TAX NEWS - JUNE 2010

Pakistan Tax: Pakistan Imposes Tax on Shares to Cut Budget Deficit

Pakistan imposed taxes on shares and electronic appliances and announced a pay cut for ministers to help lower the budget deficit and qualify for an International Monetary Fund loan in an economy hurt by rising war costs.

The fiscal gap will be reduced to 4 percent of gross domestic product in the year starting July 1, Finance Minister Abdul Hafeez Shaikh said in his budget speech in Parliament today. The deficit may be as much as 5.6 percent of GDP in the current year, according to the central bank.

Pakistan may seek more funds from the IMF after getting an $11.3 billion bailout in the past two years as donor countries delayed aid pledges, Shaikh said May 12. South Asia's second- biggest economy after India needs cash to build power plants, dams and schools after the government spent $43 billion since 2001 in the fight against Taliban militants.

"The target for the fiscal deficit is ambitious," said Sayem Ali, an economist at Standard Chartered Pakistan Ltd. in Karachi. "There are not enough avenues in the budget for revenue generation. The government is likely to enter into another IMF program."

The total budget outlay for the year starting July 1 is 3.26 trillion rupees ($38.2 billion), which is 10.7 percent more than last year, Shaikh said. The government plans to raise 2.57 trillion rupees for the new financial year, he said.


Capital Gains Tax

As part of that goal, Shaikh imposed a 10 percent capital gains tax on shares held for less than six months, and 7.5 percent for between 6 months and one year. There will be no tax for stocks sold after a year, he said.

He also announced a 10 percent federal excise duty on appliances including air conditioners and deep freezers.

A proposal to introduce a new value-added tax has been delayed until Oct. 1 because the finance ministry is still working on the modalities of its implementation, Shaikh said. As a result, the general sales tax will be 17 percent for three months, instead of levies varying from 16 to 25 percent, that offer scope for corruption and tax evasion, he said.

On Oct. 1, value-added tax will be imposed at a flat rate of 15 percent, replacing the general sales tax.

Shaikh, who took an oath as finance minister earlier today after being appointed to head the ministry in March, also said cabinet ministers will take a 10 percent pay cut. He also pledged to reduce subsidies on state-owned enterprises including Pakistan International Airlines Corp. and Pakistan Steels Mills Corp.


'Austerity Budget'

"The focus of this budget is on austerity because the global situation is still volatile and the security situation is still not controlled," Shaikh said. "We must protect the economic recovery of the last two years."

Pakistan is trimming its government debt as Europe's sovereign debt crisis, which led to a 750 billion-euro ($913 billion) rescue fund for the region's weakest members including Greece, threatens global recovery.

The economy may expand 4.5 percent in the 12 months starting July 1, the fastest pace in three years, after growing 4.1 percent this year, according to the Planning Commission.

To boost consumption, Shaikh increased salaries and pensions of government employees and vowed to spend more on cash handouts for the poor. He also raised the minimum wage to 7,000 rupees a month from 6,000 rupee and increased the personal income-tax exemption slab to 300,000 rupees a year from 200,000 rupees.


Internal Challenges

Even so, Pakistan is facing internal challenges to growth, from shortages in energy and water to security issues, that may constrain economic growth, the Economic Survey, a pre-budget document released yesterday showed.

Taliban militants have attacked major cities in retaliation to a military offensive in the country's tribal northwest. Over 500 people have been killed in more than 20 terrorist attacks this year, according to Bloomberg data, after 3,000 died in bombings in 2009.

In the year starting July 1, Pakistan will increase its defense spending budget by 29 percent to 442 billion rupees from its June 2009 estimate, according to the state-run Associated Press of Pakistan.