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Tuesday, June 30, 2009

Opportunity cost

Opportunity cost or economic opportunity loss is the value of the next best alternative forgone as the result of making a decision. Opportunity cost analysis is an important part of a company's decision-making processes but is not treated as an actual cost in any financial statement. The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done.

Opportunity cost is a key concept in economics because it implies the choice between desirable, yet mutually exclusive results. It is a calculating factor used in mixed markets which favour social change in favour of purely individualistic economics. It has been described as expressing "the basic relationship between scarcity and choice." The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, swag, pleasure or any other benefit that provides utility should also be considered opportunity costs.

The concept of an opportunity cost was first developed by John Stuart Mill.

A person who invests $10,000 in a stock denies herself or himself the interest that could have accrued by leaving the $10,000 in a bank account instead. The opportunity cost of the decision to invest in stock is the value of the interest.

A person who sells stock for $10,000 denies himself or herself the opportunity to sell the stock for a higher price in the future, inheriting an opportunity cost equal to future price minus sale price.

An organization that invests $1 million in acquiring a new asset instead of spending that money on maintaining its existing asset portfolio incurs the increased risk of failure of its existing assets. The opportunity cost of the decision to acquire a new asset is the financial security that comes from the organization's spending the money on maintaining its existing asset portfolio.

If a city decides to build a hospital on vacant land it owns, the opportunity cost is the value of the benefits forgone of the next best thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sports center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, since those uses tend to be mutually exclusive. Also included in the opportunity cost would be what investments or purchases the private sector would have voluntarily made if it had not been taxed to build the hospital. The total opportunity costs of such an action can never be known with certainty, and are sometimes called "hidden costs" or "hidden losses" as what has been prevented from being produced cannot be seen or known. Even the possibility of inaction is a lost opportunity. In this example, to preserve the scenery as-is for neighboring areas, perhaps including areas that it itself owns.

Opportunity cost is assessed in not only monetary or material terms, but also in terms of anything which is of value. For example, a person who desires to watch each of two television programs being broadcast simultaneously, and does not have the means to make a recording of one, can watch only one of the desired programs. Therefore, the opportunity cost of watching Dallas could be enjoying Dynasty. In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. For the diner, the opportunity cost of ordering both meals could be twofold - the extra $20 to buy the second meal, and his reputation with his peers, as he may be thought gluttonous or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvements. The opportunity cost of having happy children could therefore be a remodelled bathroom
The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary cost (price) attached to a course of action, or the explicit accounting or monetory cost is low, then, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all. The unseen opportunity costs then become the implicit hidden costs of that course of action.

Note that opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other. The opportunity cost of the city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land, as use for any one of those purposes would preclude the possibility to implement any of the others.

However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation of the marginal theory of value as well as the theory of time and money.

In some cases it may be possible to have more of everything by making different choices; for instance, when an economy is within its production possibility frontier. In microeconomic models this is unusual, because individuals are assumed to maximise utility, but it is a feature of Keynesian macroeconomics. In these circumstances opportunity cost is a less useful concept.

The first step to making good decisions is to think about the trade-offs involved. This primer explains how measuring opportunity cost can help you find the trade-off that lurks within every decision.

Let's begin by analyzing a typical decision carefully, just as a coach might videotape a tennis player's stroke and then study it frame by frame.

Suppose that Jim is about to purchase a CD of his favorite singer. Let's see what goes on in his mind as he makes his decision.

Jim first looks at the songs and thinks about the hours of pleasure he would get listening to them. In economic terms, he determines the benefit he expects to get from the CD. Next, he glances at the price tag to see how much it costs -- $15. Jim determines that the CD's benefit exceeds its cost, so he decides to buy it.

To make his decision, Jim followed a simple rule: Do something if its benefit outweighs its cost. To see if Jim's rule is a good one, let's try it out on another problem. Suppose a woman is walking along down the street when she sees a dime on the sidewalk. Should she pick it up?

Yes, you may be thinking. If she picks up the dime, she gets a benefit of 10 cents. On the other hand, it doesn't cost her anything to pick it up. The benefit clearly outweighs the cost.

But what if the woman is Madonna, and she's hurrying to a recording studio where a symphony orchestra is waiting to perform with her. Do you still think she should stop and pick up the dime?

It's clearly not worth her time. Perhaps Jim's rule needs to be modified, say to this: Do something if its benefit outweighs its cost unless you're a famous singer. Or a movie star, or President of the United States, or a brain surgeon.

But there's a simpler way. We can greatly improve Jim's decision-making rule by adding just one word. Here's the rule for deciding whether it's in your own best interest to do something:

Do something if its benefit outweighs its opportunity cost.

When asked how much something costs, people usually answer by giving its price, or money cost. Economists usually measure cost differently, using what they call opportunity cost, defined as the value of the next best alternative opportunity that is given up in order to do something.

Here's how to calculate it. When considering a choice, ask yourself three questions:

1. What alternative opportunities are there?
2. Which is the best of these alternative opportunities?
3. What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?

The answer to the third question is the opportunity cost of the choice.

To find out the opportunity cost to Madonna of picking up the dime, we need to come up with her alternative opportunities and select the best one. Let's assume that Madonna's best alternative to picking up the dime would be to leave it on the sidewalk and arrive at the recording studio 30 seconds sooner.

The value of those 30 extra seconds at the recording studio is the opportunity cost to her of picking up the dime. She should compare the benefit she'd get from picking up the dime (10 cents) with its opportunity cost (arriving 30 seconds sooner at the recording studio) to decide what to do.

When we compare the opportunity cost of picking up the dime with the benefit, we can see that it doesn't make sense for Madonna to retrieve it. Her time would be better spent at the recording studio. Perhaps a child─whose time isn't worth as much─will come along later and decide to pick up the dime.

Opportunity cost and trade-offs

Let's have Jim decide again whether to buy the CD, this time using opportunity cost instead of money cost. As before, he should first consider the benefit he'd get from the CD, and look at its price tag. But before making a decision, Jim should consider alternative opportunities -- other things that he could do with the $15. Suppose his best alternative is to buy a pair of $15 sunglasses. The value to him of the sunglasses represents the opportunity cost of the CD.

As he decides whether to buy the CD, he should compare its benefit with its opportunity cost -- the sunglasses. If the benefit (the value to Jim of the CD) outweighs the opportunity cost (the value to Jim of the sunglasses), then he should buy the CD. If the benefit is less than the opportunity cost, then he shouldn't buy it.

In other words, thinking about the opportunity cost of buying a CD expresses the problem as a choice between the CD and the sunglasses. This is precisely why opportunity cost is such a powerful decision-making tool. It shows a decision for what it really is -- a trade-off between your two best alternatives.

As another example, consider a government proposal to build a new dam. Here's how a poor decision-maker might view the problem:

"If we build a dam, we'll have better flood control and cheaper electricity. If we don't, then we'll experience occasional flooding, and electricity will be more expensive."

Here the choice seems to be between having a dam and not having a dam. When put that way, it's tempting to choose to build the dam. Cheaper electricity and flood control are better than expensive electricity and floods.

Here's another way of presenting the problem:

"If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."

This decision-maker recognizes that something must be given up to build a dam. There's a trade-off. This is better, but still not the best way to view a decision. When we think of the cost in dollars, the trade-off we're facing is often unclear. It's hard for most people to imagine how much $100 million is, and we don't know whether the money could be put to better use elsewhere.

Here's how an economist would view the problem:

"If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."

Here, the benefit of the dam is compared with its opportunity cost: new high schools. Expressed that way, the cost of the dam becomes much more concrete. Besides, it's not really money that we're sacrificing when we build a dam, but rather resources -- workers, machines, cement, and land -- that could be used elsewhere. If money were the only thing we sacrificed, there would be no trade-offs; our government could buy us everything we wanted simply by printing more money, preferably in very large denominations.

Using opportunity cost -- an example

Ernesto is trying to decide whether to attend college and has determined the money cost of attending college for one year.

Money Cost of a Year of College

Tuition: $1,000
Books and school supplies: 2,000
Room and board: 10,000
Transportation: 1,000
Miscellaneous expenses: 3,000
__________________________________

Total money cost: $17,000

This tells Ernesto how much money he'll need to come up with if he decides to go to college.

But in order to decide whether to go to college, Ernesto should figure out its opportunity cost. The first step is for Ernesto to determine the best alternative to going to college. Let's say that it's working full time at the local Drive-In. The opportunity cost of going to college, then, is the value of what he would gain if he worked instead of going to college.

If Ernesto worked, he wouldn’t have to pay for tuition, books, or school supplies. He also would earn $10,000 during the year that she worked. The opportunity cost of a year of college, therefore, is:

Opportunity Cost of a Year of College



Tuition: $ 1,000
Books and school supplies: 2,000
Foregone wages from working: 10,000
_____________________________________

Total opportunity cost: $13,000



This tells Ernesto how much he'd have to spend on other things if he decided not to go to college.

You may be wondering why we didn't include room and board, transportation, entertainment, and miscellaneous expenses in the opportunity cost calculation. Wouldn't Ernesto have these expenses at college?

Yes, he would, but he also would face these costs if he decided to work. Remember, opportunity cost includes only the value of what one would gain under the next best alternative opportunity. Ernesto can't get out of paying for room and board, transportation, and entertainment by working. These expenses, therefore, should not be included in the opportunity cost of going to college.

The opportunity cost of going to college -- $13,000 -- tells Ernesto what he would gain if he chose not to go to college. When deciding whether to go to college, he should weigh that cost against the benefits of college, like higher future earnings, new friends, and a better understanding of our world.



Sunk Costs


Just as Eskimos have lots of words to describe snow, economists have lots of words to describe cost. This section introduces sunk costs.

Sunk costs are costs that must be paid whether or not you do something. They're of special interest to us because we don't want to include them when calculating opportunity cost. Unfortunately, sunk costs are like invasive weeds; it's often hard to yank them out of a problem.

To see why sunk costs should be ignored, let's go back to Sheila, who has had her car for a week now. She has just returned home from school and she's trying to decide whether to go out and see a movie.

To figure out the opportunity cost of seeing a movie, Sheila first determines her best alternative opportunity. Let's assume that it's to stay home and do homework. Next, she lists all the things that she would gain if she stayed home and did homework instead of watching a movie.



Opportunity Cost of Going to a Movie

Time to do homework: 3 hours
Gas and parking: $1.50
Admission to the theater: $2.00
__________________________________________________

Opportunity Cost: 3 hours and $3.50



Notice that Sheila correctly includes gas and parking in her opportunity cost calculations. But what about all the other costs associated with owning a car, like insurance and registration fees? Shouldn't she include them as part of the opportunity cost of going to a movie?

The answer is no. If Sheila stayed home, she'd still have to pay the same insurance and registration fees. She can't reduce these costs by staying home.

Insurance and registration fees are examples of sunk costs. Sunk costs can't be recovered by choosing the best alternative opportunity. That's why economists use the following rule when calculating the opportunity cost of something:

Ignore sunk costs.

Now suppose that Sheila decides to go to the movie and her little brother asks to come along. He will pay for his own admission. What is the opportunity cost to Sheila of bringing him?

The answer is nothing at all. Since Sheila has already decided to go to the movie theater, the expense of driving there has become a sunk cost -- she will incur that expense whether or not her brother comes. She doesn't sacrifice anything by bringing him along, unless, of course, he's obnoxious.

Monday, June 22, 2009

Single Entry

Single-entry bookkeeping system also known as Single-entry accounting system is a one sided accounting entry to maintain financial information.

Most businesses maintain a record of all transactions based on the double-entry bookkeeping system. However, many small, simple businesses maintain only a single-entry system that records the "bare-essentials." In some cases only records of cash, accounts receivable, accounts payable and taxes paid may be maintained. Records of assets, inventory, expenses, revenues and other elements usually considered essential in an accounting system may not be kept, except in memorandum form. Single-entry systems are usually inadequate except where operations are especially simple and the volume of activity is low.

This type of accounting system with additional information can typically be compiled into an income statement and balance sheet by a professional accountant.

Advantages

Single-entry systems are used in the interest of simplicity. They are usually less expensive to maintain than double-entry systems because they do not require the services of a trained person.

Disadvantages

Data may not be available to management for effectively planning and controlling the business.
Lack of systematic and precise bookkeeping may lead to inefficient administration and reduced control over the affairs of the business.
Single-entry records do not provide a check against clerical error, as does a double-entry system. This is one of the most serious defects of single-entry systems.
Single-entry records seldom make provision for recording all transactions. In addition, many internal transactions, such as adjusting entries are often not recorded.
Because no accounts are provided for many of the items appearing in both the Income Statement and Balance Sheet, omission of important data is possible.
In the absence of detailed records of all assets, lax administration of those assets may occur.
Theft and other losses are less likely to be detected.

Most of financial accounting is based on double-entry bookkeeping. To understand and appreciate the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping system. In its most basic form, a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. In a simple checkbook, each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. This system is demonstrated in the following example for a repair shop business:



Single Column System
Date Description Amount
Jan 1 Beginning Balance 1,000.00

Jan 2 Purchased shop supplies (150.00)

Jan 4 Performed repair service 275.00

Jan 7 Performed repair service 125.00

Jan 15 Paid phone bill (50.00)

Jan 30 Ending balance 1,200.00





While extremely simple, because the above system uses a single column, only the difference between revenues and expenses is totaled - not the individual values of each. Knowing the individual total amounts of revenues and expenses is important to a business, for example, when formulating a budget. The revenues and expenses also are reported in the income statement. In the above example, the individual revenue and expense amounts can be determined only by sorting through the transactions and tabulating the revenue and expense totals. This process can be designed into the system by using a separate column for revenues and expenses:



Separating Revenues and Expenses
Date Description Revenues Expenses
Jan 2 Purchased shop supplies 150.00

Jan 4 Performed repair service 275.00

Jan 7 Performed repair service 125.00

Jan 15 Paid phone bill 50.00
------- -------
January Totals 400. 200.00






While the above example now uses two columns, it still is considered to be a single-entry system since only one line is used to record each transaction in the cash account. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the revenues as sales and sales tax collected, and the expenses as rent, utilities, supplies, etc. Some single-entry systems may add dozens of columns for different types of revenues and expenses. Many small businesses utilize such a system. However, even with columns to classify the revenues and expenses, single-entry bookkeeping is limited in its ability to provide detailed financial information. Some disadvantages of a single-entry system include:

Does not track asset and liability accounts such as inventory, accounts receivable and accounts payable. These must be tracked separately.

