Analysis

Federal Budget 2017: Impact On Business And Startup Industry

Federal Budget 2017-18 has been announced. It’s the 5th budget by the PML-N led government and with its standing as the last presented by the current regime, this budget is as significant for the ruling party as is for the common man and the industries.

In wake of the changing trends of world economy, the shift of power politics towards the east, emergence of new currencies, and One Belt, One Road passing through our land, it is needless to further stress upon the impact this budget is going to have on Pakistan’s national and international affairs.
The space below will present an analysis of the impact this budget will have over the niche of PakWired audience: technology industry professionals, startups, and businesses.

The 71-page speech Finance Minister Ishaq Dar delivered, has earmarked a total of Rs4,757 billion in expenditures for the next fiscal year.

Dar, a buoyant Finance Minster after the recent raised country ratings by Standard & Poor’s, Moody’s and Fitch, said:

“Just four years ago, this extraordinary turnaround would have seemed impossible. We have also performed better than the global average growth rate.”

A salient feature of the Federal Budget 2017 is the amount allocated to the development sector – Rs1 trillion, which is more than the allocated defence budget.

Also Read: E-Commerce in Pakistan, The Tax Story

Source: geo.tv

 

In his statement to APP just after the Budget release, President Islamabad Chamber of Commerce and Industry Khalid Iqbal Malik stated:

“This is a business-friendly as well as people-friendly budget. Industry is backbone for the economy of any country and it is welcoming that the government has announced incentives for the industrial sector.”

Let us see, how and where our audience can benefit from the budget facts:

Relief & Burdens

  • The fiscal target has been set to raise tax revenues to 15pc of GDP.
  • Individuals earning above Rs1m to be eligible for Advance Tax, compared to Rs0.5m earlier.
  • Corporate sector will get relief in the form of a 30pc effective corporate tax rate.

Automobiles

  • Withholding taxes for tax filers have been cut on new car registrations. (From Rs10,000 to Rs7,500 for 850CC; Rs 20,000 to Rs15,000 for 851-1,000CC; from Rs30,000 to Rs25,000 for 1,001-1,300CC cars.)
  • Reduction in sales tax on supply of hybrid electric vehicles at the import stage to promote efficient motor vehicles.
  • Tax on Lubricant oil has been reduced to 2%.
  • Regulatory duty on scrap has been increased from 5% from 10%
  • Special package is to be announced for hybrid cars in Pakistan.
  • Tax relief on 1800cc-2500cc hybrid cars shall be maintained as is.

Also read: National IT Policy 2016 Predicts IT Exports Worth $6 Billion By 2020

Banking & Finance

  • Islamic banking instruments like Musharika, Ijarah and Murabaha will face the same tax regime as conventional banks.
  • Tax rate on dividends to be increased from 12.5pc to 15pc. Dividends from mutual funds are also proposed to be taxed 12.5pc, compared to current 10pc.
  • Super Tax to be extended on the income of affluent and rich individuals, association of persons and companies earning income above Rs500m at 4pc for banking companies and 3pc of income for all others.
  • Interest income to be taxed at 10pc up to Rs5m, 12.5pc between Rs5m to Rs25m and 15pc above for interest income above Rs25m.
  • Withholding tax on branchless banking has been abolished.
  • Super Tax on banking companies will stay for another 1 year.

Business

  • Single capital gains tax rate of 15pc for filers and 20pc for non-filers.
  • Sales tax on zero-rated sectors’ retail sales to be increased to 6pc.
  • Withholding tax of 5pc to be collected from cigarette producers at the time of collection of tobacco cess.
  • FED on cigarettes to be enhanced.
  • FED on cement will be increased from Rs1 per kilogramme to Rs1.25/kg.
  • Commercial import of clothing will be taxed at 6pc.
  • New tax on import of fabrics, which will be taxed at 10pc.
  • Steel sector will be taxed on electricity consumption at Rs10.5 per unit instead of Rs9/unit.
  • A special taxation regime extended to the Association for Builders and Developers will be withdrawn due to the contribution of only Rs110m in taxes to the national kitty.
  • The rates of withholding taxes for non-filers on payments received for contracts, supplies and services, payments to non-residents, rental income, prizes on prize bonds and lotteries, commission, sale by auction, collection on gas bill of CNG stations and sale by manufacturers and commercial importers to distributors, dealers and wholesalers are proposed to be further enhanced. The withholding tax rates for filers will be maintained and there will be no increase for filers.
  • The Sales Tax on IT exports from Islamabad, Gilgit and FATA has been abolished.
  • The Customs Duties on the import of telecom equipment has been withdrawn, replaced by a uniform rate of 9% Regulatory Duty.

Sector wise Impact of Budget 2017-18

Salaried Employees

Minimum Wage increased from Rs14000 to Rs15000
Increase in salaries of government employees: 10% (on Adhoc basis)
Increase in pensions of retired government employees and army personnel: 10%
Increase in salaries of armed forces personnel: 20%

Technology

Information Technology and Telecom Division has been allocated a budget of Rs320 billion.
New IT companies are exempted from tax for 3 years.
Establishment of e-payment gateway by SBP has been announced by an allocation of Rs2 billion.
Withholding Tax on mobile calls has been reduced from 14% to 12%.
Sales Tax on mobile phone calls has been reduced from 18% to 17%.
Reduction in customs duty on Latest Smartphones has been announced from Rs1000 to Rs650
Withholding Tax on branchless banking has been abolished.

Startups & SMEs

For introducing IT reforms in the SMEs budget allocated is Rs500 million.
IT companies shall be allowed to open foreign exchange accounts in Pakistan on the condition that deposits in these accounts shall only be allowed through remittances from abroad in respect of their export earnings. They will be allowed to use these accounts for meeting business related payments outside Pakistan.
Secure Transaction Act for SMEs and agriculture- the registry will help get loans with ease via e-registry.
For low-income segment, a fund has been announced to grant small loans with an allocation of Rs8 billion.
Small loan limit for starting an SME has been set at Rs50,000.
Establishment of Risk Management Facility has been announced.
An Innovation Challenge Fund has been announced.

Also Read: China-Pakistan Information Corridor, Part of $1 Billion Cross-Border Telecom Infrastructure Initiative

Verdict

While there are innumerable factors at play, including but not limited to those listed above, it can be safely deduced that the current budget proposed for the fiscal year 2017-18, has positive tidings for the startup ecosystem in Pakistan, especially in the technology sector.

Three developments worth appreciating are:

  • Establishment of an e-payment gateway by SBP.
  • Tax exemption of new IT companies for three years.
  • Abolishing Withholding Tax on branchless banking.

These developments have the potential to play a marked role in altering the landscape of IT industry in Pakistan. Standing at the door of an e-commerce revolution, the three budget proposals mentioned here in specific, could be the prime fuel this industry needs to go big.

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