ISLAMABAD:
As a last resort to stabilise the dwindling economy, the President on Tuesday promulgated three ordinances and issued a sales tax executive order, to levy new taxes worth Rs53 billion, with immediate effect.
The step is expected to help restore the suspended $11.3 billion IMF bailout programme.
The three ordinances, promulgated by President Asif Ali Zardari, include levying of a flood surcharge, increase in special excise duty (SED) and imposition of a 17 per cent sales tax on the sale of tractors.
The flood surcharge will be levied at a rate of 15 per cent on the existing payable taxes, both direct and in withholding mode, while the SED rate has been increased to 2.5 per cent.
Meanwhile the government has withdrawn sales tax exemptions on fertilisers, pesticides, plant machinery and equipment through the executive sales tax order. The government has also withdrawn zero-rated sales tax facility on the domestic sale of garments, carpets, leather, surgical and sports goods.
Other measures adopted through the order include increasing the ex-factory rate of sugar, the one at which it collects eight per cent tax, from Rs28 to Rs55 per kilogramme, and the imposition of an average 15 paisa per unit surcharge on electricity consumers, after it failed to increase power tariffs due to legal constraints.
The government has also taken measures to control expenditures to the tune of Rs 120 billion, mainly by slashing Rs100 billion from development spending. The ordinances will remain effective till June 30th, the last day of the current financial year.
Budgetary impact
These measures will help the government in achieving the revised Rs1,604 billion tax collection target. So far, the FBR has collected Rs873 billion in eight months, leaving it with a balance of Rs731 billion to be collected in the remaining four months of the financial year.
It will help the government restrict the budget deficit to 5.5 per cent of the total size of the economy.
The Rs53 billion tax package is an “alternative to the reformed general sales tax (RGST),” and will pave the way for fifth review of Pakistan’s economy in April and May and win a Letter of Assessment from the IMF for securing the budgetary support loans from the World Bank and the Asian Development Bank.
Political support
The government had to promulgate the ordinances after it failed to get the RGST, flood surcharge and the SED bills passed from the Parliament, since it does not enjoy simple majority in the lower and upper houses of the Parliament.
It has taken its main coalition partner, the Muttahida Qaumi Movement (MQM), on board, said a finance ministry official while talking to The Express Tribune.
According to the understanding, the MQM will mildly protest against the promulgation of the ordinances, primarily for face-saving, the official added.
While both the MQM and the opposition Pakistan Muslim League-Nawaz (PML-N) had not opposed the flood surcharge and the SED bills in the Senate, and the Senate standing committee on finance and revenue had passed them unanimously. They were stuck in the standing committee of the National Assembly, mainly due to a show of aggressiveness of its chairperson Fauzia Wahab of the PPP.
The MQM had linked its support for new tax measures with agriculture income tax – a demand that has been accepted by removing the tax exemptions on agriculture inputs.
During 10-point agenda meetings with the government, the shadow Finance Minister Senator Ishaq Dar of PML-N did not oppose the tax measures either, but linked his party’s support with the eradication of corruption.
Collection through Ordinances
A 15 per cent surcharge on existing tax liabilities for a period of three and half months would generate Rs20 billion. Besides, the authorities expect to collect at least Rs6 billion by increasing special excise duty rates from one to 2.5 per cent. Through sale of tractors, the government expects to collect Rs1.75 billion in three and half month.
Sales Tax Executive Order
The withdrawal of sales tax exemptions on garments, leather, carpets, surgical and sports goods will help generate Rs7.5 billion in the remaining period of the current financial year. The authorities expect to collect Rs8.75 billion on sale of fertilisers, Rs500 million through sales of pesticides and Rs6.5 billion from the sale of plant machinery and equipment.
According to the order, the exports of garments, leather, carpets, surgical and sports goods will remain exempted from the levy. However, the facility would only be available for registered taxpayers. The total production of the unregistered taxpayers will be subject to levy, with an aim to broaden the tax base. Meanwhile, by doubling the ex-sugar factory price, the FBR will net in additional Rs2 billion in three and half months.
Power Surcharge
The government will collect an additional Rs865 million per month on account of 2 per cent per unit surcharge, amounting to an estimated collection of Rs 3.1 billion in the remaining three and half months of the current financial year.
What does the flood surcharge imply?
The flood surcharge is not an additional tax or an increase in tax rate. It is calculated on the existing tax paid by an individual taxpayer.
Hypothetically, if a man earns Rs500,000 a year and pays 10 per cent income tax i.e. Rs50,000 a year, the surcharge would be 15 percent of the tax he pays, not his total income. The flood surcharge would therefore be Rs7,500 (i.e. 15 per cent of Rs50,000) per year. Since it is imposed for only three-and-a-half months of this financial year, this man would pay roughly a quarter of this amount, i.e. Rs2,200, as flood surcharge.
Published in The Express Tribune, March 16th, 2011.
COMMENTS (20)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