Facilitates the calculation of income but not of financial position. There is no direct linkage between income and the balance sheet.

Errors may go undetected and often are identified only through bank statement reconciliation.

Because of these drawbacks, a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period, significant assets, and external suppliers of capital. The more sophisticated double-entry bookkeeping system addresses the more demanding needs of such businesses.

Critical Path Analysis and PERT Charts

Critical Path Analysis and PERT are powerful tools that help you to schedule and manage complex projects. They were developed in the 1950s to control large defense projects, and have been used routinely since then.
As with Gantt Charts, Critical Path Analysis (CPA) or the Critical Path Method (CPM) helps you to plan all tasks that must be completed as part of a project. They act as the basis both for preparation of a schedule, and of resource planning. During management of a project, they allow you to monitor achievement of project goals. They help you to see where remedial action needs to be taken to get a project back on course.

Within a project it is likely that you will display your final project plan as a Gantt Chart (using Microsoft Project or other software for projects of medium complexity or an excel spreadsheet for projects of low complexity).The benefit of using CPA within the planning process is to help you develop and test your plan to ensure that it is robust. Critical Path Analysis formally identifies tasks which must be completed on time for the whole project to be completed on time. It also identifies which tasks can be delayed if resource needs to be reallocated to catch up on missed or overrunning tasks. The disadvantage of CPA, if you use it as the technique by which your project plans are communicated and managed against, is that the relation of tasks to time is not as immediately obvious as with Gantt Charts. This can make them more difficult to understand.

A further benefit of Critical Path Analysis is that it helps you to identify the minimum length of time needed to complete a project. Where you need to run an accelerated project, it helps you to identify which project steps you should accelerate to complete the project within the available time.

How to Use the Tool:
As with Gantt Charts, the essential concept behind Critical Path Analysis is that you cannot start some activities until others are finished. These activities need to be completed in a sequence, with each stage being more-or-less completed before the next stage can begin. These are 'sequential' activities.

Other activities are not dependent on completion of any other tasks. You can do these at any time before or after a particular stage is reached. These are non-dependent or 'parallel' tasks.

Drawing a Critical Path Analysis Chart
Use the following steps to draw a CPA Chart:

Step 1. List all activities in the plan
For each activity, show the earliest start date, estimated length of time it will take, and whether it is parallel or sequential. If tasks are sequential, show which stage they depend on.

For the project example used here, you will end up with the same task list as explained in the article on Gantt Charts (we will use the same example as with Gantt Charts to compare the two techniques). The chart is repeated in Figure 1 below:

Figure 1. Task List: Planning a custom-written computer project


Task
Earliest start
Length
Type
Dependent on...

A. High level analysis
Week 0
1 week
Sequential

B. Selection of hardware platform
Week 1
1 day
Sequential
A

C. Installation and commissioning of hardware
Week 1.2
2 weeks
Parallel
B

D. Detailed analysis of core modules
Week 1
2 weeks
Sequential
A

E. Detailed analysis of supporting modules
Week 3
2 weeks
Sequential
D

F. Programming of core modules
Week 3
2 weeks
Sequential
D

G. Programming of supporting modules
Week 5
3 weeks
Sequential
E

H. Quality assurance of core modules
Week 5
1 week
Sequential
F

I. Quality assurance of supporting modules
Week 8
1 week
Sequential
G

J.Core module training
Week 6
1 day
Parallel
C,H

K. Development and QA of accounting reporting
Week 5
1 week
Parallel
E

L. Development and QA of management reporting
Week 5
1 week
Parallel
E

M. Development of Management Information System
Week 6
1 week
Sequential
L

N. Detailed training
Week 9
1 week
Sequential
I, J, K, M

Step 2. Plot the activities as a circle and arrow diagram
Critical Path Analyses are presented using circle and arrow diagrams.

In these, circles show events within the project, such as the start and finish of tasks. The number shown in the left hand half of the circle allows you to identify each one easily. Circles are sometimes known as nodes.

An arrow running between two event circles shows the activity needed to complete that task. A description of the task is written underneath the arrow. The length of the task is shown above it. By convention, all arrows run left to right. Arrows are also sometimes called arcs.

An example of a very simple diagram is shown below:



This shows the start event (circle 1), and the completion of the 'High Level Analysis' task (circle 2). The arrow between them shows the activity of carrying out the High Level Analysis. This activity should take 1 week.

Where one activity cannot start until another has been completed, we start the arrow for the dependent activity at the completion event circle of the previous activity. An example of this is shown below:



Here the activities of 'Select Hardware' and 'Core Module Analysis' cannot be started until 'High Level Analysis' has been completed. This diagram also brings out a number of other important points:

Within Critical Path Analysis, we refer to activities by the numbers in the circles at each end. For example, the task 'Core Module Analysis' would be called activity 2 to 3. 'Select Hardware' would be activity 2 to 9.
Activities are not drawn to scale. In the diagram above, activities are 1 week long, 2 weeks long, and 1 day long. Arrows in this case are all the same length.
In the example above, you can see a second number in the top, right hand quadrant of each circle. This shows the earliest start time for the following activity. It is conventional to start at 0. Here units are whole weeks.
A different case is shown below:



Here activity 6 to 7 cannot start until the other four activities (11 to 6, 5 to 6, 4 to 6, and 8 to 6) have been completed.

Click the link below for the full circle and arrow diagram for the computer project we are using as an example.

Figure 5: Full Critical Path Diagram




This shows all the activities that will take place as part of the project. Notice that each event circle also has a figure in the bottom, right hand quadrant. This shows the latest finish time that's permissible for the preceding activity if the project is to be completed in the minimum time possible. You can calculate this by starting at the last event and working backwards.The latest finish time of the preceding event and the earliest start time of the following even will be the same for circles on the critical path.

You can see that event M can start any time between weeks 6 and 8. The timing of this event is not critical. Events 1 to 2, 2 to 3, 3 to 4, 4 to 5, 5 to 6 and 6 to 7 must be started and completed on time if the project is to be completed in 10 weeks. This is the 'critical path' – these activities must be very closely managed to ensure that activities are completed on time. If jobs on the critical path slip, immediate action should be taken to get the project back on schedule. Otherwise completion of the whole project will slip.

'Crash Action'
You may find that you need to complete a project earlier than your Critical Path Analysis says is possible. In this case you need to re-plan your project.

You have a number of options and would need to assess the impact of each on the project’s cost, quality and time required to complete it. For example, you could increase resource available for each project activity to bring down time spent on each but the impact of some of this would be insignificant and a more efficient way of doing this would be to look only at activities on the critical path.

As an example, it may be necessary to complete the computer project in Figure 5 in 8 weeks rather than 10 weeks. In this case you could look at using two analysts in activities 2 to 3 and 3 to 4. This would shorten the project by two weeks, but may raise the project cost – doubling resources at any stage may only improve productivity by, say, 50% as additional time may need to be spent getting the team members up to speed on what is required, coordinating tasks split between them, integrating their contributions etc.

In some situations, shortening the original critical path of a project can lead to a different series of activities becoming the critical path. For example, if activity 4 to 5 were reduced to 1 week, activities 4 to 8 and 8 to 6 would come onto the critical path.

As with Gantt Charts, in practice project managers use software tools like Microsoft Project to create CPA Charts. Not only do these ease make them easier to draw, they also make modification of plans easier and provide facilities for monitoring progress against plans.

PERT (Program Evaluation and Review Technique)
PERT is a variation on Critical Path Analysis that takes a slightly more skeptical view of time estimates made for each project stage. To use it, estimate the shortest possible time each activity will take, the most likely length of time, and the longest time that might be taken if the activity takes longer than expected.

Use the formula below to calculate the time to use for each project stage:

shortest time + 4 x likely time + longest time
-----------------------------------------------------------
6

This helps to bias time estimates away from the unrealistically short time-scales normally assumed.

Key points:
Critical Path Analysis is an effective and powerful method of assessing:

What tasks must be carried out.
Where parallel activity can be performed.
The shortest time in which you can complete a project.
Resources needed to execute a project.
The sequence of activities, scheduling and timings involved.
Task priorities.
The most efficient way of shortening time on urgent projects.
An effective Critical Path Analysis can make the difference between success and failure on complex projects. It can be very useful for assessing the importance of problems faced during the implementation of the plan.

PERT is a variant of Critical Path Analysis that takes a more skeptical view of the time needed to complete each project stage.

Thursday, June 18, 2009

Cost-Volume-Profit (CVP) Analysis

Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses.

Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:

The behavior of both costs and revenues in linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
Costs can be classified accurately as either fixed or variable.
Changes in activity are the only factors that affect costs.
All units produced are sold (there is no ending finished goods inventory).
When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
In the following discussion, only one product will be assumed. Finding the breakeven point is the initial step in CVP, since it is critical to know whether sales at a given level will at least cover the relevant costs. The breakeven point can be determined with a mathematical equation, using contribution margin, or from a CVP graph. Begin by observing the CVP graph in Figure 1, where the number of units produced equals the number of units sold. This figure illustrates the basic CVP case. Total revenues are zero when output is zero, but grow linearly with each unit sold. However, total costs have a positive base even at zero output, because fixed costs will be incurred even if no units are produced. Such costs may include dedicated equipment or other components of fixed costs. It is important to remember that fixed costs include costs of every kind, including fixed sales salaries, fixed office rent, and fixed equipment depreciation of all types. Variable costs also include all types of variable costs: selling, administrative, and production. Sometimes, the focus is on production to the point where it is easy to overlook that all costs must be classified as either fixed or variable, not merely product costs.

Where the total revenue line intersects the total costs line, breakeven occurs. By drawing a vertical line from this point to the units of output (X) axis, one can determine the number of units to break even. A horizontal line drawn from the intersection to the dollars (Y) axis would reveal the total revenues and total costs at the breakeven point. For units sold above the breakeven point, the total revenue line continues to climb above the total cost line and the company enjoys a profit. For units sold below the breakeven point, the company suffers a loss.

Illustrating the use of a mathematical equation to calculate the BEP requires the assumption of representative numbers. Assume that a company has total annual fixed cost of $480,000 and that variable costs of all kinds are found to be $6 per unit. If each unit sells for $10, then each unit exceeds the specific variable costs that it causes by $4. This $4 amount is known as the unit contribution margin. This means that each unit sold contributes $4 to cover the fixed costs. In this intuitive example, 120,000 units must be produced and sold in order to break even. To express this in a mathematical equation, consider the following abbreviated income statement:
Unit Sales = Total Variable Costs + Total Fixed Costs + Net Income
Inserting the assumed numbers and letting X equal the number of units to break even:
$10.00X = $6.00X + $480,000 + 0

Note that net income is set at zero, the breakeven point. Solving this algebraically provides the same intuitive answer as above, and also the shortcut formula for the contribution margin technique:
Fixed Costs ÷ Unit Contribution Margin = Breakeven Point in Units
$480,000 ÷ $4.00 = 120,000 units

If the breakeven point in sales dollars is desired, use of the contribution margin ratio is helpful. The contribution margin ratio can be calculated as follows:
Unit Contribution Margin ÷ Unit Sales Price = Contribution Margin Ratio
$4.00 ÷ $10.00 = 40%

To determine the breakeven point in sales dollars, use the following mathematical equation:
Total Fixed Costs ÷ Contribution Margin Ratio = Breakeven Point in Sales Dollars
$480,000 ÷ 40% = $1,200,000

The margin of safety is the amount by which the actual level of sales exceeds the breakeven level of sales. This can be expressed in units of output or in dollars. For example, if sales are expected to be 121,000 units, the margin of safety is 1,000 units over breakeven, or $4,000 in profits before tax.

A useful extension of knowing breakeven data is the prediction of target income. If a company with the cost structure described above wishes to earn a target income of $100,000 before taxes, consider the condensed income statement below. Let X = the number of units to be sold to produce the desired target income:
Target Net Income = Required Sales Dollars − Variable Costs − Fixed Costs
$100,000 = $10.00X − $6.00X − $480,000

Solving the above equation finds that 145,000 units must be produced and sold in order for the company to earn a target net income of $100,000 before considering the effect of income taxes.

A manager must ensure that profitability is within the realm of possibility for the company, given its level of capacity. If the company has the ability to produce 100 units in an 8-hour shift, but the breakeven point for the year occurs at 120,000 units, then it appears impossible for the company to profit from this product. At best, they can produce 109,500 units, working three 8-hour shifts, 365 days per year (3 X 100 X 365). Before abandoning the product, the manager should investigate several strategies:

Examine the pricing of the product. Customers may be willing to pay more than the price assumed in the CVP analysis. However, this option may not be available in a highly competitive market.
If there are multiple products, then examine the allocation of fixed costs for reasonableness. If some of the assigned costs would be incurred even in the absence of this product, it may be reasonable to reconsider the product without including such costs.
Variable material costs may be reduced through contractual volume purchases per year.
Other variable costs (e.g., labor and utilities) may improve by changing the process. Changing the process may decrease variable costs, but increase fixed costs. For example, state-of-the-art technology may process units at a lower per-unit cost, but the fixed cost (typically, depreciation expense) can offset this advantage. Flexible analyses that explore more than one type of process are particularly useful in justifying capital budgeting decisions. Spreadsheets have long been used to facilitate such decision-making.
One of the most essential assumptions of CVP is that if a unit is produced in a given year, it will be sold in that year. Unsold units distort the analysis. Figure 2 illustrates this problem, as incremental revenues cease while costs continue. The profit area is bounded, as units are stored for future sale.

