ISLAMABAD, 18 June 2007 — A number of tax breaks, customs duty cuts and fiscal incentives for domestic and foreign business are geared to boost trade and industry in Pakistan’s new national budget for fiscal 2008 that starts July 1.

These tax measures and policy initiatives show that budget is keyed to significantly improve Pakistan’s business competitiveness, raise industrial and agricultural productivity, expand infrastructure development including building big dams, human resource and skill development.

Some of these initiatives, Prime Minister Shaukat Aziz stressed, are directed to boost the currently stagnating exports by improving competitiveness, bringing down cost of production and help the domestic market expands. Domestic expansion, in turn, will upgrade the country’s competitiveness in the global market place.

The government insists that the budget is “investment-friendly.” But three key elements will, in fact, determine its success: controlling widening traded deficit, reigning in galloping food inflation and checking the growing income inequalities.

In order to step up industrial output and reduce cost of industrial inputs and raw materials, the budget provides a “zero tariff slab.” “This change is expected to accelerate industrial development, promote exports and increase national income, Omar Ayub, Minister of State for Finance, said. Customs duty has been withdrawn from machinery used in industries like horticulture, furniture, marble and granite, surgical and medical instruments.

Customs duties on import of raw materials used in electrical, capital goods, paper, paperboard, chemicals, plastic and rubber industries come down by 5.0 percent.

Customs duty on import of power generators for home use is abolished and reduced on generators for industrial use.

Capital value tax (CVT) on imported autos and vehicles has been abolished. But in order to protect the domestic auto industry, customs duty ranging from 5.0 to 15.0 percent, depending on their cubic capacity (CC), has been levied. There will be a 5 percent withholding tax on domestically produced vehicles.

A decision of interest to overseas Pakistanis working in the Gulf, Saudi Arabia, UK and US is that import of autos under transfer of residence and gift and baggage schemes will only be allowed if the vehicle is not more than three years old. So far, import of 5-year old cars was allowed.

The textile industry has been demanding incentives to export more and face up to the international competition. In view of this, concession import of polyester fiber will be allowed. Subsidy that is already available to rest of the industry, has also been extended to fiber manufacturers. The spinning industry can now also swap its high-cost long-term credits with low-interest loans under a plan launched by State Bank of Pakistan (SBP), the central bank.

The growing imports of industrial inputs and materials, reflecting larger domestic consumption, has greatly widened the trade deficit. In order to narrow it and discourage conspicuous consumption, a 1.0 percent levy is imposed on all imports, excepting oil products, edible oil, fertilizers, medicines, and essential foods like vegetables and lintels. The already exempted items will stay free from this levy.

The existing sales tax and excise duty — a production tax — exemptions under the “zero rating” has been extended to more products like sewing machines, bicycles, and cotton seed oil. Excise Duty on cable TV is withdrawn.

Sales tax on raw material imported for iron and steel, plastic and paper industries have been raised from 15 to 20 percent. But the rate of 15 percent sales tax on final products of these industries will stay at the same rate.

Legislation regulating holding companies has been amended. Seventy five percent shareholding will be required if none of the companies is listed on stock exchange as a public company.

Current losses can be surrendered by holding company to a subsidiary, or between subsidiaries, which fulfill the requirements of shareholding. The inter-corporate dividend will be liable to 10 percent adjustable withholding tax.

In the area of group taxation, the budget proposes that for formation of a group, transfer of shares between companies and the owners in one direction may not be treated as a taxable event. \

Further, group taxation is allowable for 100 percent-owned companies as one fiscal unit and no relief will be available on losses prior to formation of group. Group taxation will be restricted to domestic companies only. For assessment on group basis, option will have to be exercised for a minimum period of five years.

The budget provides for a new taxation basis for mergers and acquisitions, a growing trend especially in the financial sector, with foreign banks buying local banks. The existing provisions of law do not expressly provide disposal of an asset under amalgamation or merger to be a tax-neutral event.

The government felt there is a need to introduce specific provisions regarding non-taxability of capital gains in the hands of shareholders.

The budget provides that transfer of shares between companies and shareholders in one direction, under an approved plan — not involving cash — may not be taken as taxable event if the purpose of such transfer is formation of a group. The incentive will be available under scheme of merger and acquisition.

But each plan has to be approved by High Court, Security & Exchange Commission of Pakistan or State Bank of Pakistan, as the case may be, which does not involve cash payment.

The budget provides that for computation of income of the banks, a separate schedule will be added to the Income Tax Ordinance, 2001. This step is based on the analogy of taxation of insurance companies. Inter-corporate dividend will be subjected to adjustable withholding tax at the rate of 10 percent.

With a view to expand domestic industrialization and competitiveness, customs duty rates on raw materials, parts and components for manufacturing of 22 categories of products have been reduced or abolished.

These are CNG compressors, paper and paperboard, alternate energy resources including solar, wind and bio-tech energy, gum base, transformers, submersible motors, electricity meters, switch gears and electric bulbs and tube lights, light engineering products, polyesters and their raw materials, energy saving lamps and their raw materials parts, petroleum bitumen-asphalt, footwear, football bladder, aviation equipment, germs and jewelry, furniture, marble & granite, horticulture, surgical equipment & medical devices, poultry feed items, poultry vitamins, evaporation air coolers, insulated sandwich panels and silos for storage of poultry. In order to promote production of better trailers and semi-trailers, there is no sales tax.

Excise duty of exchange companies and health insurance has been abolished. Utilities for rice exporters are also tax-exempt.