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Old 29-11-2002, 10:08 AM
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2003 Budget Alert

28 November 2002

Minister for Finance and Treasury the Hon. Bart Philemon presented the Government’s 2003 budget in Parliament on 28 November 2002.

The Budget, labelled “Adjustments for Recovery and Development” has seven core objectives. These are:
  • To alleviate pressure on the Kina;
  • To reduce demands on domestic financing, so reducing pressures on inflation;
  • To facilitate an easing of monetary conditions and reductions in interest rates;
  • To stabilize foreign exchange reserves;
  • To commence a fundamental restructuring of the Budget to focus on more productive outlays;
  • To allow entities to operate with greater certainty and achieve better budgetary outcomes; and
  • To establish the platform for robust broad based sustainable growth.
The 2003 budget deficit is projected to be K244.2 million or 2% of GDP.

Significant effort has been made to encourage exploration in the Mining and Petroleum sectors with several concessions made in the Income Tax Act. Given the nature of this sector benefits arising from these concessions will take a number of years to have any significant impact on the economy.

Resources have also been directed at boosting the informal and agricultural sectors with significant portions of the development budget aimed at these areas. The Rural Development Bank will receive a capital injection of K2 million to assist in the revitalisation of the RDB as an effective lending facility to PNG’s agricultural sector.

Public Sector accountability and reform have also been targeted with the revitalisation of the Public Accounts Committee, the establishment of a monthly revenue and expenditure
committee and tightening of mechanisms to ensure that expenditure is kept within the established systems. Financial controllers have also been appointed for key departments
including Health, Police, Defence, Works, Education and Corrective Institutional Services. The Internal Revenue Commission is to receive funding for 100 additional auditors to enable more enforcement and audit activities to be carried out in an attempt to increase tax revenues.

The Government is considering various measures to remove barriers to investment resulting from overly bureaucratic migration mechanisms (i.e. work permit and visas processes).
However the budget indicates that as a starting point it is likely that fees for these and other departmental services are likely to increase.

Revenue Measures
  • The company tax rate has increased from 25% to 30% with effect from 1st January 2003. The dividend tax rate remains at 17% with an effective tax rate of 41.9% on net divided income.
  • Prescribed taxable values for housing and motor vehicles will increase by 25%. The overall increase in tax for a taxpayer in high covenant housing and paying the top marginal tax rate will be an additional K21.15 per fortnight. The increase in tax for a taxpayer receiving a vehicle supplied with fuel is K11.75 per fortnight
  • Excise Duties for alcohol and tobacco products will increase from 1 June 2003 at the rate of 4% every six months. Duty on spear cigarettes will be increased to 50% of the rate of ordinary cigarettes and 60% if they have filers.
  • Bank Debits Tax – stamp duty on cheques has been removed and is replaced by a new bank debits tax that will apply from 1 April 2003. The tax will apply at the rate of 0.01% (1 toea per K100) on all withdrawals from bank accounts whether by cheque or electronic. The tax does not apply to passbook accounts or charities.
  • Log export tax is currently expressed in Kina terms thereby exposing the industry to exchange rate variations. The budget converts the log tax into US $ terms based on the exchange rate that applied on 20 August 2002.
  • Mining Sector
    1. Additional profits tax has been abolished. The mining sector viewed APT as a major disincentive to the mining industry.
    2. Ring fencing has been eased to allow 25% of new exploration expenditure outside of the mining project to be deducted from the income of current mining projects. Previously this was capped at 10% of new exploration expenditure
    3. A double tax deduction is introduced for exploration carried out by existing mining companies. Such exploration is deductible as outlined above. Should the project be successful and a new project result a second deduction is then allowed as allowable exploration expenditure.
    4. For new developments, all capital expenditure can be deducted at the rate of 25% of the residual value effectively accelerating the deductions that can be claimed. Over the life of a project the total tax remains unchanged, however less tax is paid in earlier years increasing the net present value of such projects.
    5. A premium of 2% will apply for mining companies who opt to use the provisions for fiscal stabilisation.
    6. Mining levy was to be abolished over the next 4 years with a 25% reduction for each year. The mining levy will be retained and will stay at the current level.
    7. The twenty year time limit for the carry forward of losses has been extended to an indefinite period.
  • Petroleum
    1. The first tier of additional profits tax has been abolished. The second tier, which applies when a rate of return of 20% is reached, remains. The second tier has remained in light of the potential war with Iraq that may cause fuel prices to rise.
    2. A concessionary tax rate of 30% will apply for a development that starts before 31 December 2017 and is the result of an exploration licence issued between 1 January 2003 and 31 December 2007. Holders of existing licences will need to have the licence “reissued” after 1 January 2003 to enable the company to
      potentially qualify for the concessionary tax rate. The mechanism to have the licence “reissued” needs to be finalised with the Department of Petroleum. Any new projects that do not qualify for the 30% tax rate will pay tax at the rate of 45%.
  • Gas
    1. Specific incentives have been introduced to encourage the development of the Gas Project but will only be effective if the Gas Project proceeds.

Budget Breakfast
Deloitte will be hosting a Budget Breakfast on Thursday 5 December in conjunction with the Port Moresby Chamber of Commerce and Industry.

Source: Deloitte Touche Tohmatsu - Papua New Guinea
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