Unsold production is carried on the books as finished goods inventory. From a financial statement perspective, the costs of production on these units are deferred into the next year by being reclassified as assets. The risk is that these units will not be salable in the next year due to obsolescence or deterioration.

While the assumptions employ determinate estimates of costs, historical data can be used to develop appropriate probability distributions for stochastic analysis. The restaurant industry, for example, generally considers a 15 percent variation to be "accurate."

APPLICATIONS
While this type of analysis is typical for manufacturing firms, it also is appropriate for other types of industries. In addition to the restaurant industry, CVP has been used in decision-making for nuclear versus gas- or coal-fired energy generation. Some of the more important costs in the analysis are projected discount rates and increasing governmental regulation. At a more down-to-earth level is the prospective purchase of high quality compost for use on golf courses in the Carolinas. Greens managers tend to balk at the necessity of high (fixed) cost equipment necessary for uniform spreadability and maintenance, even if the (variable) cost of the compost is reasonable. Interestingly, one of the unacceptably high fixed costs of this compost is the smell, which is not adaptable to CVP analysis.

Even in the highly regulated banking industry, CVP has been useful in pricing decisions. The market for banking services is based on two primary categories. First is the price-sensitive group. In the 1990s leading banks tended to increase fees on small, otherwise unprofitable accounts. As smaller account holders have departed, operating costs for these banks have decreased due to fewer accounts; those that remain pay for their keep. The second category is the maturity-based group. Responses to changes in rates paid for certificates of deposit are inherently delayed by the maturity date. Important increases in fixed costs for banks include computer technology and the employment of skilled analysts to segment the markets for study.

Even entities without a profit goal find CVP useful. Governmental agencies use the analysis to determine the level of service appropriate for projected revenues. Nonprofit agencies, increasingly stipulating fees for service, can explore fee-pricing options; in many cases, the recipients are especially price-sensitive due to income or health concerns. The agency can use CVP to explore the options for efficient allocation of resources.

Project feasibility studies frequently use CVP as a preliminary analysis. Such major undertakings as real estate/construction ventures have used this technique to explore pricing, lender choice, and project scope options.

Cost-volume-profit analysis is a simple but flexible tool for exploring potential profit based on cost strategies and pricing decisions. While it may not provide detailed analysis, it can prevent "do-nothing" management paralysis by providing insight on an overview basis.


The relationships among revenue, cost, profit and volume can be expressed graphically by preparing a cost-volume-profit (CVP) graph or break even chart. A CVP graph highlights CVP relationships over wide ranges of activity and can give managers a perspective that can be obtained in no other way.

Preparing a CVP Graph or Break-Even Chart:
In a CVP graph some times called a break even chart unit volume is commonly represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Preparing a CVP graph involves three steps.



1. Draw a line parallel to the volume axis to present total fixed expenses. For example we assume total fixed expenses $35,000.



2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. For example we select a level of 600 units. Total expenses at that activity level is as follows:

Fixed Expenses $35,000
Variable Expenses (150×600) $90,000
------------
Total Expenses $125,000
======


After the point has been plotted, draw a line through it back to the point where the fixed expenses line intersects the dollars axis.

3. Again choose some volume of sales and plot the point representing total sales dollars at the activity level you have selected. For example we have chosen a volume of 600 units. sales at this activity level are $150,000 (600units × $250) draw a line through this point back to the origin. The break even point is where the total revenue and total expense lines cross. See the graph and note that break even point is at 350 units. It means when the company sells 350 units the profit is zero. When the sales are below the break even the company suffers a loss. When sales are above the break even point, the company earns a profit and the size of the profit increases as sales increase.

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Monday, June 15, 2009

INCOME TAX IN BUDGET 2009-10

INCOME TAX
RELIEF MEASURES:
• The basic limit of exemption from income tax in respect of salaried persons is proposed to be increased from Rs.1,80,000 to Rs.2,00,000. In the case of women salaries taxpayers, this limit is proposed to be increased from Rs.2,40,000 to Rs.2,60,000.
• Presently senior citizens are allowed 50% relief in tax liability provided the taxable income, in a tax year, does not exceed Rs.5,00,000/-. In view of inflationary trend, it is proposed to enhance limit of taxable income to Rs.7,50,000.
• In view of the less margin of profit available to cigarettes and pharmaceutical products distributors, withholding tax rate in respect of such taxpayer is being reduced from 3.5% to 1%.
• At present, the taxpayers are entitled to compensation @ 6% for the late payment of refunds. Considering the prevailing interest rates on bank loans the rate of compensation is being increased to 10% per annum.
• Presently, receipts form accumulated balance of voluntary pension scheme is exempt up to 25% of the available balance. In order to promote the voluntary pension schemes and allow relief to pensioner class the said limit is proposed to be enhanced to 50%.
• Under the existing provisions of the Income Tax Ordinance, a person is entitled to tax credit on interest payment of housing loans up to 45% of the taxable income or Rs.5,00,000/- whichever is low. The said limits are proposed to be enhanced to 50% and Rs.7,00,000/- respectively.
• Presently, tax collected on monthly electricity bills in respect of non-corporate Commercial and Industrial consumers is treated as final tax. An amendment has been proposed in section 235 of the Income Tax Ordinance by virtue of which the tax deducted on the monthly electricity bills exceeding Rs.30,000/- will be adjustable which consequently could be refunded.
• Last year amendment was made in the seventh schedule to the Income Tax Ordinance whereby the banks were deprived of the facility to claim deduction on account of provisions of non-performing loans. This facility is being restored. However, the same is proposed to be restricted to 1% of the total advances made by the bank in a tax year.
Revenue Measures:
• Before amendment made through Finance Act, 2008 withholding tax on imports was collected @ 5% which was reduced to 2%. The benefit of reduction in tax rate could not be passed on to end users therefore, the rate is proposed to be enhanced to 4% across the board.
• Presently, advance tax is payable in four quarterly installments on the basis of last assessed income. It is proposed that far working out the advance tax liability the sales should also be taken in to account.
• Last year the provision regarding payment of minimum tax on declared turnover by the companies showing losses for one or other reasons was deleted mainly for the reason that the revenue collection was insignificant. Subsequently, it was found that actual collection from this source was much higher, however due to misclassification, the same could not be reported properly. In view of huge revenue loss the provision is being revived.
• Presently, the indenting commission is being taxed @ 1% of the gross receipts whereas the general rate for commission and brokerage is 10%. In view of the gross disparity in the rate it is proposed to be enhanced to 5%.
• The scope of advance tax collection on purchase of new locally manufactured motorcar/jeep is proposed to be extended to all types of motor vehicles.
• In order to raise funds for the rehabilitation of internally displaced persons (IDPs) of Swat, Dir & Bunir it is proposed to charge 5% tax on tax payable by individuals and AOPs whose taxable income exceeds one million rupees.
• In order to support IDPs in their habilitation a new tax is being proposed to be charged on bonus income of corporate executives @ 30% of the bonus. This is a one time levy and payable for tax year 2009 only.
• At present, additional tax is chargeable @ 12% per annum on late payment of tax. The rate being low as compared to prevailing interest rate on bank loan gives temptation for delaying payment of tax. It is therefore, proposed to increase the rate of additional tax to 15% per annum.
• At present, depreciation on passenger transport vehicles is allowed on total cost which has encouraged the purchase of luxury vehicles mainly used for personal purposes at the cost of revenue. It is, therefore, proposed to restrict the value of such vehicle to Rs.1.5 million for the purpose of depreciation.
• Presently the large trading houses are exempt from payment of withholding tax on imports as well as sales of goods. The facility of exemption of tax at import stage is being withdrawn. However, the tax so collected will be adjustable against final tax liability.
• The exemption regime provided under the second schedule to the Income Tax Ordinance has been reviewed to delete the redundant and unjustified exemptions as per detail given in the Finance Bill.
• It has been noticed that the facility of tax exemption available to educational institution is being grossly misused by private universities and medical colleges etc. It is therefore proposed that such facility would only be available to those institutions which have been approved by the concerned Director General of LTU/RTO for this purpose.
o At present no tax is collected on export of goods made without form “E” because in this case export proceeds are received in cash. An amendment has been proposed in section 154 whereby the Collectorate of Customs shall collect tax @ 1% at the time of clearing goods for export made without form “E”. Presently such exports are mainly allowed to Afghanistan through land routs.
TECHNICAL MEASURES:
• In order to avoid false claims of tax payments and make possible speedy verification of tax paid for issuance of refund, it is proposed that the taxpayer would be required to furnish copies of challan or other equivalent document in support of claims of tax payments.
• At present, the taxpayers are allowed to file revised return any time within five years of the filing of original return. It is proposed to disallow filing of revised return in cases, where the department has initiated proceedings for amendment of assessment order.
• An amendment has been proposed in section 124 of the Income Tax Ordinance, 2001 by virtue of which the taxpayers would be provided the facility of filing appeal against the reassessment order.
• In order to safeguard the interest of revenue it has been proposed that in certain cases where departmental appeals are pending in courts the Commissioner will be empowered to withhold refunds.
• In the cases of taxpayers having special tax year calculation of additional tax for delayed payment of advance tax will be made from the first day of the last quarter of the relevant tax year instead of 1st April as allowed in case of taxpayers having normal tax year.
• Presently the taxpayers are allowed to rework out the cost of an asset, purchased against a loan in foreign currency, for the purpose of depreciation. An amendment has been proposed to restrict the revaluation of the asset only in the year of occurrence of exchange fluctuation and not in previous years.
• An amendment has been proposed in section 115 of the Income Tax Ordinance to provide for filing of revised statement by the tax payer on account of any omission or wrong statement of particulars of income.
• The motor vehicle registration authorities are being empowered to collect advance tax payable on purchase of a new locally manufactured motor vehicle at the time of registration of such vehicle.
• It is being made mandatory that the taxpayers who are required to file wealth statement shall also file wealth statement reconciliation giving necessary details and documents in support thereof.
• An amendment has been proposed in section 177 of the Income Tax Ordinance 2001 to empower the Commissioner of Income Tax to delegate powers to a chartered accountant firm for conducting audit of a taxpayer.
• Harmonization of different tax laws namely Income Tax, Sales Tax, Customs and Federal Excise Duty is one of the objectives of the ongoing Tax Reforms. In this connection necessary amendments are being made in the Income Tax Ordinance, 2001 to make it harmonized with other tax laws. These amendments mainly relate to appellate proceedings, appeal fees, fine, penalties and appointment of Special Judges.
MEASURES FOR BROADENING OF TAX BASE:
• In order to broaden the tax base and promote documentation of economy, importers, exporters and service providers are being required to file normal return of income instead of simple statement. Further tax deducted/collected from such taxpayers would be treated as minimum instead of final tax.
• It is proposed that obtaining of NTN may be made mandatory for purchase of property, obtaining commercial and industrial gas/electricity connection and opening of a bank account. All NTN holders are also proposed to file returns necessarily.
• In order to ensure filing of income tax returns by all persons having reasonable resources and income, it is proposed that any person owning immovable property with a land area having 500 sq. yards, flat having covered area 2000 sq.ft or owns a motor vehicle having engine capacity of 1000CC or more shall file return of income.
• Taxation Officers are being empowered to pass best judgment assessment orders in the cases of the taxpayers who failed to furnish statutory statement as required under section 115 of the Income Tax Ordinance, 2001.
• To accelerate the pace of documentation of the economy and broadening of tax base the manufacturer are being incentivized by allowing tax credit at 2.5% of
the tax payable if they are able to make at least 90% of their sales to sales tax registered persons.
• The real estate sector is known to be the most under taxed sector of the economy which usually attracts black economy. In order to curb the speculative tendency and discourage non productive investment the rate of CVT on transfer of immoveable property is being enhanced from 2% to 4%.

