Presidential ordinance likely to bring mini-budget

ISLAMABAD:

The government may promulgate a Presidential Ordinance to impose flood levy on imports to raise additional Rs60 billion in revenues but on Thursday it delayed a decision about slapping a windfall income tax on commercial banks to punish them for currency manipulation.

Sources in the Ministry of Finance told The Express Tribune that it has been decided, in principle, to impose 1% to 3% import duties to raise around Rs60 billion in additional revenues.

However, these duties might be imposed as a levy, which would keep the money outside the federal divisible pool and would not be distributed under the National Finance Commission Award.

Due to its non-tax nature, the levy would also not be counted as part of the Federal Board of Revenue collection.

The sources said that the first draft of the Presidential Ordinance has been prepared and subject to the endorsement of the federal cabinet and ascent of the president. The ordinance might be enforced with effect from Sunday.

In case the government decides to make the windfall income tax on commercial banks part of the ordinance, it may take some more time, they added.

The promulgation of the ordinance may also strengthen the government’s case in the eyes of the International Monetary Fund provided it takes enough measures to bridge the revenue shortfall.

The sources said that the 1% to 3% flood levy on imports could be imposed to generate Rs60 billion in revenues.

The 1% rate could be charged on imported goods that are currency exempted except on those that are exempted under the 5th Schedule of the Customs Act or under the Vienna Convention.

The 2% levy may be imposed on goods that do not fall in the category of luxury items.

The luxury items may attract a 3% levy, they added.

The initial plan was to impose up to 3% additional customs duties to compensate for the Rs100 billion shortfalls in custom duties’ annual collection target.

The government has set a customs duty collection target at Rs1.150 trillion, which may be missed by over Rs100 billion in the current fiscal year.
From July through mid-December, imports amounted to $29 billion. But nearly $12 billion or 41% of imports were duty free. So far, the imports have contracted by 22%, which are hitting the revenue receipts.

In the last fiscal year, the share of import taxes was around 52%, which during the first four months of the current fiscal year came down to 45%.
Due to slowdown of economic activities, the government has estimated that its annual target of Rs7.470 trillion will be adversely affected by Rs380 billion. The legal challenges have also started undermining the revenue collection of the FBR.

Because of these sensitivities, the FBR on Thursday could not decide about the windfall income tax on the commercial banks. The tax is being proposed to be imposed only on the foreign exchange income part of the commercial banks.

The State Bank of Pakistan has completed an inquiry against the commercial banks and has established currency manipulation during April-June 2022 quarter, according to the government officials. However, the central bank may not be able to impose hefty penalties and whatever amount it will collect would go to the SBP’s coffers.

The government is planning to recoup the additional gains made by the banks through the windfall tax, according to the sources.

The decision could not be taken on Thursday due to absence of credible data about the net additional gains that these banks made on the number of incremental currency transactions.

The matter will now be reviewed again and the tax can be included in the ordinance provided the tax authorities have solid base to determine the legality of the windfall profits.

It is estimated that the total income from the foreign exchange earnings by all the commercial banks during the year 2022 could be around Rs100 billion to Rs110 billion.

The FBR has to determine how much of it was because of currency manipulation. The windfall tax rate could be as high as 40% of the foreign exchange earning component of the banks.

Without the windfall tax, the banks will be paying 49% income tax in the year 2023, including 10% super tax.

If the FBR allows the banks to exclude the expenses from the foreign exchange earnings part, the rate might be less than 40%.

The banking sector witnessed a phenomenal growth despite overall meagre economic growth of 3.5% in 2021. The total deposits of banks increased by 17.7% while the advances grew exceptionally well by 23.4%, due at least in part to the recently introduced measures of taxing unhealthy Advances-to-deposit (ADR) ratios at higher rates.

The overall growth in the banking assets was mainly financed by a 17.7% increase in deposits due to Roshan digital accounts and discontinuation of Rs15,000 and Rs7,500 bearer prize bonds by the government.

The total profit before taxation of the banking industry grew by 12.6% from Rs417 billion in 2020 to Rs470 billion in 2021.

These measures are being discussed as the FBR faces a mammoth task of collecting Rs965 billion in December. This target is even higher than the June 2023 target, which was set on the assumption that the FBR would receive around Rs260 billion in December on account of taxes that were levied in the budget.
For the first half (July-December) of FY2022-23, the government has set a tax target of Rs3.65 trillion.

The Sindh High Court (SHC) last week struck down up to 10% super tax – terming it “discriminatory” and “ultra vires to Constitution” – in a move that will strip the government off of Rs247 billion in revenues and has also exposed the poor working of the tax machinery.
But the FBR is still collecting the tax from the companies that had not challenged the levy in the courts.