about inadequate taxation of undocumented real estate and trade sectors. The financial and investment experts express concerns about the lack of structural reforms and the challenges in meeting IMF requirements. Overall, the budget's impact on different sectors highlights a mix of positive and negative sentiments, reflecting the diverse perspectives and expectations within the business community.
Doing Business at the Capital: Embracing Change and Enhancing Opportunities:
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| Doing Business at the Capital: Embracing Change and Enhancing Opportunities |
Doing business in the capital, Islamabad will be different as a result of the provisions outlined in the Federal Budget 2023. These changes aim to create a more favorable business environment and promote economic growth. Here are some ways in which doing business in Islamabad may be impacted:
- Ease of Doing Business for Freelancers: Granting the status of cottage industry to freelance exporters dealing in IT and IT-enabled services eliminates the requirement for registration, sales tax invoicing, and filing tax returns. This simplifies the process for freelance professionals and reduces administrative burdens, making it easier for them to operate and contribute to the digital economy. It promotes a freelance-friendly ecosystem and encourages more individuals to engage in freelance work.
- Lower Sales Tax for Restaurants: The reduced sales tax rate on services provided by restaurants, cafes, and food parlors incentivizes dining out by making it more affordable for customers. This reduction from 15% to 5 % applies when payments are made through electronic means, such as debit/credit cards or mobile wallets. It promotes transparency and convenience in transactions, contributing to a more seamless dining experience. This change may attract more customers to restaurants and stimulate growth in the food service industry.
- Support for IT and Software Development Services: The reduction in the sales tax rate for software or IT-based system development consultants and the inclusion of IT and IT-enabled services in a lower tax bracket aim to support the growth of the IT industry in Islamabad. This can make IT services more cost-effective for businesses, encouraging their adoption and attracting investment in the sector. It creates opportunities for IT businesses to thrive, innovate, and contribute to the digital transformation of the capital.
- Clarification of Tax Treatment for Electric Power Transmission Services: The proposed tax classification of electric power transmission services as services rather than goods under the sales tax ordinance brings clarity to the tax regime. This ensures consistency in the treatment of these services and aligns with their nature. It may impact the operational and financial aspects of power transmission service providers, who will now be subject to sales tax under the appropriate category.
The changes aim to create a more business-friendly environment in Islamabad. The measures introduced in the budget promote the growth of key sectors, reduce administrative burdens, provide tax incentives, and encourage digital transactions. By facilitating the operations of freelancers, supporting the restaurant and IT sectors, and ensuring clarity in tax treatments, the business landscape in Islamabad is expected to become more conducive to entrepreneurship, investment, and economic development.
Enhancing Competitiveness and Improving Country’s Attractiveness, The FIPPA Impact:
The provisions outlined in the Federal Budget 2023 regarding the Foreign Investment (Promotion and Protection) Act, 2022 (FIPPA) have the potential to significantly impact the investment climate in Pakistan, fostering a more conducive environment for both domestic and foreign investors. Here is a more in-depth analysis of the potential impact in enhancing competitiveness and the country’s attraction for potential investors:
1. Investor Confidence: The passage of FIPPA and the incorporation of its provisions in fiscal laws send a strong signal to investors that Pakistan is committed to providing a stable and secure investment climate. The legal protection and guarantees offered under FIPPA, coupled with the alignment of fiscal laws, instill confidence in investors by assuring them of the continuity and stability of the regulatory framework.
2. Attraction of Large-Scale Investments: By empowering the Federal Government to designate investments, sectors, industries, or projects as "Qualified Investments," FIPPA provides a clear framework for identifying priority areas for investment. This designation signals the government's commitment to support and incentivize investments in these sectors, creating a favorable investment climate for large-scale projects. The threshold for qualifying as a "Qualified Investment" is set at a substantial amount, further emphasizing the focus on attracting significant capital inflows.
3. Investment Incentives and Exemptions: FIPPA's definition of "Investment Incentives" includes exemptions, reductions, and concessions in various federal, provincial, and local duties, charges, taxes, levies, fees, and cesses. These incentives serve as powerful tools to attract investors by reducing the financial burden and improving the competitiveness of investments. The incorporation of these incentives into fiscal laws ensures their enforceability and simplifies the process for investors to avail themselves of these benefits.
4. Legislative Protection: The concept of "Protected Benefits" provided under FIPPA offers additional legal protection to qualified investments. This provision ensures that any legislated amendments that adversely affect the benefits granted to investors cannot be made. By safeguarding the interests of investors, Pakistan aims to foster trust and long-term commitment from both domestic and foreign investors.
5. Streamlined Implementation: The alignment of fiscal laws, such as the Income Tax Ordinance, Sales Tax Act, Federal Excise Act, and Customs Act, with FIPPA, streamlines the implementation of investment incentives. By incorporating these concessions into the existing fiscal laws, the government aims to simplify administrative processes and eliminate any potential hurdles that investors may face when availing themselves of the benefits. This streamlining enhances transparency and reduces the burden on investors, making the investment process smoother and more efficient.
The author is a global competitiveness, risk, and development expert. He leads Mishal Pakistan, the country partner institute of the Centre for the New Economy and Society Platform at the World Economic Forum. He is a leading strategic communication specialist and an alumnus of the Harvard Kennedy School’s Program on Artificial Intelligence: Exploring Policy, Technology, and Governance and the Program on National and International Security.
He can be reached at aj@mishal.com.pk; he tweets at @amirjahangir
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