Sunday, June 14, 2009

SALIENT FEATURES FOR THE BUDGET 2009-10

SALIENT FEATURES FOR THE BUDGET 2009-10
INCOME TAX
RELIEF MEASURES:
• The basic limit of exemption from income tax in respect of salaried persons is proposed to be increased from Rs.1,80,000 to Rs.2,00,000. In the case of women salaries taxpayers, this limit is proposed to be increased from Rs.2,40,000 to Rs.2,60,000.
• Presently senior citizens are allowed 50% relief in tax liability provided the taxable income, in a tax year, does not exceed Rs.5,00,000/-. In view of inflationary trend, it is proposed to enhance limit of taxable income to Rs.7,50,000.
• In view of the less margin of profit available to cigarettes and pharmaceutical products distributors, withholding tax rate in respect of such taxpayer is being reduced from 3.5% to 1%.
• At present, the taxpayers are entitled to compensation @ 6% for the late payment of refunds. Considering the prevailing interest rates on bank loans the rate of compensation is being increased to 10% per annum.
• Presently, receipts form accumulated balance of voluntary pension scheme is exempt up to 25% of the available balance. In order to promote the voluntary pension schemes and allow relief to pensioner class the said limit is proposed to be enhanced to 50%.
• Under the existing provisions of the Income Tax Ordinance, a person is entitled to tax credit on interest payment of housing loans up to 45% of the taxable income or Rs.5,00,000/- whichever is low. The said limits are proposed to be enhanced to 50% and Rs.7,00,000/- respectively.
• Presently, tax collected on monthly electricity bills in respect of non-corporate Commercial and Industrial consumers is treated as final tax. An amendment has been proposed in section 235 of the Income Tax Ordinance by virtue of which the tax deducted on the monthly electricity bills exceeding Rs.30,000/- will be adjustable which consequently could be refunded.
• Last year amendment was made in the seventh schedule to the Income Tax Ordinance whereby the banks were deprived of the facility to claim deduction on account of provisions of non-performing loans. This facility is being restored. However, the same is proposed to be restricted to 1% of the total advances made by the bank in a tax year.
Revenue Measures:
• Before amendment made through Finance Act, 2008 withholding tax on imports was collected @ 5% which was reduced to 2%. The benefit of reduction in tax rate could not be passed on to end users therefore, the rate is proposed to be enhanced to 4% across the board.
• Presently, advance tax is payable in four quarterly installments on the basis of last assessed income. It is proposed that far working out the advance tax liability the sales should also be taken in to account.
• Last year the provision regarding payment of minimum tax on declared turnover by the companies showing losses for one or other reasons was deleted mainly for the reason that the revenue collection was insignificant. Subsequently, it was found that actual collection from this source was much higher, however due to misclassification, the same could not be reported properly. In view of huge revenue loss the provision is being revived.
• Presently, the indenting commission is being taxed @ 1% of the gross receipts whereas the general rate for commission and brokerage is 10%. In view of the gross disparity in the rate it is proposed to be enhanced to 5%.
• The scope of advance tax collection on purchase of new locally manufactured motorcar/jeep is proposed to be extended to all types of motor vehicles.
• In order to raise funds for the rehabilitation of internally displaced persons (IDPs) of Swat, Dir & Bunir it is proposed to charge 5% tax on tax payable by individuals and AOPs whose taxable income exceeds one million rupees.
• In order to support IDPs in their habilitation a new tax is being proposed to be charged on bonus income of corporate executives @ 30% of the bonus. This is a one time levy and payable for tax year 2009 only.
• At present, additional tax is chargeable @ 12% per annum on late payment of tax. The rate being low as compared to prevailing interest rate on bank loan gives temptation for delaying payment of tax. It is therefore, proposed to increase the rate of additional tax to 15% per annum.
• At present, depreciation on passenger transport vehicles is allowed on total cost which has encouraged the purchase of luxury vehicles mainly used for personal purposes at the cost of revenue. It is, therefore, proposed to restrict the value of such vehicle to Rs.1.5 million for the purpose of depreciation.
• Presently the large trading houses are exempt from payment of withholding tax on imports as well as sales of goods. The facility of exemption of tax at import stage is being withdrawn. However, the tax so collected will be adjustable against final tax liability.
• The exemption regime provided under the second schedule to the Income Tax Ordinance has been reviewed to delete the redundant and unjustified exemptions as per detail given in the Finance Bill.
• It has been noticed that the facility of tax exemption available to educational institution is being grossly misused by private universities and medical colleges etc. It is therefore proposed that such facility would only be available to those institutions which have been approved by the concerned Director General of LTU/RTO for this purpose.
o At present no tax is collected on export of goods made without form “E” because in this case export proceeds are received in cash. An amendment has been proposed in section 154 whereby the Collectorate of Customs shall collect tax @ 1% at the time of clearing goods for export made without form “E”. Presently such exports are mainly allowed to Afghanistan through land routs.
TECHNICAL MEASURES:
• In order to avoid false claims of tax payments and make possible speedy verification of tax paid for issuance of refund, it is proposed that the taxpayer would be required to furnish copies of challan or other equivalent document in support of claims of tax payments.
• At present, the taxpayers are allowed to file revised return any time within five years of the filing of original return. It is proposed to disallow filing of revised return in cases, where the department has initiated proceedings for amendment of assessment order.
• An amendment has been proposed in section 124 of the Income Tax Ordinance, 2001 by virtue of which the taxpayers would be provided the facility of filing appeal against the reassessment order.
• In order to safeguard the interest of revenue it has been proposed that in certain cases where departmental appeals are pending in courts the Commissioner will be empowered to withhold refunds.
• In the cases of taxpayers having special tax year calculation of additional tax for delayed payment of advance tax will be made from the first day of the last quarter of the relevant tax year instead of 1st April as allowed in case of taxpayers having normal tax year.
• Presently the taxpayers are allowed to rework out the cost of an asset, purchased against a loan in foreign currency, for the purpose of depreciation. An amendment has been proposed to restrict the revaluation of the asset only in the year of occurrence of exchange fluctuation and not in previous years.
• An amendment has been proposed in section 115 of the Income Tax Ordinance to provide for filing of revised statement by the tax payer on account of any omission or wrong statement of particulars of income.
• The motor vehicle registration authorities are being empowered to collect advance tax payable on purchase of a new locally manufactured motor vehicle at the time of registration of such vehicle.
• It is being made mandatory that the taxpayers who are required to file wealth statement shall also file wealth statement reconciliation giving necessary details and documents in support thereof.
• An amendment has been proposed in section 177 of the Income Tax Ordinance 2001 to empower the Commissioner of Income Tax to delegate powers to a chartered accountant firm for conducting audit of a taxpayer.
• Harmonization of different tax laws namely Income Tax, Sales Tax, Customs and Federal Excise Duty is one of the objectives of the ongoing Tax Reforms. In this connection necessary amendments are being made in the Income Tax Ordinance, 2001 to make it harmonized with other tax laws. These amendments mainly relate to appellate proceedings, appeal fees, fine, penalties and appointment of Special Judges.
MEASURES FOR BROADENING OF TAX BASE:
• In order to broaden the tax base and promote documentation of economy, importers, exporters and service providers are being required to file normal return of income instead of simple statement. Further tax deducted/collected from such taxpayers would be treated as minimum instead of final tax.
• It is proposed that obtaining of NTN may be made mandatory for purchase of property, obtaining commercial and industrial gas/electricity connection and opening of a bank account. All NTN holders are also proposed to file returns necessarily.
• In order to ensure filing of income tax returns by all persons having reasonable resources and income, it is proposed that any person owning immovable property with a land area having 500 sq. yards, flat having covered area 2000 sq.ft or owns a motor vehicle having engine capacity of 1000CC or more shall file return of income.
• Taxation Officers are being empowered to pass best judgment assessment orders in the cases of the taxpayers who failed to furnish statutory statement as required under section 115 of the Income Tax Ordinance, 2001.
• To accelerate the pace of documentation of the economy and broadening of tax base the manufacturer are being incentivized by allowing tax credit at 2.5% of
the tax payable if they are able to make at least 90% of their sales to sales tax registered persons.
• The real estate sector is known to be the most under taxed sector of the economy which usually attracts black economy. In order to curb the speculative tendency and discourage non productive investment the rate of CVT on transfer of immoveable property is being enhanced from 2% to 4%.
SALIENT FEATURES
CUSTOMS BUDGETARY MEASURES 2009-10
Policy Objectives:
• Industrial incentives for growth and expansion.
• Boosting the export oriented sectors.
• Discouraging import of non-essential and luxury items.
• Minimizing the cost of doing business.
• Amendments in Customs Act, Rules and Procedures for further simplification.
1. Relief Measures:
a. Concession/exemption on pharmaceutical raw materials, lifesaving drugs and cancer diagnostic.
b. Exemption from customs duty on colostomy bags (PCT 3926.9050).
c. Reduction of duty on mobile phones from Rs. 500/set to Rs.250/set and removal of RD @ Rs. 250/set.
d. Exemption of duty on Betain (PCT 2923.9010) for poultry industry.
e. Exemption from duty on calf milk replacer (CMR) from existing 20% duty rate.
f. Exemption from duty on premix of micro nutrients (cattle feed premix) from 20% duty rate for dairy development.
g. Reduction of duty from 10% to 5% on raw materials for manufacturing pre-fabricated steel buildings.
h. Continuation of exemption of duty on import of Agricultural tractors.
i. Reduction of duty on import of Kits for 4-stroke auto-rickshaws from 32.5% to 20%
j. Extension in scope of exempted relief goods falling under chapter 99 of Customs Tariff.
2. Protection to local industry:
a. Increase in duty on hydrogen peroxide from 5% to 10% to protect local manufacturer.
b. Increase in duty on Isobutyl Acetate from 5% to 20% to protect local manufacturer.
c. Increase in duty on Welded stainless steel pipes from 5% to 15% to protect local manufacturer.
d. Increase of duty on multi system airconditioners of capacity 5 tones and above from 10% to 35% plus regulatory duty @ 15%.
e. Reduction in concessionary rate by 5% on import of pharmaceutical packing materials (PVC rigid film and aluminum foil)
f. Incentive for manufacturing of LPG,CNG dispensers and energy efficient door and windows.
g. Reduction of duty from 10% to 5% on CRC black plate for manufacture of tin plate.
h. Reduction of duty on raw materials of transformers and control panels.
i. Exemption from duty on import of linear alkyl benzene from 5%.
j. Increase of duty on import of Spark Plugs and Wire Condensers from 5% to 10%.
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k. Increase in duty on plastic sanitary ware from 20% to 25%. Continuation of 5% CD rate on SKD kits for LCD/Plasma TVs manufacturers for further period of one year.
l. Increase in scope of exemptions on import of solar equipments.
m. Exemption on steel tubes for manufacturing of CNG cylinders
n. Increase of duty on tufted carpets from 10% to 15% to avoid misdeclaration with other types of carpets.
o. Rationalization of duty on silicon sealant
p. Exemption on inputs for manufacturing parts/components for engineering sector.
q. Increase in duty on conductors falling under PCT code 8544.6000 from 20% to 25%.
r. Partial waiver of exemption of RD for manufacturers of sack Kraft paper bags.
s. Inclusion of condition “Not manufactured locally” in SRO 656(I)/06 for OEMS.
t. Freezing duty structure on cars/Jeeps and LCVs for a period of one year.
3. Tariff rationalization:
a. Regulatory duty @ 10% on Pigment thickener is merged in Tariff.
b. Rationalization of duty on unglazed ceramic tiles to bring duty incidence at par with that on glazed tiles.
c. Rationalization of duty on Spin finish oil to check misdeclaration.
d. Rationalization of duty on LED panels to check misdeclaration.
e. Rationalization of duty rate on carbon black of rubber grade and other.
f. Uniform rate of duty on Cameras of PCT 8525.8000 to avoid misdeclaration.
g. Rationalization of duty on rolling coating printing ink.
h. Rationalization of duty on printed aluminum foil to avoid misdeclaration.
i. Increase in duty on residue oil (PCT Code 2713.9090) from 10% to 15%.
j. Rationalization of duty rate on import of cinematographic films from 5%ad.val. to 5% ad.val. plus Rs.5 per meter.
k. Improvement in Tariff Based System for vehicles :
i. Customs Duty on CBU motorcycles is proposed to be reduced from 70% to 65%;
ii. Customs Duty on non-localized components and sub-assemblies of motorcycles is proposed to be reduced from 20% to 15%;
iii. Additional Duty of 32.5% is proposed to be increased on four localized parts of motorcycles to protect local vendor industry;
iv. Customs Duty on five non localized components used in the manufacture of ‘Trailers’ is proposed to be reduced from 15% to 5% to promote local manufacturing of Trailers;
v. Tyres have been included in TBS on statutory rate of duty
l. Change in description of PCT codes 3824.9094 and 7228.3010.
m. Correction of PCT Codes of Polyamides based paints and CNG buses.
n. Creation of separate PCT code for cryogenic tanks and secondary quality steel sheets falling under PCT code 7210.5000.
4. Miscellaneous:
a. Continuation of regulatory duty on luxury/non-essential goods.
b. No change in duty structure on cars/jeeps and LCVs for a period of one year.
5. Administrative Improvement Measures:
Streamlining of Customs Valuation System.
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6. Legal changes:
Following amendments have been proposed in the Customs Act, 1969.
a. Definition of “document” is being amended to include certificate of country of origin, Vessel Information Report (VIR), Carrier Declaration Information.
b. Definition of KIBOR (Karachi Inter Bank Offered Rate) is being added for purpose of the Act and surcharge rates have been prescribed as KIBOR plus three per cent per annum in Sections 21A, 83, 86 and 202A.
c. Due to increase in prices of gold and other precious items, the limit for taking cognizance under the smuggling related provisions is being enhanced from Rs.50,000 to Rs.200,000.
d. A proviso is being added to section 15 so that offences relating to goods imported or exported in violation of intellectual property rights shall be adjudicated by appropriate officers of customs.
e. Section 25A is being amended to empower Director Custom Valuation to determine customs value on his own motion to control under invoicing more effectively.
f. Section 25D is being amended to prescribe time limit of 30 days for filing of review application against determination of customs value with Director General Customs Valuation.
g. Section 32 is being amended to curb the tendency of deliberate wrong self-assessment and less payment of revenue through computerized clearance system.
h. Section 32A is being amended by inserting words “any matter of customs including assessment, classification” to make it more comprehensive in order to curb the tendency of deliberate wrong self-assessment and less payment of revenue.
i. Section 33 is being amended so that no refund shall be allowed if sanctioning authority is satisfied that incidence of customs duty and other levies has been passed to the buyer or consumer.
j. Section 139 is being amended so that if a passenger avails the facility of green channel for clearance of his baggage, it should be taken as declaration made by him that no dutiable or contraband goods are being cleared through green channel.
k. Section 155F is being amended to empower Collector to immediately suspend Unique User Identifier on information of misuse of the same. However, the Collector
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of Customs shall, after giving opportunity of hearing, pass an order confirming suspension or otherwise the use of Unique User Identifier.
l. Section 179 is being amended so that Principal Appraiser and Superintendent of Customs are empowered to adjudicate petty cases not exceeding Rs.50,000. Moreover, the time limit for finalization of adjudication shall commence from the date of issuance of show cause notice and period of adjournments by the party etc shall be excluded for computation of time limit.
m. Section 194B is being amended that Appellate Tribunal shall not pass stay order for suspending recovery of duty and taxes without providing opportunity of hearing to respondents and such stay shall not exceed 180 days.
n. Section 195 is being amended to enhance the period of reopening of cases from two to three years.
o. Section 211 is being amended so that the retention of record is to be linked to final decision in any proceedings including proceeding for assessment, appeal, revision, reference, petition and any proceeding before an Alternative Dispute Resolution Committee.
SALIENT FEATURES
SALES TAX & FEDERAL EXCISE BUDGETARY
MEASURES (FY 2009-10)
o The budgetary measures of Sales Tax & Federal Excise are primarily aimed at:
• To bring Sales Tax & Federal Excise Laws in conformity with each other in order to make them simple and easy to follow.
• Enhance the Sales Tax & Federal Excise revenue by bringing more items in the tax net.
• Enhancing the tax incidence on cigarette i.e, an injurious to health item.
BRIEF POINTS ON MAJOR BUDGETARY MEASURES:
RELIEF MEASURES
o Zero-rating of wheel chairs for special people.
• Zero-rating of Sales Tax on import and local supply of wheel chairs is aimed at providing wheel chairs to special people at cheaper prices.
Enforced through S.R.O. 472(I)/2009 dated 13.06.2009, effective from the 14th June, 2009.
o Exemption of Lysine Sulphate.
• Exemption of Sales Tax on import and local supply of Lysine Sulphate is aimed at providing cheaper raw materials for poultry feed which will result into decrease in prices of poultry products.
Enforced through SRO. 477(I)/2009 dated 13.06.2009, effective from the 1st July, 2009.
o Reduction of Federal Excise Duty on cement from Rs. 900 / PMT to Rs. 700/ PMT.
• Reduction of Federal Excise Duty on cement is aimed at providing cement at cheaper rate which will encourage construction activities in the country.
Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 14th June, 2009.
o Withdrawal of 5% Federal Excise Duty on motor cars.
• Withdrawal of 5% Federal Excise Duty on motor cars is aimed at providing motor cars at lower rate which will boost their demand and stabilize the local auto mobile industry.
Enforced through SRO. 474(I)/2009 dated 13.06.2009, effective from the 14th June, 2009.
o Reduction of Federal Excise Duty on telecommunication services.
• Reduction of Federal Excise Duty on telecommunication services from 21% to 19 % is aimed at reducing the cost of the service.
Enforced through amendment in Table II First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Reduction of activation charges of cellular phones.
• Reduction of activation charges of cellular phones from Rs. 500 to Rs. 250 is aimed at reducing the cost of new connection of mobile phones.
Enforced through SRO. 476(I)/2008 dated 13.06.2009, effective from the 1st July, 2009.
REVENUE MEASURES
o Withdrawal of Exemption on import of ware potatoes and onion.
• Withdrawal of Exemption on import of ware potatoes and onion is aimed at providing protection to local growers of potatoe and onion.
Enforced through amendment in Sixth Schedule to Sales Tax Act, 1990, effective from the 14th June, 2009.
o Enhancement of Federal Excise Duty on Cigarette.
• Enhancement of rate of Federal Excise Duty on locally produced Cigarette in different slabs is aimed at brining tax rate on this item near international level, increasing revenue and discouraging cigarette smoking.
Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 14th June, 2009.
o Levy of FED on advertisement in newspapers, periodicals, hoarding boards, pole signs, sign board and shop boards.
• To generate additional revenue for meeting dire national needs the scope of FED on advertisement has been increased.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Enhancement of FED on short message services.
• Levy of twenty paisa per SMS in addition to the rate specified for telecommunication services is aimed at meeting revenue requirements.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Enhancement of rate of FED on insurance services from 10% to 16%.
• The rate of FED on insurance services from 10% to 16% in VAT mode is aimed at widening tax net.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Levy of FED on fund services provided by banks.
• The FED @ 16% in VAT mode has been levied on fund / non-fund services provided by banking companies and non-banking financial companies to widen the tax net.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Levy of FED on services provided by the port and terminal operators including wharfage in respect of imports.
• The FED @ 16% at VAT mode has been levied on services provided by the port and terminal operators including wharfage in respect of imports to widen tax net.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
o Levy of FED on services provided by stock broker.
• The FED @ 16% in VAT mode has been levied on services provided by stock brokers is aimed at widening the tax net.
Enforced through amendment in Table II of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2009.
STREAMLINING MEASURES
o Introduction of KIBOR plus three percent per month as default surcharge.
• In order to keep the rate of default surcharge higher than the interest rates of banks to avoid short filing by the taxpayers, KIBOR (Karachi Inter Bank Offered Rates) plus three percent has been introduced.
Enforced through amendment in Sales Tax Act, 1990 and Federal Excise Act, 2005, effective from the 1st July, 2009.
o Reduction in the period by which the Collector / Federal Excise Officer can extend the time limit for adjudication of cases under Sales Tax Act, 1990 and Federal Excise Act, 2005 respectively.
• The time limit which the Collector can extend in adjudication of Sales Tax cases has been reduced from 120 to 60 days and which can be extended by Federal Excise Officer in Federal Excise cases has been reduced from 90 to 60 days.
Enforced through amendment in section 11 and 36 of Sales Tax Act, 1990 and section 31 of Federal Excise Act, 2005, effective from the 1st July, 2009.
o Introduction of penalty / imprisonment for violation of section 40B of the Sales Tax Act, 1990.
• The penalty / imprisonment for violation of section 40B has been introduced to make enforcement more effective.
Enforced through amendment in section 33 of Sales Tax Act, 1990, effective from the 1st July, 2009.
o Redefining the time period regarding reopening of any decision or order by the Board or Collector to three years.
• The time period for reopening the cases under Sales Tax Act, 1990 and Federal Excise Act, 2005 is being changed to three years.
Enforced through amendment in section 45A of Sales Tax Act, 1990 and section 35 of Federal Excise Act, 2005, effective from the 1st July, 2009.
o Regularization of the system of Alternate Dispute Resolution.
• The system of ADRC has been streamlined by prescribing a period of 180 days for submission of recommendation and period of 45 days for passing of orders by the Board.
Enforced through amendments in section 47A of Sales Tax Act, 1990 and section 38 of Federal Excise Act, 2005, effective from the 1st July, 2009.
o Introduction of KIBOR as the rate of amount payable in addition to refund in case of delay in payment of refund of Sales Tax & Federal Excise Duty.
• The KIBOR has also been made the basis for calculation of compensation in cases when payment of refunds is delayed.
Enforced through amendments in section 67 of Sales Tax Act, 1990 and introduction of section 44A of Federal Excise Act, 2005, effective from the 1st July, 2009.
o Harmonization of provisions regarding appeals to Appellate Tribunal under Sales Tax Act, 1990 and Federal Excise Act, 2005 with Customs Act, 1969.
• The provisions regarding the appeals to Appellate Tribunal in Sales Tax Act, 1990 and Federal Excise Act, 2005 have been harmonized and brought in conformity with Customs Act, 1969 to have uniformity in all the three laws.
Enforced through amendments in section 46 of Sales Tax Act, 1990 and section 34 of Federal Excise Act, 2005, effective from the 1st July, 2009.

