The government on Tuesday increased the general sales tax (GST) rate to 18% and drastically enhanced taxes on cigarettes with immediate effect to collect Rs115 billion out of the planned Rs170 billion mini-budget.
The federal cabinet took the step to implement another condition set by the International Monetary Fund (IMF) for the revival of the derailed $6.5 billion programme after President Arif Alvi refused to promulgate an ordinance sent by the government.
But the global lender will accept only permanent tax measures, which the government will ensure by getting the nod of parliament.
While exercising its administrative authority, the federal cabinet increased the GST rate by 1% to 18% and also enhanced the federal excise duty (FED) rates on cigarettes to give effect to Rs115 billion new taxes from midnight, Finance Minister Ishaq Dar told The Express Tribune after the cabinet meeting.
It is for the first time ever, the government made a real dent to the tobacco sector by massively increasing the taxes on cigarettes.
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The Federal Board of Revenue (FBR) notified the FED increase on expensive brands from Rs6.5 per cigarette to Rs16.5 – an increase of 153%. For less expensive brands, per stick increase is from Rs2.55 to Rs5.05 – an increase of 98%.
The government had presented the draft bill in the federal cabinet, which would now be presented in parliament on Wednesday (today) for approval.
The finance minister said that the federal cabinet had the authority to increase the GST rate while the FBR could also enhance the FED rate on cigarettes on its own.
In order to provide permanent legal cover to the immediately notified Rs115 billion tax measures as part of the mini-budget, the government also convened separate sessions of the National Assembly and the Senate on Wednesday (today).
Out of Rs115 billion, at least Rs55 billion will be collected from 1% increase in the GST in just four and half months. The maximum amount of Rs60 billion will be collected through increase in the FED on cigarettes.
There will be a further increase in the rates on items mentioned in the third schedule of the Sales Tax Act but this surge will be enforced through an act of parliament.
The decision to use the administrative authority was taken after President Dr Arif Alvi did not agree to promulgate the presidential ordinance, said Dar. He added that the president advised to call the session of the parliament and get these taxes approved but this process would consume eight to 10 days.
According to a press statement issued by the Presidency, Finance Minister Ishaq Dar called on President Dr Arif Alvi and apprised him of the progress in the talks with the IMF and that all modalities had been agreed upon.
“The President advised that it would be more appropriate to take the Parliament into confidence on this important subject, and that a session be called immediately so that the bill is enacted without delay”, it added.
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“The President was of the view that the taxes should not be imposed in his name, instead the Parliament should bring legislation”, said Dar.
In order to discourage hoarding by the companies or clearing goods by them at the old low rates, the government has decided to enforce the increase in the GST rate and the FED rates on cigarettes from midnight, Dar added.
The increase in the GST rate is highly inflationary and will affect the poor more than the rich. But the government did not have a choice after the IMF refused to entertain measures that can be challenged in the courts.
The IMF stopped the government from levying taxes on bank deposits of the general public and imposing a flood levy on imports.
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The government has proposed to increase FED on international air travel in club, business, and first class at 20 % of the gross amount or Rs 50,000 per ticket whichever is higher issued on or after the date of enactment of this bill.
It has also proposed to increase the rate of sales tax on imported mobile phones valuing $201 to $500 at 25% of ad valorem.
A 10% advance adjustable income tax will be collected from persons on Active Taxpayers List and 20 % for non-ATL of the amount paid for social functions and gatherings.
It has proposed to impose an advance adjustable income tax of 10% on sale consideration on off-market disposal of shares.
The FED on cement has been increased from Rs 1.50 per kg to Rs 2 per kg.
These measures are taken to generate Rs55 billion more, taking the total size of the mini-budget to Rs170 billion.
Now, Dar will present the supplementary Finance Bill 2023 in the National Assembly at 3.30 pm.
The finance minister informed the media on Friday that the Rs170 billion worth of additional taxes would be collected in four months. Some internal documents suggested that the net impact of these measures for four months could be Rs189 billion, bringing the annual impact to nearly Rs570 billion.
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The FBR on Tuesday notified the increase in cigarette rates. As against the existing rate of Rs6,500 per 1,000 cigarettes per 1,000 sticks, the FBR notified the new FED rate at Rs16,500 – an increase of Rs10,000 or 153%.
Per-cigarette FED rate has been increased from Rs6.5 to Rs16.50 for expensive brands. The minimum price cap for the expensive brand has also been increased from Rs6,600 to above Rs9,000.
Similarly, for the less expensive brands of below Rs9,000 per 1,000 cigarettes, the per-1000 cigarette tax has been notified at Rs5,050 – up from Rs2,550. There is an increase of 98% in the tax for this category. Per-cigarette tax has been increased from Rs2.55 to Rs5.05.
Dar said that the cabinet has also approved the increase in the FED on sugary drinks, beverages to 20% – up from 13%. But this measure will take effect only after the approval of the Finance Bill by the National Assembly, he added. The FED on juices has been proposed to be set at 10% in the first phase.
The government has also increased the GST on air tickets that will be passed by the National Assembly before implementation.
To a question, Dar said that even before the Staff-Level Agreement with the IMF, both sides would first agree to the Memorandum for Economic and Financial Policies (MEFP).
The minister added that the government had given its response to the IMF on the draft of the MEFP and an agreement would be reached.
The IMF mission visited Pakistan from January 31 to February 9 for the ninth review of the $6.5 billion programme. But both sides could not reach a staff-level agreement after the IMF demanded to meet all the conditions upfront due to deep mistrust, rooted in broken past promises made by the PTI and the PDM governments.
The president appreciated the efforts of the government for negotiating an agreement with the IMF, and assured that the state of Pakistan would stand by the commitments made by the government with the IMF, according to the Presidency’s statement.
The finance minister informed that the government wanted to raise additional revenue through taxes by promulgating an ordinance, according to the statement.
The development came amid global credit rating agencies raised apprehensions that a delay in finalising the staff-level agreement with the IMF could increase the country’s external sector risks.
The Fitch Ratings on Tuesday downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating to CCC-negative, from ‘CCC-positive. It is the second time in less than five months that Fitch has lowered Pakistan’s rating, making it virtually impossible to raise debt from the international credit rating agencies.
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