IMF shares LoI with govt to seal loan deal

ISLAMABAD:

The government is considering giving about Rs60 billion in tax relief to bankers, stock market brokers, traders and transporters amid its attempts to pacify the International Monetary Fund (IMF) by imposing equal amounts of taxes on other sectors to keep the loan programme on track.

The government disclosed its intentions to give relief to the powerful sectors the day the global lender handed over draft of the letter of intent (LoI) -- a promissory document that is required to be signed by the finance minister and the governor of the State Bank about their commitments to keep the programme afloat.

The finance ministry was reviewing the draft and its signing by them would pave the way for calling the board meeting, likely on August 29.

Pakistan has committed with the IMF that it would generate a primary budget surplus of Rs153 billion in this fiscal year to achieve the global lender’s programme objectives.

However, sources said that in the middle of convincing the IMF about its intentions to implement fiscally prudent policies, the government was going to create a big hole of around Rs230 billion, including Rs60 billion that it wanted to give away in tax relief.

They added that during Thursday’s meeting between Pakistan and the IMF authorities, the latter had raised concerns about giving tax relief to these sectors. They added that Finance Minister Miftah Ismail had assured the IMF that the relief would be “tax neutral” -- an expression used to tax imports and cigarettes to raise money to fund the wealthy bankers and stock market brokers.

After the approval of the budget, the government has given about Rs84 billion in additional subsidies to exporters -- over and above the money kept in the budget.

The Economic Coordination Committee (ECC) of the cabinet is also sitting on the Rs54 billion pending subsidy demand by the Utility Stores Corporation (USC) to fund the subsidised food.

The ECC has already approved Rs30 billion additional budget for the PSO subsidy.

Read Govt plans Rs40b new taxes to appease IMF

In the middle of the economic crisis, the government is going to give massive tax relief of billions of rupees to these sectors through a presidential ordinance.

The banks might receive at least Rs10 billion to Rs12 billion in income tax relief, as the government is planning to reduce its tax rates on profits earned by giving loans to the Centre, said the sources.

They added that Prime Minister Shehbaz Sharif had not yet given consent to give relief to the stock market.

Through the Finance Act, 2021, for tax year 2022 onwards, higher rates of tax were prescribed for the banking companies in respect of the taxable income attributable to investment in the federal government securities.

To encourage banks to the private sector, the government had linked the tax rates with the banks’ advances to deposits ratio (ADR).

For up to 40% ADR, the government had increased the income tax rate from 40% to 55% in the budget.

The FBR was considering reducing this rate back to 40% for the tax year 2022 and then set it at 50% for the tax year 2023, according to the sources.

Similarly, for the ADR of above 40% to 50%, the government in this year’s budget had increased the tax rate from 37.5% to 49%.

The sources added that now there was a proposal that the rate should be reverted back to 37.5% for tax year 2022 and set at 45% for the tax year 2023.

In the budget, the standard rate of tax for banking companies was revised at 39% for the tax year 2023 and onwards. The super tax rate was also enhanced to 10% for tax year 2023.

The sources said the government was planning to give another tax relief of nearly Rs5 billion to the stock market.

The government had already given Rs8 billion to Rs10 billion relief in income tax to the stock market by lowering the capital gains tax rates on sale of shares after holding them for two years. It had also completely abolished the tax by the sixth year in the budget.

In the recent budget, this relief has been restricted only to those disposal of shares acquired on or after July 1, 2022.

Read more IMF toughens stance on loan tranche release

For shares purchased before July 2022, the old fixed tax rate of 12.5% had been retained.

However, the sources said the government was considering that the shares purchased before July 1, 2022 should also be charged on the reduced income tax rates. This will provide around Rs5 billion income tax relief.

In the budget, the government had increased the fixed income tax rate for transporters.

The advance tax on passenger transport vehicles has been increased in the range of Rs1,000 to Rs4,000 per seat.

The finance minister has already announced reducing the maximum per seat rate to Rs1,500.

This will cause about Rs2 billion hit to the revenues, according to the sources.

The government has already announced withdrawing the fixed tax regime for the traders. This will cause a Rs42 billion dent in the revenues.

However, the finance minister said that the government would collect Rs27 billion from the traders in this fiscal year by enhancing the previous tax regime rates.

The Rs15 billion gap would be filled by increasing taxes on other sectors, he added.

The finance minister further stated that the relief in taxes would be compensated by increasing taxes on tobacco, cigarettes, and increasing duties on certain imported goods.