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Saturday, June 13, 2009

BUDGET SPEECH 2009-10



BUDGET SPEECH FOR FISCAL YEAR 2009-10

I rise to present the Budget for the Fiscal Year 2009-10.
Madam Speaker!
I have the honor to be the first woman in the history of Pakistan to present a budget before the august House. It is indeed the privilege of the Pakistan People’s Party to have given the country its first woman Prime Minister, Mohtarma Benazir Bhutto Shaheed. The People’s Party also has the singular honour of nominating the first woman Speaker of the National Assembly in Pakistan. These are important milestones in our quest for women empowerment and gender equality.

Madam Speaker!
The efforts of the government to manage the economic and financial
affairs of the country need to be viewed in the context of the prevailing state of security in the country. Pakistan today is not simply a front line state against the war on terror; in fact we are today fighting insurgency and terrorism within the country. The war on terror has already cost us over $ 35 billion since 2001-02 in economic costs. We now face the prospect of incurring huge costs on account of counter-insurgency expenditures. We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency. The International community has pledged its support
for this human cause. However, your government is fully conscious of its
responsibility and has allocated Rs. 50 billion, I repeat Rs. 50 billion, in the budget 2009-10 for the relief, rehabilitation, reconstruction and security of the internally displaced persons. I also take this opportunity to salute the efforts of the people of Pakistan in contributing generously to the relief effort and demonstrating that we are all one and stand united in the face of terrorism. I may also express the gratitude of the government to all those generous households who have opened their homes and hearts to the displaced people in the true spirit of Islam.

Madam Speaker!
Our armed forces are in the forefront of the war against terror and in
fighting insurgency in the country. Our western border is most volatile and faces the brunt of insurgency. The President of Pakistan has been pleased to announce an increase in the allowances of the personnel of armed forces deployed in the western theatre, equal to one month’s basic pay with effect from 1st July, 2009. He has further announced that this benefit be extended to the entire armed forces from 1st January, 2010. The government is in complete support of the President’s
decision. Today, the nation stands behind our valiant armed forces. No amount of compensation is adequate enough to cover the risk to one’s life. I hope this small gesture on the part of the government helps in building the morale of our jawans and officers in the war against terror.

Madam Speaker!
While presenting last year’s budget the government had given a detailed account of the economy as was inherited by us from the previous government. We had highlighted that our economy could not sustain a high level of artificial growth. We had presented that sustainable growth was only possible through investments in the real sectors of the economy that is, agriculture and industry. These, unfortunately, were neglected in the past. Instead growth was fuelled
through high consumption and extensive luxury imports and those too financed through external borrowings. No wonder the fiscal deficit mounted to 7.6% of GDP, the current account deficit became unmanageable, there was a run on foreign exchange reserves and the stock market crashed. More importantly, inflation started to rise steeply and peaked at 25% in October 2008. In the face of these developments the economy suffered but the poor of Pakistan suffered the most.

Madam Speaker!
Surely this state of affairs was intolerable! The government reacted to this by formulating a Nine Point Agenda of economic and social recovery. The first pillar of our agenda was to stabilize the economy. As a result of our efforts, the fiscal deficit would decrease by 3.3 percentage points in 2008/09.. The current account deficit was brought down from a high of 8.5% in 07-08 to 5.3% of GDP in 2008-09. Madam Speaker! It is now universally acknowledged that reducing inflation is the best recipe for reducing poverty. Through the efforts of your government, inflation declined from 25% to 14.4% in May, 2009. Inshallah, it is expected to be in single digit by the end of the next fiscal.

Madam Speaker!
While stabilization of the economy was necessary it was achieved at a cost. A tight monetary policy coupled with strict public expenditure management adversely impacted access to capital in the private sector and a reduction in the public sector development programme. The biggest casualty of stabilization was economic growth which declined to around 2%. The contraction in the economy adversely affected growth in manufacturing. However, our pricing policy for Agriculture sector helped this sector in recording a growth of 4.7% in 08-09 as compared to 1.1% in the previous year. The government was fully conscious that
stabilization and a contracting economy would impact the poor adversely. That is why it triggered the 2nd pillar of its nine point agenda that is, social protection. Through the Benazir Income Support Program (BISP) we targeted the poorest of the poor through an income grant of Rs. 1000 per month, allocating Rs. 34 billion for the programme. In the next financial year we propose to allocate Rs. 70 billion for BISP to bring over 5 million households in the ambit of the programme.

Madam Speaker!
Having attained a certain level of stabilization it is now time to move
towards growth by targeting the real sector of the economy that is Agriculture and Industry. Beginning with this year’s budget we propose to announce policies and undertake budgetary and legislative measures which would put our real sectors of the economy onto the path of greater productivity. This paradigm shift would help the country in attaining sustainable growth which would help in the reduction of
poverty. Madam Speaker, we propose to pursue growth with equity.

Madam Speaker,
We propose to pursue stabilization with a human face. This government
believes that the focus of government’s policy and investment program has to be the well being of the people, especially the poor segments of our society.

Madam Speaker!
The government is managing the affairs of our country within a strategic
policy framework expressed in its Nine Point Agenda of economic and social recovery. I take this opportunity to highlight these nine pillars:
I. Macroeconomic Stability and Real Sector Growth.
II. Protecting the Poor and the Vulnerable.
III. Increasing Productivity and Value Addition in Agriculture.
IV. Making Industry Internationally Competitive.
V. Capital and Finance for Development.
VI. Removing Infrastructure Bottlenecks through Public Private
Partnerships.
VII. Integrated Energy Development Programme.
VIII. Human Capital Development for the 21st Century.
IX. Governance for a Just and Fair System.

The budget 2009-10 has been prepared to obtain the twin purposes of
stabilization with a human face and growth with equity. I would wish to clarify as to what stabilization means. Stabilization is essentially an expression which advises households, organizations and governments to live within their means. Surely, this is what we all want. And if additional resources become available we need to use these to obtain the best dividend for our people. As a measure of support towards attaining a reasonable growth target the total expenditure, including Provinces, is estimated at Rs. 2897.4 billion. The total revenue is estimated at Rs. 2174.9 billion. The overall fiscal deficit of Rs. 722.5 billion would be 4.9% of the GDP. This deficit would be met through external financing
of Rs 264.9 billion and domestic financing of Rs. 457.6 billion. Pakistan is likely to receive external resources equivalent to 1.2% of its GDP (Rs. 178 billion) from pledges made in the Donors’ Conference at Tokyo. We further expect resources equivalent to 0.3% of the GDP (Rs. 48 billion) for expenditure on internally displaced persons. In essence the real deficit would be 3.4% of the GDP.

