Criticism takes the better out of Asad Umar. He sounded confident in his speech and clear on the offerings. It was by no means a mini budget, as admitted by the FM himself. It is meant to be an economic reform package to boost industrialization, exports and SMEs. The taxation reliefs are intended to support wealth creation, encouraging business conglomerates and reinvestment of profits.
The missing link is taxation as there are no measures to enhance revenues apart from a bit of import compressing duties. The FBR revenue shortfall is Rs170 billion in six months, at this pace, annual gap would be around Rs350 billion - the fiscal deficit is bound to be north of 6.5 percent; the stabilization process will take its time and consumer slowdown is likely to continue.
The intent is to enhance national savings rates which are too low, and that has to be done by curbing consumption - measures for which are likely to be announced in medium term economic framework. These measures can increase domestic savings but main reason of recent fall in national savings rates is government’s falling saving (read deficit) - nothing is in offing to lower fiscal deficit.
The direction is to shift investment from consumer and domestic market driven retailing and wholesaling markets to manufacturing and export seeking markets. The big business groups are provided space to expand in new venture and to grow web of companies. Reinvestment of profits is encouraged by abolishing tax on retained earnings; dividends might be low and that is a dent on consumption.
The super tax on non-banking companies is to be abolished by Jul-19, and the lowering on income tax in a stage mannered to 25 percent by 2023 is to continue. The banks are encouraged to extend credit to SMEs by slashing the tax on income from SMEs to half relative to other lending. Lack of credit is a big constraint to SME growth and employment generation - the steps taken will help create backward linkages in industrial processes - gaps are in chemical, energy and many other sectors. The steps taken are to boost housing and ancillary 30 odd industries.
The game changer could be green field investments upcoming SEZs - there are complete exemption of sales tax and duties on imports of plant and machinery for green field projects and no income tax for five years. Any industry coming in SEZs would have the special care - no taxation and smooth processes. The first step is to build necessary infrastructure in SEZs - caution is to tread with care as in China, only one forth of SEZs are successful.
For stock market, it is a much needed structural bailout - no more advance income tax on brokers. The businesses operating in formal structures which are mostly listed on PSX are seeing a bright sunny season ahead. It is time to put money in conglomerates, and exporting businesses.
The storyline is strong; Asad and Razzaq duo are betting on long race horses. The growth trajectory is of J-curve; and success is hinged upon attaining macroeconomic stability - lowering and sustaining manageable twin deficit - especially fiscal and for that revenues to, at least, double in five years.
The model is to give it all to businesses what they need and generate tax revenues from their growth. That might not enough - the businesses and individuals operating in shadows should voluntarily start paying taxes. The theory is that for the mistrust between people and government to end - Imran has to win hearts of potential taxpayers
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