Islamabad refuses to cave in to IMF demands

Global lender insists on increasing electricity tariff and imposing taxes

ISLAMABAD:

Talks between Pakistan and the International Monetary Fund (IMF) remained inconclusive after the global lender did not budge from its demand of increasing electricity tariff by Rs4.95 per unit and imposing taxes worth Rs150 billion.

For now, Islamabad has refused to accept both of these demands and instead Finance Minister Shaukat Tarin is set on Friday (today) to reverse some of the adverse taxation measures that were part of the Finance Bill 2021 unveiled on June 11.

The minister will conclude the general budget debate and make new announcements.

Tarin may announce withdrawal of the Rs10 billion in taxes imposed on the salaried class, retaining the current sales tax rate on dairy products, plants, machinery and maize seed, and provision of some relief to the banking industry.

“The IMF Board meeting was on July 7, but we need more time for concluding the discussions,” the minister said on Thursday during a meeting of the National Assembly Standing Committee on Finance.

“The 6th and the 7th programme reviews will be merged and the board is now expected to meet in September,” he added.

The minister said he had a detailed discussion with the IMF on Wednesday on two outstanding issues of introducing Rs150 billion worth of personal income tax and Rs4.95 per unit increase in electricity prices.

“The IMF demanded that the government should increase Rs1.39 per unit price in June and Rs3.56 per unit in July,” he noted.

“This is the wrong way of doing things and we will be putting extra burden on the people and the industry” he added.

“Even if we protect poor people from increase in electricity prices, the cost of electricity for industry will go up that in turn will increase the prices of their products.”

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Tarin had held a meeting with Jehad Azhour, the IMF director for Central Asia and Middle East, which remained inconclusive.

The 6th review talks for $1 billion tranche and approval of the budget were originally planned to conclude on June 10-- a day before the announcement of the budget.

The IMF’s global spokesperson, Gerry Rice, and its resident representative, Teresa Dabán Sánchez, also gave statements that suggested that the talks had collapsed.

“The IMF remains fully engaged and aims to resume the discussions in the period ahead,” Rice told a regular IMF briefing.

He added that the IMF was holding open, constructive discussions with Pakistan as part of the 6th review.

Rice declined to say if disbursements under that programme had been halted but said further discussions were needed about Pakistan’s fiscal spending plans, structural reforms, particularly in the tax and energy sectors, and social spending.

Sánchez said while the recent mission could not complete these discussions, “we remain engaged with the authorities, aiming to resume the discussions in the period ahead”.

“We stand ready to continue supporting Pakistan achieve the objectives of debt sustainability and strong and sustainable growth,” she added.

“This will require continued discussion on a sustainable fiscal path, structural reforms, particularly on the tax and energy sectors, and social spending enhancements envisaged in the authorities’ reform program supported by an extended fund facility.”

The finance minister maintained that he did not see any risk to the programme.

“We expect to receive over Rs400 billion [$3.1 billion] from the IMF in the next fiscal year.”

He said the government had decided to float Eurobonds, Sukuk Bonds and Panda bonds in the next fiscal year to arrange funds for meeting the external financing needs.

“The government will impose 2.5% additional tax, if the bank’s advance-to-deposit ratio (ADR) falls in between 50% and 40% of the total deposits,” Tarin told the standing committee.

He added that if the ratio fell below 40%, then the additional tax rate would be 5%.

“The purpose is to encourage the banks to give loans for productive sectors of the economy.”

The ADR shows how much a bank has lent against its deposits. However, the banks in Pakistan have been making easy money be investing funds in the government securities.

However, sources said that instead of increasing the tax burden on bank, the ADR related taxation may reduce the burden when compared with the existing law.

The government wants to slap an additional tax of 2.5% to 5% on the amount that is below the threshold.

Under the present law, the total additional income from investment in the government securities is taxable at additional 2.5% rate.

Clause 6C of the 7th schedule of the Income Tax Ordinance read: “The taxable income arising from additional income earned from additional investment in Federal Government securities for the tax years 2020 and onwards, shall be taxed at the rate of 37.5% instead of the rate provided in Division II of Part I of the First Schedule.”

It was also proposed that the ADR related amendment should be given effect from the past, which the FBR was resisting so far and was inclined to do it from new fiscal year.

A senior government functionary said that this issue of reduction in tax rate due to linking tax with the ADR could be tackled through framing of rules.

Tarin said the tax on profit from investment in debt instruments for the individuals would be reduced from 25% to 15%

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The Senate Standing Committee on Finance had also recommended that 25% withholding tax on dividend income was exorbitant, thus, should be reduced to 15%.

Tarin in his budget debate windup speech may announce withdrawal of Rs10 billion in taxes levied on the salaried class.  However, the sales tax rate on dairy products and plants and machinery at 10% is likely to be retained.

The minister said the tax rates for the poultry and dairy sectors and products that would help in reducing stunting would remain unchanged. He added that Real Estate Investment Trusts (REITS) income tax rates would also be reduced from 25% to 15%.

The sales tax rate on the import of plant and machinery would be retained at 10%, said Tarin, as against the budget proposal of 17%.

He said the gaps that had appeared due to reversal of some of the taxation proposals will be bridged through enforcement measures.

The minister hinted at retaining the changes proposed for withdrawing the federal excise duty from erstwhile Fata and Pata areas.

“Some administrative measures will be taken to make sure that the facility is not misused in the settled areas,” he added.

To a question, the minister said the four provincial budgets did not show the combined cash surplus of Rs570 billion, which was contrary to the understanding reached with them.

“There is a gap of Rs250 billion but it is our job to get the required surplus created.”

The minister said the FBR had data of 7.2 million people and they would be asked to pay their due taxes.

“The FBR will not ask them this question rather a third party will be engaged for this purpose and those who would not cooperate will be arrested.”