Madam Speaker!
The core budget of the federal government estimates net revenues of Rs
1377.5 billion with a current expenditure of Rs 1699.19 billion. The development expenditure (including Provinces) is estimated at Rs. 783.1 billion against the revised estimates of Rs. 421.9 billion, an increase of 85%. This increase is unprecedented. The Public Sector Development Programme approved by the National Economic Council is pitched at Rs. 626 billion in BE 2009-10 against Rs. 359 billion in RE 2008-09. It is expected that full utilization of the development allocation would strongly assist in revival of growth.

Madam Speaker!
May I offer a note of caution at this stage. Pakistan has one of the lowest tax to GDP ratios in the world. In the outgoing year we were only able to attain tax revenues equivalent to 9% of our GDP. We expect to improve our tax to GDP ratio by 0.6% in the next financial year. Allow me to state that if we as a nation do not imbibe the tax culture, if each citizen capable of paying tax does not do so, Pakistan shall never be able to stand on its own feet. It is, therefore, imperative that each one of us as a citizen of this great country meets his or her tax obligation. While government would be undertaking deep rooted reforms in tax
policy and its administration, success of any initiative would hinge on the support given by the entire nation. We have to broaden our tax base; there is no escape from this reality.

Madam Speaker!
The government made a commitment that it would pursue stabilization
with a human face. Our tax and duty measures in Budget for Fiscal Year 2009/10 would revolve around the following concepts:-
􀂃 Provide protection to the poor and vulnerable against the current economic downturn;
􀂃 Revive manufacturing and industry, especially export-oriented industry;
􀂃 Broaden the tax base instead of overburdening the existing taxpayers; and
􀂃 Restrain unnecessary imports to improve the Balance of Payment position.

Madam Speaker!
As a measure to broaden the tax base we had desired that the provinces
bring additional services into the net of sales tax. We had also desired that the provinces impose capital gains tax on immovable property. This would have marked a beginning towards further broadening of the tax base. However, the provinces would much rather wish to discuss these issues in meetings of the National Finance Commission. While we respect the decision of the provinces none-the-less measures would be taken in the Budget 2009/10 to bring additional services into the excise net as well as continue with Capital Value Tax. On reaching agreement with the provinces in the NFC discussions, the Capital Value Tax as well as excise on services would be considered for replacement by provincial taxation on these subjects.

I. MACROECONOMIC STABILITY AND REAL SECTOR GROWTH

Madam Speaker!
The immediate threat to economic stability and the servicing of
international debt obligations were overcome through a homegrown
Macroeconomic Stabilization Programme. The Programme has already ensured adjustment in petroleum prices and significant cuts in expenditures to reduce the budgetary deficit; while keeping a tight monetary policy in place. These measures are paying dividends under precarious global and domestic conditions. Recent trends in most macroeconomic variables also suggest that a disciplined implementation of this Programme has started paying off.

Madam Speaker!
􀂃 During the Fiscal Year 2009/10 real GDP is expected to grow by 3.3 percent and by 4 and 4.5 percent during Fiscal Years 2010/11 and 2011/12, respectively.
􀂃 This will be contributed by sectoral growth rates of agriculture amounting to 3.8 percent; manufacturing totaling to 1.8 percent; and services contributing 3.9 percent.
􀂃 For Fiscal Year 2009/10 the inflation target is 9.5 percent, which will be brought down to 7 and 6 percent during Fiscal Years 2010/11 and 2011/12, respectively.
􀂃 A targeted decrease in current expenditure to 15.3 percent of GDP in FY 2009/10 and 14.7 percent of GDP in 2010/11, owing to elimination of unproductive subsidies is planned in order to maintain the fiscal deficit at sustainable levels.
􀂃 The Government is going to take all necessary measures to ensure
documentation of the economy and broadening of the tax base in order to shift reliance on domestic resource mobilization.
􀂃 Total revenue will grow by 15.7 percent and Federal Board of Revenue collection is projected to grow by 16.8 percent.
􀂃 Tax to GDP ratio will be 9.6 percent, with measures, as against 9 percent during Fiscal Year 2008/09.
􀂃 Revenue as a percentage of GDP is projected at 14.7 percent in Fiscal Year 2009/10 and will increase to 15.1 percent during Fiscal Year 2010/11.

II. TARGETING THE POOR AND THE VULNERABLE

Madam Speaker!
The previous government pursued a policy of trickle down, expecting that the benefits of growth would automatically reach the poor. The flaw in this strategy was that the rich became richer and the poor became poorer. Our government is tackling the issue of poverty by launching a frontal attack against it. Our efforts at poverty-reduction aim to eliminate poverty.

As a tribute to our leader, Shaheed Mohtarma Benazir Bhutto, who laid
down her life for democracy, the introduction of the government’s flagship programme, named ‘Benazir Income Support Programme’ to provide direct cash transfers to the poor, is proof of its commitment to reach out to the most vulnerable to share their burden and ease their misery as much as possible. Following our Quaid, Shaheed Zulfiqar Ali Bhutto’s words, ‘The Masses Will Rule’.

Madam Speaker!
The conception behind the Benazir Income Support Programme was not
only providing financial assistance to the needy but also to ensure women empowerment and child care. During Fiscal Year 2008/09, Rs 22 billion was distributed to 1.8 million beneficiaries. During fiscal year 2009/10, it is proposed to increase the allocation of BISP to Rs 70 billion. Madam Speaker, this would constitute more than 200 percent increase; I repeat more than 200 percent increase over the last year’s distribution. Five million families would benefit from this increase in the coming financial year. A programme for the Internally Displaced Persons has also been started by Benazir Income Support Programme wherein the
Internally Displaced families are being identified and cash grants are being paid to them on regular basis.

In the short to medium term, the Benazir Income Support Programme will
also serve as a platform for complementary social assistance programmes, the main being health insurance for the poor and the vulnerable. This will cover full hospitalization, pregnancy, daycare treatment, diagnostic tests and accident compensation for earning members of the family to a maximum limit of Rs 25,000/- per family per year. In addition, cash transfer programmes will be complemented to promote household independence via various poverty exit strategies, which can help to upgrade the poor beneficiaries to the level of selfsufficiency by various means including transition to Conditional Cash Transfers; training and employment of one person per household; and provision of workfare through small public works under a social mobilization programme initiatives.

The latter programme is based on the concept of small development schemes for construction of paved streets and water and sanitation facilities at the local level with help of community contribution.

Madam Speaker,
I hold out an assurance that the government is committed to ensuring
complete transparency in the management of BISP. A census would be
completed within three months in 16 districts of Pakistan as a pilot to bench mark incomes. This would be extended to the entire country within the calendar year.

The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable.
The government also plans to bring in legislation during the next financial
year for creating a social security protection programme for the haris. It is the firm resolve of the government to mainstream the marginalised haris, provide them with social protection available to other labour in the country and to make them proud citizens of Pakistan.

The government also plans to revamp the Ministry of Social Welfare by
replacing it by a Ministry of Social Protection and Development in order to provide a common platform for safety nets and enhanced institutional capacity for social service delivery.

Peoples’ Works Programme

Madam Speaker!
This programme covers basic areas like provision of electricity, gas, farm
to market roads and water supply. An allocation of Rs 35 billion is proposed in the Fiscal Year 2009/10 for this purpose. This will create sizable employment opportunities and, therefore, will increase the incomes of the less privileged.

Workers Welfare

Madam Speaker!
• For the Fiscal Year 2009/10, an amount of Rs 10.8 billion has been
allocated for different Worker Welfare development schemes in the
housing, health, education and technical education sectors. Quota has been abolished with the result that every worker will now be provided marriage grants irrespective of number of daughters. The rate of marriage grant has been increased from Rs 50,000 to Rs 70,000 per daughter. Construction of 9,469 housing units and flats for industrial workers is also proposed.
• The President of Pakistan has directed to take necessary measures for
empowerment of employees of State Owned Enterprises through their
representation on the respective Boards by transferring 12 percent shares to employees in order to revamp privatization process.

Microfinance

• Microfinance plays a critical role in improving lives of the poor and
particularly women.
• The Government has set the target to increase outreach of the
microfinance services from 2 million to 3 million borrowers in fiscal
09/10.

Housing

Madam Speaker!
Our founder leader Shaheed Zulfiqar Ali Butto’s vision and foresightedness identified four decades ago that housing is the basic necessity and raised the slogan of Roti, Kaprha Aur Makan.
We, being the followers of Shaheed Zulfiqar Ali Bhutto, have taken the
following initiatives to turn the dream of our leader into a reality.
• Affordable housing under a phased programme for the low-income
population through community participation and squatter-settlement
regulation; and
• For facilitation of working journalists, the Ministry of Information &
Broadcasting managed to reserve a good number of residential plots in
Islamabad for them.
• In this budget, tax credit limit on interest paid on loans for construction of a new house or acquisition off a house is proposed to be enhanced from Rs 500,000 to 750,000.

III. INCREASING PRODUCTIVITY AND VALUE ADDITION IN
AGRICULTURE

Madam Speaker!
The Government’s agriculture policy is aimed at ensuring food security;
generating jobs; and enhancing farm profitability and competitiveness through realizing the existing productivity potential of various crops. The vast and rapidly changing agriculture sector offers enormous opportunities to millions of rural poor to move out of poverty.

‘Increasing productivity and value addition in agriculture’ will receive
high priority. Self-reliance in commodities, food security through improved productivity of crops as well as development of livestock and dairy would be the main pillars of policy. More importantly government would continue to ensure a minimum guaranteed price to the farmers based on international comparisons. The response given by the farmers to the price policy of the government for the wheat crop raises hopes for improved production of other crops. Government would continue with this pricing policy. Other areas of support for agriculture and livestock would be through:
􀂃 focusing on research and development by upgrading existing R&D facilities and initiating the establishment of two world class institutes of research for wheat and cotton;
􀂃 development of new technologies;
􀂃 more productive use of water through precision land leveling and high efficiency irrigation systems;
􀂃 promoting production and export of high value crops;
􀂃 accelerating the move towards high-value activities, such as livestock rearing, dairy production, fisheries, and horticulture;
􀂃 creating necessary infrastructure; and
􀂃 ensuring availability of agricultural credit.
􀂃 Formation of common facilitation centres.
􀂃 encouraging research and extension.
In addition:
􀂃 Establishment of ten model agricultural union councils for each major crop across the country will be undertaken;
􀂃 Promotion of model organic farming would be supported.

Overall PSDP allocation for Agriculture will be increased by 25 percent from Rs 14.4 billion in Fiscal Year 2008/09 to Rs 18 billion during Fiscal Year 2009/10. An amount of Rs 2.5 billion is proposed for Fiscal Year 2009/10 to ensure food security and productivity enhancement of farmers.

Madam Speaker!
Interventions made in this light have already started providing dividend in
the shape of record production of major food crops like wheat and rice. The policy measures undertaken by the government have led to an estimated transfer of resources of about Rs 294 billion in to the rural economy. Government has made an agreement with Ms Monsanto of United States of America to formally introduce Generally Modified cotton into Pakistan on fast track basis. It has been planned that the farmers will be offered BT cotton hybrids varieties during Fiscal Year 2009/10. It is the vision of the government to treat livestock, agriculture and
fisheries as an industry. In this context, the nil customs duty regime on tractors, poultry inputs and cattle feed would be continued in future.

Water Use Efficiency

Madam Speaker!
To boost production of crops and improve water use efficiency, a major
initiative of ‘National on Farm Water Management Programme’ was implemented by the Ministry of Food and Agriculture.
Water sector has been allocated Rs 60 billion, which comes to 14 percent of the total federal progamme. A total of 32 small and medium dams, 8 in each province are being financed. Similarly, adequate allocation has been made to projects such as National Programme of Watercourses, irrigation system, rehabilitation, lining of canals, and distribution, etc. Improved water management efforts under the PSDP for Fiscal Year 2009/10 to raise agricultural productivity will involve allocations of:
􀂃 Rs 12 billion for Raising of Mangla Dam including resettlement;
􀂃 Rs 10 billion for the improvement of water courses; and
􀂃 several projects in all the provinces with allocations of Rs 15 billion for canal improvement and rehabilitation of irrigation system

Madam Speaker!
For Fiscal Year 2009/10 the strategy adopted is to complete ongoing mega projects side by side with construction of small/medium dams. The Government has launched a massive programme of water resource development and is earmarking an amount of Rs 47 billion in the PSDP for Fiscal Year 2009/10.

Major water sector irrigation projects being completed in the water sector include raising of Mangla Dam, Gomal Zam, Dam and Satpara Dam. Preparatory works on Basha, Akhori, Mujda, Naigaj Dam have been initiated. Kachi Canal in Balochistan and Rainee Canal in Sindh will be completed in mid 2010.

The lining of irrigation channels in saline zones is being undertaken in
Punjab, Sindh and NWFP to save the seepage and other losses. A national programme of Small Dams covering all the four provinces is being implemented. A comprehensive plan is also being developed for rainwater harvesting and ground water recharge.

Madam Speaker!
Development of agriculture infrastructure including warehousing facilities
will involve Integrated Agriculture Marketing and Storage Infrastructure
including feasibility study projects the total cost of which is Rs 37 billion, with Rs 500 million allocated for Fiscal Year 2009/10.

To assist small farmers the Government is launching the Benazir Tractor
Scheme costing over Rs 4 billion over two years.

In order to ensure food security and to improve productivity of small
farms, the Government is implementing a phased ‘Special Programme for Food Security and Productivity Enhancement of Small Farmers’ covering 13,000 villages by the year 2015 starting with 1,012 villages. This programme will be executed in all the four provinces in addition to Azad Jammu & Kashmir, FATA and FANA during the first phase at a cost of Rs 8.013 billion.

Madam Speaker!
A new Agriculture Model Village Programme has been initiated in 26
villages under the auspices of Zarai Taraqiati Bank Limited. The objective is to organize the farming community at the village level ensuring farmers easy access to agri credit.

