maximum tax credit of 10%. This - KPMG

BBUUDDGGEETT RREED-EYE
22001155

KEY MEASURES While the budget speech is silent on
significant gains to the economy from
Compared with last year, the budget collapsing international oil prices in 2014-
speech this year was strewn with a 15, the belief that oil prices will not
positive undercurrent, the optimism increase in 2015-16 is seemingly implicit in
perhaps fostered by inauguration of the budget strategy.
Islamabad Metro Bus, the developments
on the China Pakistan Economic Corridor The Government appears to be keen to
(CPEC), and money in the bank, enhanced continue pursuing Keynesian economics
foreign exchange reserves. On the other during next year with a 65% increase in
hand, historically, budget speeches have budget for building highways. The PSDP
always highlighted the accomplishments of has been allocated a total of Rs 700 billion
the incumbents in the previous year and which includes a welcome appropriation for
proposed initiatives designed to alleviate Diamer-Basha Dam, a gift of Green Line
the country’s economic distress within a Bus Transit System for Karachi, spending
year, with some gains accruing over three on energy projects, on Gawadar and on
years. railways. The budget proposals additionally
include steps to bring down taxes on
The plan for next year is to keep fiscal construction machinery, financing and raw
deficit at 4.3% through increased revenue inputs.
generation and curtailment of expenditure;
increase capital investment to 15.6%; bring The Government has once again reiterated
public debt to 60% of GDP maintaining its commitment to provide funds necessary
inflation in single digit; and target GDP for CPEC.
growth at 5.5%.

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Red-Eye 2015-16

The proposed increase in education balance in services due to the package
spending is admirable, however proposed for the aviation industry; which
considering the minimal current spending, a includes zero custom duty on import of
growing population and its importance in aircrafts and their parts. Since, passenger
tackling unemployment, there is definitely a and cargo traffic is now mostly handled by
need to enhance education spending by foreign airlines it is likely that the effect
multiples. Aside from economic activity may be adverse.
generated during construction period, gains
from infrastructure remain uncertain and Khyber Pakhtunkhwa has been offered a
accrue over a limited time; the benefits of bunch of concessions that were specifically
investing in education on the other hand mentioned at length in the speech;
are certain and infinite. Education needs to probably Sindh has already started doing
be the top priority for Pakistan. homework on its list of demands.

EXIM Bank of Pakistan is proposed to be Finally, the Government increased the
established in 2015-16. Additionally, and as salaries and pension of its primary
expected, mark-up rates on ERF and LTTF constituency, the public servant.
have been reduced with a promise to
remove anti-export bias in imports. The Before concluding, two components of the
textile sector has been offered further budget speech require special mention.
incentives to increase exports and benefits Firstly, the government has admitted that
have been announced to boost livestock the informal economy is equivalent to the
exports. It is also proposed to have tax size of the formal economy, and that too on
holidays for certain industry and plans to the floor of the parliament; however the
set up industrial zones. Whether all these strategy to absorb the informal into the
steps will actually result in expanding formal seems lacking. Secondly, the
exports, which have stagnated for the last banking sector seemingly has been singled
3 to 4 years, remains to be seen. out to bear the brunt of additional tax
collection, with a 35% tax rate on all
On the other hand slashing maximum sources of income and a further 4% super
tariffs (Custom duty) down to 20%, tax on income to be utilized to settle
excluding vehicles and their spare parts, is Temporarily Displaced Persons.
likely to increase the import bill. A more
than comparable increase in the latter will INCOME TAX
hardly curtail the trade deficit consequently
forcing the government to borrow more in • CNIC also to be NTN with effect from
the international markets. There is a tax year 2015 for individuals. This should
definite need to monitor trade, export and facilitate in identifying non-filers and
import both, with a focused objective of enhancing the tax base.
expurgating the trade deficit.

In the absence of detailed information it is
difficult to determine the impact on trade

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Red-Eye 2015-16

• Super tax imposed, supposedly for tax respectively. For profit under Rs 25
year 2015, for rehabilitation of displaced million, the rate will continue to be 10%.
persons. This tax is payable by banking The withholding tax rate for filers will
companies at the rate of 4% and by all continue to be 10%, while for non-filers,
other taxpayers at the rate of 3% of where income exceeds Rs 500,000,
income; the latter required to pay such withholding tax at 17.5% would apply.
tax only if income equals or exceeds Rs.
500 million. For the purposes of this • Threshold for investment in newly
provision, income will be the sum total issued shares and for insurance
of all taxable income, imputable income premium, increased to Rs. 1.5 million,
and that computed under the Ordinance for purposes of tax credit.
including profit on debt, dividend, capital
gains, brokerage and commission. • Tax credit for house loans substituted by
deductible allowance of upto Rs 1
• Income of banks from all sources, million or 50% of taxable income
including dividend and capital gains, whichever is less.
proposed to be tax at a uniform rate of
35%. Corporate tax rate other than for • In order to increase employment, the
banking companies proposed to be finance bill proposes a 10 year tax credit
reduced to 32% for Tax Year 2016. of 1% for every 50 employees
registered under labor laws upto a
• Tax at the rate of 10% on undistributed maximum tax credit of 10%. This
reserves, reintroduced, effective Tax exemption will be available to new
Year 2015, on companies other than a manufacturing units set up between 01
scheduled bank, modaraba or July 2015 and 30 June 2018. This
companies where 50% shares are provision could be extended to
owned by the Government. A expansion projects of existing
Company, which earns profit in the tax companies as it targets job creation.
year and do not pay cash dividend or its
reserves exceed 100% of its paid up • The minimum tax rate for land
capital after distributing a dividend, will developers is proposed at 2% of the
attract this proposed tax. value of land notified by the relevant
authority.
• Profit on debt is proposed to be taxed as
a separate block of income @ 12.5% • It is proposed to provide exporters the
and 15% where such income exceeds option to be assessed under the normal
Rs 25 million and Rs 50 million tax regime, as opposed to final tax

