The government has decided to give income tax exemption to a financial sector firm and reduce tax liabilities of steel and mobile phone production sectors amid a sharp rise in its debt that increased at an average rate of Rs38 billion a day in July.
The increase of Rs38 billion a day in the public debt was two times more than the average addition of Rs13.6 billion per day with which the PTI-led government added Rs14.9 trillion to the public debt in the past almost three years.
A finance ministry spokesperson said that the public debt would come down in August due to repayment of some of the maturing debt, suggesting that the average increase would come back to the historical ratio of the past three years.
The income tax relief for a few sectors has been proposed under the Third Tax Laws Amendment Ordinance 2021, which is at the approval stage, sources told The Express Tribune.
The intended purpose of the draft ordinance is to give the National Database and Registration Authority (NADRA) access to taxpayers’ data but it is now being used to meet other policy goals, they added.
The promulgation of a presidential ordinance will depend upon when parliament will be in recess, as the government does not have a plan to bring the legislative changes through a more representative and acceptable manner - the introduction of a finance bill in the National Assembly.
The Federal Board of Revenue (FBR) has proposed that the total income of Pakistan Mortgage Refinance Company Limited (PMRC) should be exempted from income tax, said the sources.
If approved by the cabinet, it will be partial reversal of corporate income tax reforms that the government had introduced early this year to qualify for a loan tranche of the International Monetary Fund (IMF).
PMRC was among the entities whose income tax exemption had been withdrawn to raise Rs140 billion in taxes under the IMF programme.
“IMF team remains engaged with Pakistani counterparts on conducting technical and data discussions and we stand ready and looking forward to our continued discussions with the Pakistani authorities on the set of policies and reforms that could form the basis for the completion of the 6th review under the EFF,” said Teresa Dabán Sanchez, Resident Representative of the IMF.
She had been requested to comment whether the IMF was supportive of further tax relief for the corporate sector.
Sources said that the IMF nod for tax exemption was critical, if Pakistan was serious about getting the $6 billion loan programme restored.
The federal government was of the view that giving tax exemption to the mortgage refinance company was critical for Prime Minister Imran Khan’s construction sector package, a senior FBR official said.
The government has already offered an asset legalising scheme to the construction sector, which gave complete immunity from disclosing the source of money. About 2,125 projects worth Rs493 billion have been registered under the PM’s second tax amnesty scheme.
The government is proposing these amendments at a time when its debt has hit the roof. After adding nearly Rs15 trillion in its first three years, the government took a bad start in new fiscal year 2021-22 as well.
By the end of July, the central government debt rose to Rs39.9 trillion, a net addition of Rs1.172 trillion in just one month, according to data released by the State Bank of Pakistan (SBP) this week. At the end of June, the central government debt had been calculated at Rs38.7 trillion.
There was an increase of Rs561 billion in the domestic debt while the external debt increased by Rs611 billion in July, according to the central bank.
A key reason behind the surge in external debt was the depreciation of the rupee by Rs5.2 against the US dollar. The rupee closed at Rs162.5 to a dollar in July.
Even after excluding the exchange rate impact, the increase in public debt was presumably more than the projected budget deficit for July, said the sources.
Finance ministry version
“Around 80% of increase in central government debt during July 2021 was due to depreciation of US dollar against other international currencies; depreciation of Pak rupee against US dollar; and temporary increase in cash balances of the federal government to meet the upcoming maturities,” said a spokesperson for the finance ministry.
The spokesperson added that the increase in debt due to exchange rate depreciation cannot be termed fresh borrowing as revaluation of the external debt in terms of rupees after currency devaluation has resulted in higher value of central government debt at the end of July 2021 compared with end-June 2021.
The government took the revolutionary and economically sound step of not borrowing from the SBP and maintaining a cash buffer, said the spokesperson.
During July 2021, borrowings were made to build the cash buffer in anticipation of meeting upcoming debt maturities, which led to an increase in debt. However, this increase is offset by the corresponding increase in the government’s liquid cash balances.
The government has repaid the said debt maturities and cash balances of the government were accordingly reduced during August 2021. This implies that the increase in central government debt due to higher cash balances during July 2021 has been offset through the retirement of debt maturities during August 2021, resulting in a lower debt stock at end-August 2021, said the spokesperson.
Other tax exemptions
Sources said that the government has also decided to reduce the 4.5% withholding tax being collected from distributors, dealers and sub-dealers of the steel sector to just 0.25%.
The massive relief will be for those businesspersons who would file annual income tax returns.
Similarly, the minimum income tax of 1.25% has also been proposed to be reduced to 0.25% for the steel sector business chain, the sources said.
There is also a proposal to waive the 1.25% minimum income tax being collected from the mobile phone manufacturers engaged in the local manufacturing of mobile phone devices, said the sources.
The government may also partially reverse its decision to limit the federal cabinet’s powers to give income tax exemptions. It has also proposed an amendment to Section 53 of the Income Tax Ordinance that deals with the powers to grant income tax relief.
Now, the government wants to add the word federal government to partially address the concerns of the IMF.
Published in The Express Tribune, September 12th, 2021.
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