In Fiscal Year 2009/10 the Government plans to initiate new programmes
like commercialization of the seed sector in order to enhance high quality supply through setting up an industry on the concept of Public Private Partnerships and diverting major investments in building and strengthening infrastructure in the sector.

Livestock and Dairy

Madam Speaker!
Livestock plays an important role in our economy. The Ministry of
Livestock & Dairy Development, created in November, 2008 envisages food security, greater availability of quality products at competitive prices and the promotion of deep sea fishing to enhance foreign exchange earnings to address livelihood concerns of fishermen. A number of initiatives to strengthen livestock sector include:
a. Prime Minister’s Special Initiative on Livestock;
b. livestock production and development for meat production;
c. Prime Minister’s Special Initiatives for White Revolution, that is, Doodh
Darya and Dairy Pakistan projects are serving as a primary vehicle to
bring about a white revolution through fundamental changes in the dairy
sector;
d. National Programme for the control and prevention of Avian Influenza;
e. upgrading and establishing animal quarantine stations;
f. efforts to enter into the halal food market; and
g. improving reproductive efficiency of cattle under smallholders system.

Projects foreseen during the Fiscal Year 2009/10 include:
a. ‘Capacity Enhancement of Dairy Products under Public Private
Partnership’ a project worth Rs 3,500 million, for which Rs 300
million will be allocated during Fiscal Year 2009/10;
b. ‘Poverty Reduction through Small Holders Live Stock and Dairy
Development’ worth Rs 3,539.13 million, from which an amount
of Rs 400 million will be allocated in Fiscal Year 2009/10;
c. More model dairy community, biogas and breeding farms, cooling
tanks, rural services providers and pasteurization plants.

Fisheries

Madam Speaker!
During the Fiscal Year 2009/10 focus will be on:
a. lifting European Union’s ban on fisheries export by upgrading
fishing vessels;
b. improvement of infrastructure facilities for value added products;
c. establishing a fisheries training centre at Gawadar;
d. landing sites along the coastal line;
e. reducing post harvest losses through improved fish handling along
the food chain and marketing; and
f. establishment of shrimp aquaculture in the country.
IV. MAKING INDUSTRY INTERNATIONALLY COMPETITIVE
V. CAPITAL AND FINANCE FOR DEVELOPMENT
VI. REMOVING INFRASTRUCTURE BOTTLENECKS THROUGH

PUBLIC PRIVATE PARTNERSHIPS

Madam Speaker!
40. As a result of international recession, energy shortages, and a contraction in the economy, the industrial sector in Pakistan has been adversely affected. This sector posted a negative 3.3 percent growth in the outgoing year with large scale manufacturing posting a negative 7.7 percent growth. The industrial sector is our engine of production and employment. The government proposes to declare fiscal 2009/10 as the year of industrial recovery. Our industry is fragmented and lacks consolidation. It is being provided the following support measures:

Financial Measures:
• With a view to moving industry towards consolidation and value
addition an Export Investment Support Fund, worth Rs. 40 billion has
been proposed for FY 2009-10. The government will contribute Rs 10
billion towards this fund; another Rs 10 billion would be contributed
by the Export Development Fund; balance Rs 20 billion would be
contributed by governmental agencies through mopping up of
surpluses in commercial banks.
• In order to support the SME sector by providing access to credit, a
fund worth Rs. 10 billion for Credit Guarantees is going to be
established. This fund would be financed by the government and the
private sector in the ratio of 50:50 over the next two years. The
government has already proposed Rs 2.5 billion in the Budget 2009/10
as its share to the fund.
• For citizens who lack equity financing, a Venture Capital Fund of Rs
10 billion is also proposed to be established which shall be financed in
the same manner as the SME Credit Guarantee Fund. A provision of
Rs 2.5 billion has again been proposed for this fund in Budget
2009/10.
• A new DFI is being created for industrial financing.
• Industrial clusters are going to be involved for the skill development to
ensure ownership, monitoring/oversight and relevance of programs
• The allocation for M/o Industries will be increased by 335 %, I repeat
335%, from Rs.2.0 billion in FY 2008-09 (R.E) to Rs.8.7 billion in FY
2009-10.
• The budgetary allocation for Science & Technology has doubled from
Rs 1,510 million in FY 2008/09 to Rs 3,140.4 million during FY
2009/10.
Government is not going to enhance tax incidence on industry, except
tobacco; rather following tax facilitations have been proposed:-
• In order to assist automobile manufacturers and their vendor industries
a reduction of 5% excise duty on automobiles (CKD) is proposed.
• In order to revive the construction sector a reduction of Rs 200 per ton in the excise duty on cement. This decrease shall be passed on to the consumer.
• In order to support Textile sector, withdrawal of FED on import and
supply of Viscose Staple Fiber (VSF) and zero rating of chemicals
used in manufacturing of fire retardant fabrics is proposed
• Cellular service providers have been provided the following relief:
o Elimination of Regulatory Duty of Rs 250/- per set.
o Reduction in Customs Duty from Rs 500/- per set to Rs 250/- per
set.
o Reduction in Excise Duty from 21 percent to 19 percent.
o Sim activation charges reduced from Rs 500/- to Rs 250/-.
• Incentives for documented sector in case of 90% purchases from sales
tax registered suppliers.
• Zero rating duty on exports sector will continue this year as well.
• To protect the local industry from under invoicing by importers,
improvement in Customs valuation and enforcement mechanism would be ensured.
• Refund procedure would be streamlined - FBR to pay interest on
refunds delayed beyond 90 days.
• To facilitate all tax payers including industry harmonization of tax
laws (Sales, Excise, Income, Customs) would be ensured.
• The limit of credit on donations in case of companies is proposed to be
enhanced from 15% to 20%.

Madam Speaker!
In order to revive our industrial sector, following additional initiatives
have been proposed:-
• Industry would receive priority in allocation of gas and electricity.
• Cross subsidy in electricity and gas tariffs would be reduced in a
phased manner to provide relief to the industry.
• Large Export Houses would be established to support the export
industry.
• Development of Special Economic Zones and Special Industrial Zones
would be fast tracked.
• Market access to USA and EU is being negotiated to provide level
playing field to our industry in international market.
• Corporate Rehabilitation Act (CRA) is being finalized to improve
bankruptcy and insolvency regime.
• Proposals to form Resolution Trust Corporation (RTC) to promote
consolidation of industry are being finalized.
• SECP Reforms like Holding Company Formation facilitation and
number of other business environment improvement initiatives are
underway to develop competitive markets for the private sector
• Capital markets are being developed for financing of trade and
industry.
• The Industrial Relations Act 2008 has been passed by the Parliament
to improve the labor-owner relationship regime.
• In order to provide opportunities to the entrepreneurs for expansion as
well as assist the government in disposing off public assets, a
transparent privatization policy based on Public Private Partnership is
being pursued through sale of 26 percent shares to the private sector or
allow privatization of management on profit sharing basis.
• To improve industrial competitiveness implementation of the National
Trade Corridors Improvement Program has been launched.
• To achieve a high quality road and rail network, allocations for
National Highway Authority amounted to an increase from Rs.36
billion to Rs.40.2 billion whereas in the case of Pakistan Railways
from Rs.6.6 billion to Rs.12.7 billion.
• Custom duty is proposed to be reduced on a number of items to
provide cheaper raw materials to different sectors like poultry, dairy,
fish processing and pharmaceuticals. Adequate protection is also
proposed to be given to local industry.

VII. INTEGRATED ENERGY DEVELOPMENT PROGRAMME

Madam Speaker!
Uninterrupted supply of energy is not only the need of the citizens but of
all sectors of the economy. The industrial sector has already been hit very badly in the outgoing financial year. Prime Minster’s Economic Advisory Council has developed an integrated energy plan to cater for the short, medium and long term energy needs of the country. This is the first ever integrated energy plan of Pakistan as previously energy sector had been dealt in isolation.

Government is well aware of the problems that have arisen in the wake of energy crisis in the country. The previous regime’s short sighted policies handed over its legacy in the form of abrupt powers shortages, load shedding and unaffordable energy mix. We have taken a number of measures in order to improve energy scenario of the country to give impetus to our agriculture and industrial sector

Madam Speaker!
In this light, PSDP allocations for the power sector will be increased by
100 percent, from Rs 11.4 billion in Fiscal Year 2008/09 to Rs 22.8 billion during Fiscal Year 2009/10.
The previous Government left a huge backlog of circular debt in the
energy sector. A total lack of decision making to address this issue in a timely manner on the part of the previous government has left the present government with a huge challenge. We have not shied away from our responsibility. In this regard the government has taken up the challenge to resolve the issue of circular debt which has reduced the efficiency of the energy sector. In order to improve the liquidity position of the power sector, the Government/ specially created holding company:
􀂃 will assume the entire bank loan liabilities of Rs 216 billion and pay the markup on these loans from budgetary resources;
􀂃 has already arranged TFC facilities of Rs 92 billion for PEPCO from
banks to discharge its payment obligations towards Independent Power
Producers and oil and gas companies;
􀂃 will assist to settle the remaining payables of PEPCO at Rs 61 billion;
􀂃 has decided to pick up the entire past arrears of PEPCO against FATA consumers to the tune of Rs 80 billion and pay the current electricity bill of FATA; and
􀂃 will help PEPCO to clear its outstanding receivables from federal and
provincial government departments and entities, mainly KESC and
KW&SB.

Projects have been undertaken to reinforce the transmission and
distribution systems to minimize power losses and outages so as to provide a stable and reliable supply to consumers. Currently 15 Independent Private Power Houses with a total capacity of 2,921 Megawatts are in different stages of development. Out of these, 9 projects for 1,861 Megawatts will be commissioned in 2009; 4 projects for 776 Megawatts will be completed in 2010; while 2 projects for 284 Megawatts are due for completion in 2011.

Madam Speaker!
To meet the Government’s target of eliminating load shedding by 2009,
agreements have been made with 5 rental Power Projects for 800 Megawatts.

Work on 16 Hydropower Projects in the private sector with a total capacity of 4,160 Megawatts has been initiated. Two new combined cycle power projects of 500 MW each in the public sector to supplement total capacity are planned at Chichoki Mallian and Nandipur.

The Government has also made an elaborate plan for electrification of all
villages where electricity can be extended from grid supply. This was achieved in 6,419 new villages last year.

Demand side measures including conservation have been initiated
including:
􀂃 massive media campaign to raise public awareness;
􀂃 induction of energy saver lamps for peak chopping; and
􀂃 enforcement of Daylight Saving Time during summer.

Other major activities proposed to be undertaken in the Fiscal Year
2009/10 include:
􀂃 induction of two hydro projects i.e. Khan Khwar & Jinnah Hydro, with
total capacity of 168 Megawatts;
􀂃 setting up call centres in all Distribution Companies to improve
customer services; and
􀂃 infrastructure development to reduce energy losses.
The PSDP allocation of Rs 4,000 million for FY 2009/10 has been made
for the 4,500 Megawatts Diamer Basha Dam Project. Construction of more than 30 small and medium Dams in different provinces has also been funded.

In order to ensure transparency in the pricing of petroleum products and to reduce its use as well as assist in the cause of environmental protection, the petroleum development levy is being abolished and replaced by a specific Carbon
Surcharge.
The government has determined the ideal policy mix for energy needs of
Pakistan. These are hydel, coal, wind and solar. A comprehensive renewable
energy policy is being formulated. The following steps are being taken in FY 2009-10:-
􀂃 A 50 Megawatt Solar Thermal Power Project to be established in
Southern Punjab;
􀂃 Development of Wind Farms in areas in addition to Gharo-Keti
Bandar, identifying new corridors of available wind potential in
Punjab, Balochistan and NWFP;
􀂃 Solar Water Heaters Programme;
􀂃 Production of solar cells and modules up to an annual capacity of 80
Kilowatts;
􀂃 Depreciation allowance for renewable energy being enhanced by 100
percent;
􀂃 Allowance of duty free import of equipment under nine categories of
alternate energy being considered.

VIII. HUMAN DEVELOPMENT FOR THE 21ST CENTURY

Madam Speaker!
‘Human resource development’ is a prerequisite for improving all
aspects of the quality of life of our citizens. The government is aware that improvement in social indicators needs to be expedited and has, therefore, adopted human resource development as a priority area particularly in education; health; clean drinking water and sanitation; population planning; and gender equality.

Education

Madam Speaker!
Significant reforms in education sector include:
􀂃 Strengthening the planning and implementation capacity of the
government;
􀂃 Improving utilization of resources by educational institutions;
􀂃 Enhancing governance for greater accountability of education service providers to the community;
􀂃 Capacity building of district and local level institutions; and
strengthening the role of communities through school committees.
Budget proposal for Fiscal Year 2009/10
􀂃 Major programmes of the Ministry of Education include:
(i) Establishment and operation of basic education and community schools in the country; (Rs 2 billion) and
(ii) Education for All through providing missing facilities to primary schools.

􀂃 Development funding to Higher Education Commission is being enhanced by 60% to Rs 22.5 billion in Fiscal Year 2009/10; current budget provision is being enhanced by 26% to Rs 21.5 billion.
􀂃 National Vocational & Technical Education Commission is targeting one million trainees every year in a phased programme. An allocation of Rs 2.2 billion has been provided in FY 2009-10.
􀂃 Skill development (vocational/technical) programmes aimed for labour export market are being planned.

