Budget to focus on industry and food production

ISLAMABAD — The national budget for fiscal 2007 starting July 1, will push for a major boost in industry and food production in order to stay on a growth trajectory of six to seven per cent.

By M. Aftab

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Published: Sun 4 Jun 2006, 10:32 AM

Last updated: Sat 4 Apr 2015, 3:21 PM

The corporate taxes are going to be slashed to encourage new units in all sectors, including banking, financial services, telecom, IT, and large scale manufacturing and to help the existing ones attain better profits.

The budget, to be unveiled next week, will also provide major incentives for foreign and domestic investors. The production constraints that have emerged over the past three years are forcing the government to spend a large amount of foreign exchange on imports.

Big opportunities are opening up for exporters to Pakistan in heavy machinery, capital goods, and equipment for mega water and power projects. The government has raised its development spending to a record Rs435 billion in fiscal 2007, including Rs50 billion for post-earthquake reconstruction. Total allocation was Rs284 billion in current fiscal 2006.

Funding in 2007 while being spread over all major sectors but will focus more on mega projects including building of water reservoirs, power generation, highways, railways, ports and infrastructure. The key allocations are: infrastructure Rs132.5 billion , social sector Rs130.8 billion, and Rs 6.7 billion for other sectors. The ministries of industries, commerce, textiles, and water and power have asked the government to reduce import duties on a wide range of imports, particularly capital goods and machinery. The Ministry of Commerce has asked the budget makers to reduce to zero-to-five per cent all customs duties on import of machinery for a number of industries including textiles, knitwear, footwear, marble, horticulture, and parboiled rice. A large variety of machinery already enjoy the benefit of this reduced duty for import. These industries need to import a large quantity of machinery for their use in order to expand capacity and upgrade the existing units to compete globally. If these duties are abolished it will also bring down the cost of production for a number of industries.

The Textile Ministry while asking Prime Minister Shaukat Aziz for slashing import duties on machinery imports, has said that a number of units are still using obsolete equipment at a time when Pakistan's competitors, China, India, and Bangladesh, are using sophisticated machinery to produce similar items.

Reduction in customs duties to zero per cent, as recommended by the ministries of industries and commerce is based on their own judgement, as well as the demands from the private business. Businessmen insist that import restrictions and high custom duties on imported machinery, which was originally meant to protect the local manufacture of machinery of similar categories, is discouraging expansion of industries that mainly export their finished products.

The Central Board of Revenue, during the current fiscal 2006, had reduced customs duties to five per cent across-the-board on import of all machinery which is not manufactured in Pakistan. But, the duty on imported machinery which is also manufactured in Pakistan still exist in a 10 to 25 per cent range. It hinders import of essential machinery that is needed to upgrade production of export goods.

The government is now also trying to tailor the budget in the light of problems that have just surfaced, while fiscal 2006 is going to close June 30. These problems relate to agriculture, the country's biggest contributor to GDP with a 23 per cent share. The output of major crops is merely 2.5 per cent higher this year, against the targeted 4.5 per cent, and down from 7.5 per cent that was actually attained in fiscal 2005.

Large scale industry, which contributes 18 per cent to GDP, has put up only 6.0 per cent growth, against a 9.5 per cent target, and the actual of 10.2 per cent in fiscal 20054. The overall growth of all manufacturing was 8.6 per cent, against a target of 11 per cent, due to capacity constraints. New capacity will have to be created by establishing large industrial units in several key areas.

The growth of the construction sector was a bit better at 9.2 per cent against a target of 7.5 per cent, and 2005 growth of 6.2 per cent.

Transport and telecom growth was 7.2 per cent, against the target of 5.2 per cent and 2005 performance of 5.6 per cent.

The wholesale and retail trade grew 10 per cent, against a 9.3 per cent target. However, it was lower than the 2005 achievement of 12 per cent.

Services which contribute 52 per cent to GDP, indicate a growth of 8.8 per cent, against the target of 6.8 per cent, and last year's performance of 7.9 per cent.

The government has decided to cut tax rates for the corporate, business and the salaried people, besides simplifying tax laws. It also plans to unveil, in the budget, measure to widen tax exemptions for low income groups, and raise the tax-to-GDP ratio. "The government cannot ignore extending relief to tax payers in the new budget, particularly the people in the low income groups. But, it cannot provide maximum relief to the people without further achieving increase in the tax-to-GDP ratio," Dr. Salman Shah, Adviser to the Prime Minister on Finance says.

One of the proposal being considered for the budget is introduction of a flat rates for taxing the gross income of the salaried class. The plan is to tax gross salaries, and other allowances. But, the maximum income tax rate will stay at 30 per cent, as at present.

Businessmen expect an "export-and-industry oriented" budget and demand measures to slash cost of doing business to improve competitiveness of exports in the global markets.

Ameen Bandukda, Chairman Sindh Indusrial and Trading Estate said the current General Sales Tax (GST) on a wide variety of goods and services, imposed on recommendations of IMF four years ago is likely to be reduced from 15 to 10 per cent. There also will be a reduction in income tax rate on corporate and banking sectors, he added.

Mushtaq Vohra, Vice Chairman, All Pakistan textile Mills Association (APTMA), has asked the government to ensure a reduction in the current 13.5 per cent lending rate of commercial banks. He said among Pakistan's main rivals in textile exports India has a 6.5 per cent, and Bangladesh 6.0 per cent rate," he said.

Rafeeq Ibrahim, Director of Al-Karam Textile Mills, said, "The governments of China, India and Bangladesh are providing incentives and concessions to their textile industries, thereby creating problems for Pakistani goods to compete in the world markets. We are gradually getting out of these markets and heading for a closure of big industrial base in the country because of rising input costs." He particularly identified hosiery products and apparels as "facing tough competition."

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