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Red-Eye 2015-16

regime. Considering that tax on exports slabs and proposed to be levied at the
will in such cases be deemed as rate of 7.5% where holding period
minimum tax, the possibility of anyone exceeds 24 months but less than 4
opting under this provision seems years.
unlikely.
• Following industrial undertakings
• Rate of additional tax is proposed to be proposed to be exempted from tax:
reduced from 18% to 12%, which is a
welcome change pursuant to the o Manufacturers of equipment for
decrease in State Bank of Pakistan generation of renewable energy set
interest rate. In addition, tax on delayed up by 30 December 2016- for 5 years
payments by FBR has been changed to effective 01 July 2015
KIBOR plus 0.5%.
o Warehouse and cold chain facilities
• Withholding Taxes: set up by 30 June 2016- for 3 years
o 14% proposed for internet services
o 0.6% on banking transactions by o Halal meat operations set up by 31
non-filers in excess of Rs 50,000 per December 2016- for 4 years
day.
o 10% for resident persons on royalty o Manufacturing units set up by 30
on use of industrial, commercial or June 2018 in KPK- for 5 years
scientific equipment or rent of
machinery o Transmission line projects set up by
o 5% on remittance of education 30 June 2018.
expenses abroad
o Tax on commission enhanced for o LNG terminal operators and owners
non-filers to 15%. from start of commercial operations-
for 5 years
• It is proposed to increase tax rate on
dividend from 10% to 12.5% and for SALES TAX
non-filers such rate is however
proposed at 17.5%. Certain exceptions • The bill introduces the concept of
to this general rule include REIT, Stock whistleblower, both in Sales tax and
Funds, and Power projects. FED Acts, and empowers FBR to
sanction rewards for identification of
• Capital gains tax on sale of listed concealment, fraud, evasion, corruption
securities increased by 2.5% on existing and misconduct. The underlying
procedure is however to be prescribed.

• The further tax of 1% chargeable on
supplies by non-registered persons is
proposed to be increased to 2%.
Considering the Government’s
admission on the size of the informal
economy, this may have an inflationary
effect. But due to depressed

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Red-Eye 2015-16

international oil prices, inflation may not FEDERAL EXCISE DUTY (FED)
be a concern for the moment.
• Average rate of duty on locally produced
• The Federal government has been cigarettes increased from 58% to 63%.
authorized to enter into agreements
with Provincial governments and • The rate of duty on aerated waters is
governments of foreign countries for proposed to be increased from 9% to
sharing of information on sales tax and 12%. Cigarettes and Beverages remain
FED matters. A positive step towards the biggest revenue earners under FED,
capturing black money trail. and the strategy to squeeze these twin
sectors continues; but for how long?
• The services sector, within the federal
capital, has been brought into the ambit
of sales tax, in line with the tax regime
followed by provinces.

• Electronic monitoring system is
envisaged for cigarettes, beverages,
cement, fertilizer, sugar and restaurants,
with intent perhaps to reconcile taxes,
sales tax and FED, with production. The
efficiency of the monitoring system will
be critical for the success of this
proposal.

• Dairy products (other than milk) moved
from zero rating regime to exemption
regime. Whereas, dairy products (other
than milk) sold under retail packing
made chargeable sales tax @ 10%.

• Diagnostic kits and equipment; aircrafts
and specified goods related to aviation
sector exempted from sales tax.

• Consequent to withdrawal of regularity
duty, sales tax slabs on import and
registration of cell phones are proposed
to be doubled.

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Offices in Pakistan Budget Red-Eye 2015-16

Karachi Office: This document contains significant highlights of the
Khalid Mahmood budget 2015.
Partner The amendments in taxation laws are generally
Tel: +92 21 3568 5847 applicable from 01 July 2015, unless otherwise stated.
[email protected] This document contains comments, which represent our
Sheikh Sultan Trust Bldg. No. 2 interpretation of the legislation, and we recommend
Beaumont Road that while considering their application to any particular
Karachi-75530 case, reference be made to the specific wordings of the
relevant statutes.
Islamabad Office:
Faisal Banday
Partner
Tel: +92 51 282 3558
[email protected]
Sixth floor, State Life Building
Blue Area, Islamabad

Lahore Office:
Kamran I. Butt
Partner
Tel: +92 42 3585 0471-6
[email protected]
2nd Floor, Servis House
2-Main Gulberg, Jail Road
Lahore.

www.kpmg.com.pk

© 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.