Health

Madam Speaker!
The health strategy has been constructed on the key principles of equity, universal access to essential healthcare, timeliness, results, accountability, strong leadership and strategic coordination of the overall effort. The Strategy envisages addressing special needs of the vulnerable population, especially women and children particularly in the rural areas. The health sector continued to remain the focus of attention of the elected Government during Fiscal Year 2008/09 and received a special thrust in terms of enhanced PSDP allocation and initiation of a
number of new projects aimed at improving the health of the nation.
􀂃 Allocations for health under the PSDP have increased by 66 percent, from Rs 13.99 billion in Fiscal Year 2008/09 to Rs 23.15 billion during Fiscal Year 2009/10.
􀂃 National programmes for Family Planning and Primary Healthcare; and Expanded Programme of Immunization continue to receive top priority with respective allocations each of Rs 7 billion and Rs 6 billion.
􀂃 The Prime Minster’s Emergency Action Plan for disease has been launched and will cost Rs 11 billion in the next five years.
􀂃 A concessionary import duty rate on 35 raw materials used in
pharmaceuticals, medicines and diagnostic kits is also being proposed.
􀂃 Zero rate sales tax on import and supply of wheelchairs for the special people is proposed.
􀂃 Tobacco taxation is being increased as per World Health Organization recommendations for protecting health of the population.
Clean Drinking Water for All and Environment

Madam Speaker!
Clean drinking water is the first line of defense in protecting public health. The Clean Drinking Water Project is a promising initiative for the masses prone to waterborne diseases. The work for installation of filtration plants is going on and about 600 plants have been operationalized till now.

It is proposed that 3,500 plants will be installed one in each union council by end of Fiscal Year 2009/10 for which an amount of Rs 6 billion is being allocated. Besides providing safe drinking water, the project will also create sufficient job opportunities contributing to reduction in unemployment.

The budget for environmental protection has been increased from Rs 1.14 billion in Fiscal Year 2008/09 to Rs 2.96 billion for Fiscal Year 2009/10. This amount will be spent on forestry; environment friendly public transport and on provision of clean drinking water.

Gender Equality

Madam Speaker!
Pakistan has also expressed its commitment to gender equality and
equitable development in many international forums and conventions including Convention on the Elimination of all Forms of Discrimination against Women and the Beijing Platform for Action. In order to advance the goal of gender equity in the process of implementing socio-economic policies, the Federal Budget for Fiscal Year 2008/09 showed a hefty increase in budgetary allocations for women specific expenditures amounting to Rs 44.7 billion compared to Rs 7.7 billion during Fiscal Year 2007/08.

The Government is committed to maintain gender equality in policies and
programmes. It is pertinent to mention that health and education, the two core social sectors, are the main recipients and sources of gender specific allocations, with the Benazir Income Support Programme also having emerged as a key source of growth in gender targeted allocations. Targeted and pro-women allocations in the federal budget with the intention to bridge the gap between men and women in acquiring access to basic service is surely a commendable policy.
Gender mainstreaming project is being run at the Planning Commission and an engendering budget exercise is being also carried out under the Medium Term Budgeting Framework in the Ministry of Finance.

Human Rights

Madam Speaker!
Following the footprints of former Prime Minister, Mohtarma Benazir
Bhutto Shaheed’s dreams of addressing the problems of the oppressed in Pakistan, for Mohtarma created a wing of Human Rights, we have built upon that and have established a full fledged Ministry of Human Rights.
64. Steps are being taken to establish “Benazir Shaheed Human Rights Fund” and the bill for creation of the National Commission of Human Rights has been tabled on floor of the House. The Board of Governors of the Women Distress and Detention Fund has been reconstituted. The Provinces are being requested to allocate their share in the fund. We have distributed cheques to eligible petitioners out of the Relief and Revolving Fund to redress their grievances.

Youth Affairs, Culture and Sports

Madam Speaker!
Youth is the most important asset of our country, particularly at this stage when we are endeavouring to rapidly modernize and introduce technological innovation. They can play an important role in the decision making process for development of the country. During the fiscal year 2009/10, following initiatives have been envisaged,
􀂃 Different programmes for youth motivation, character building,
awareness and integration, and establishment of youth activity centers
will be undertaken under the National Youth Policy.
􀂃 Approximately 30,000 educated postgraduates will be offered
internships under the National Internship Programme for which the
Government has allocated Rs 3.6 billion for Fiscal Year 2009/10.
􀂃 A Mobile Youth Computer Literacy and Awareness Programme have
been started through Mobile Computer Vans to educate/train the youth
of rural areas.
􀂃 Approximately 15,000 volunteers from all walks of life have been
registered for community development activities and disaster
management.
􀂃 An amount of Rs 450 million for Fiscal Year 2009/10 for cultural
development has been allocated which is an enhancement of Rs 186
million over the previous year’s allocation.
􀂃 The government is placing special focus on the development of sports in the country. An amount of Rs 583 million has been allocated in
PSDP in FY 2009/10 against an allocation of Rs 140 million in RE
2008/09. Government wishes to promote sports with private sector
participation to afford the children and youth an opportunity for
healthy recreation and sports related employment opportunities.

IX. GOVERNANCE FOR A JUST AND FAIR SYSTEM

Madam Speaker!
Improved ‘Governance’ is a must for a just and fair system. The manner in which public institutions and officials acquire and exercise authority to shape public policy and provide public goods and services is at the crux of our agenda.

Political instability, corruption, volatile law and order situation and inadequate infrastructure have all left a detrimental impact on Pakistan’s business environment. Autonomous institutions are needed, capable of outlasting their creators and resisting capture by individuals lusting for power and money. They must so function as to inspire confidence, which means that they must protect the rights of society against the exercise of arbitrary power.

Madam Speaker!
To strengthen governance, an additional amount of Rs 500 million was
provided to the provincial implementing agencies of the ongoing Access to Justice Programme to support improvements and development measures in Fiscal Year 2008/09. An opportunity has now been created for the people of Pakistan under Access to Justice Programme to build upon the existing framework of reform initiatives for securing immediate and visible improvements in the system of justice administration. The initiatives that will be carried out in the near future under this programme include:
• Establishment of Public Defender and Free Legal Aid System across the
country;
• Establishment of Fast Track and Evening Courts at the federal level and provincial headquarters; and
• Pro-poor legislation and automation of the justice sector.

Madam Speaker!
During Fiscal Year 2009/10, greater focus will be on administrative
reforms. We have already constituted a Pay and Pension Commission to make recommendations to the government linking compensation with performance. We believe that the compensation package of government servants should be brought close to market salaries in a phased manner. The Pay and Pension Commission is expected to make realistic recommendations regarding the following concepts which we have included in our agenda of governance reforms:-
􀂃 Monetizing incentives for civil servants;
􀂃 Making public sector the ultimate choice for talent, in other words
‘Employer of choice’;
􀂃 Improved service delivery;
􀂃 Greater transparency and self-accountability;
􀂃 Market-based competitive salary structure.

Madam Speaker!
We realize that the government servants are not adequately paid. In order to revise the compensation package a Pay and Pension Commission has already be constituted. During the course of the year, we would be benefited by the recommendations of the said Commission. However, to compensate government servants, I have the pleasure to announce:
• an ad-hoc relief allowance of 15% of pay of serving government servants from 1st July, 2009.
• An increase in the allowance of armed forces deployed on the western
front equal to one month’s initial basic pay with effect from 1st July 2009, as announced by the President of Pakistan.
• For the remaining armed forces personnel, allowance equal to one
month’s initial basic pay will be admissible from 1st January 2010 in line
with the Presidential announcement; in the interim period, an adhoc relief
allowance of 15% of pay will be allowed. This adhoc relief allowance
will be withdrawn w.e.f. 31st December 2009.
• The retired government servants and armed forces personnel will also get 15% increase in their net pension from 1st July 2009

In addition:
• Limit for the exemption on Income Tax for salaried male is being
enhanced from Rs 180,000 to Rs 200,000
• Limit for the exemption on Income Tax for salaried female is being
enhanced from Rs 240,000 to Rs 260,000
• Senior citizens will now enjoy 50 percent relief in their tax liability in case of income upto Rs 750,000/-; previously this limit was upto Rs 500,000/-.

The government would also take measures during the next financial year
to undertake the following actions in its drive towards governance reforms:
• Public sector enterprises including Pakistan Railways, Pakistan Steel
Mills, Pakistan International Airlines and the Power Distribution
Companies would undergo financial reforms to improve their
management and service delivery.
• National Savings Organisation and the Federal Bureau of Statistics
would move towards becoming corporate entities displaying the
highest level of efficiency and service delivery.

Madam Speaker!
Federal and provincial solidarity is a must in the process of governance
reform. Criticism must be genuine and solutions should be just and realistic. The line between government and opposition should not be based on vendetta and abuse, but on a sincere difference in principles.
National Finance Commission

The present government has constituted the National Finance Commission which would be convened immediately in the next financial year. It is our belief that decision making on financial matters relating to the distribution of resources between the federation and the provinces need to be addressed in an institutional manner. This notwithstanding, we have made efforts to increase the share of the provinces in the divisible pool of taxes alongwith special grants from the existing
47.5% to 49% during fiscal year 2009-10. On a cumulative basis the provinces would receive federal transfers in excess of Rs 708.1 billion against Rs 600 billion in the last financial year, an increase of 18%.

National Assembly Secretariat, Provinces and Parliamentary Affairs and Opposition

Madam Speaker!
The National Assembly is an important organ of the Federation’s
consultative process and needs further strengthening. A budget provision of Rs 1.1 billion was approved for the activities of National Assembly Secretariat during the Fiscal Year 2008/09, while for fiscal year 2009/10 an amount of Rs 1.3 billion is being allocated. Other improvements to strengthen the Parliament made during FY 2008/09 include:
􀂃 Sovereignty of the newly elected Parliament has been ensured through discussion and debate on all issues of national importance in the
Parliament;
􀂃 The Defence Budget was presented in the Parliament for the first time after 1964;
􀂃 The Prime Minister regularly attends the National Assembly sessions
and himself responds to questions, points of orders, motions and other
important issues;
􀂃 Formation of Standing Committees in time and in proportion to the
political parties’ strength in the Parliament;
􀂃 Chairmanship of the Standing Committees has been given to the
Opposition according to their strength;
􀂃 Chairmanship of the Public Accounts Committee has been given to the Leader of the Opposition for the first time in the Parliamentary
history of Pakistan in line with established traditions of parliamentary
democracy in the developed world; and
􀂃 Equal distribution of development funds has been made amongst the
members of the Parliament irrespective of party affiliations.

Taxation Proposals

Madam Speaker!
Allow me to give you the highlights of taxation proposals for the year
2009/10. I have already presented the important fiscal incentives for the different sectors of the economy. Allow me to add that the tax measures being proposed by the government are fair and equitable guided by the principle of “ability to pay”, set in the context of an economy fighting a war.

Excise duty on petroleum products is being levied in the shape of a carbon surcharge which would eliminate the existing petroleum development levy. This would ensure transparency in the pricing of petroleum products, curb consumption, save foreign exchange and reduce carbon emissions.

In order to discourage consumption of cigarettes excise duty and sales tax on cigarettes is proposed to be enhanced. This would generate estimated revenues of Rs 15 billion.

As a revenue measure and to broaden the tax base, FED in VAT mode is
proposed to be levied on the following additional services:
• Fees charged by banking services.
• Fees charged by import cargo handlers.
• Fees charged by stock brokers.
• Fees charged by insurance companies.
• Fees charged by electronic media for advertisements.
The estimated revenue impact of these measures is Rs 16 billion

It is proposed to enhance the rate of withholding tax on imports of
commercial nature from 2% to 4%. This measure would result in estimated revenue of Rs 23 billion.

Following the policy of broadening the tax base and putting the burden on those who can bear it, it is proposed to enhance the rate of Capital Value Tax on property from 2 to 4 percent. Government intends to adopt effective measures to ensure its collection. It is estimated to generate revenues of Rs 15 billion.

To help the internally displaced persons, it is proposed to levy for a single year:
• a nominal tax of 5% on the tax payable by every individual deriving
income above rupees one million.
• It is further proposed to levy a flat rate of 30% on bonuses earned by
individuals in the corporate sector drawing salary exceeding Rupees one
million.

It is proposed to levy a Minimum Tax under section 113 of the Income
Tax Ordinance 2001 on the income of a resident company, provided that this will not be applicable to a company which has declared gross loss before set off of depreciation and other inadmissible expenses under the Ordinance.

To promote documentation of the economy, it is proposed that certain
sectors may be pulled out of the presumptive, or final, tax regime. These sectors will now be required to file returns. Phasing out the presumptive tax regime will be an on going process.

Madam Speaker!
What the nation and the people need now is a guarantee for permanence in policy, permanence in ideology and permanence in approach which cannot be found in elusiveness. Our power is the power of the people. Our founding father, Quaid-e-Azam, Mohammed Ali Jinnah pledged that Pakistan would have a government and a constitution chosen by the people. Mankind has reached great heights by pursuing democratic ideals. Democracy is our polity and all power belongs to the people.

Madam Speaker!
As Shaheed Zulfiqar Ali Bhutto stated, “A new era is emerging in the
political life of the nation. The politicians of Pakistan are facing a crucial new test as destiny stands at the dawn of a New Year. A new look amid a new style will have to emerge. The old ways will no longer appeal to the people. A new allround approach will have to be found in every facet of politics. The hand must reach the ground, the eye must perceive the sub-surface movements and the ear be able to hear the sound of music in the far distance. Crescendos of ‘Zindabad’ and warm ovations at public meetings are not going to be the final tests of political acumen.”

Pakistan is a rich country in terms of both natural and human resources.
Yet clearly, Pakistan has not fully exploited its potential. In this scenario, the government will ensure that clearer priorities and pro-poor sectoral programmes are in place that will provide an appropriate strategic framework to effectively reduce poverty.


Madam Speaker!
“Let us welcome the sound of bells of another year which is likely to bring more hope for all than the one that has ended. Time and with it events are moving faster……But as a new page is being turned in an old book, let us end on a hopeful note.”

Pakistan Paindabad!

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