Finance Minister Ishaq Dar on Wednesday formally unveiled a Rs170 billion mini-budget that carried some highly inflationary measures but spared the commercial banks and traders of any new taxation, weakening the coalition government’s case of putting burden on the sectors which could bear it the most.
The case of commercial banks was more glaring given the fact that the finance minister had announced in the recent past to impose heavy taxes on them to punish them for “currency manipulation”. He had stated last year that the banks made about Rs50 billion in undue profits, which the government would recover by imposing additional taxes.
The Finance (Supplementary) Bill 2023 also contained some measures, which have failed to yield any significant revenues in the past such as the imposition of 10% advance income tax on public-private gatherings and functions.
“Pakistan has reached an understanding with the IMF [International Monetary Fund] during January 31-February 9th staff-level visit and the most important element of it was to introduce Rs170 billion worth additional taxes, Dar said.
In his first budget speech during the past six years, the minister clarified that the additional Rs170 billion taxes had not been imposed to cover any revenue shortfall in the Federal Board of Revenue’s (FBR) annual target of Rs7.470 trillion. Instead, he added, because of these measures, the FBR’s target had been increased to Rs7.640 trillion.
Dar said that the IMF programme would help stabilise the rupee and ensure economic stabilisation. “Through the IMF programme, our foreign exchange reserves will increase and the exports, foreign remittances will also improve and issues regarding opening of LCs [letters of credit] will also cease,” he added.
According to the minister, the staff-level agreement with the IMF would be reached after both sides would first agree to the Memorandum for Economic and Financial Policies (MEFP). He said that the virtual discussions on the draft MEFP would begin on Wednesday.
The additional taxes have been imposed to offset the projected Rs755 billion circular debt flow, which would be reduce to Rs336 billion, said the minister. However, according to the sources the net annual impact of these additional measures is roughly Rs550 billion.
Pakistan had committed to keep the flow of the circular debt to only Rs75 billion but the Power Division suddenly revealed that the flow would in fact be Rs952 billion without taking additional measures.
The government did not tax the income of the traders – a sector that remains highly under-taxed due to its proximity with the ruling Pakistan Muslim League-Nawaz (PML-N).
Dar introduced the bill first in the National Assembly and then in the Senate. Both the houses were later adjourned till Friday (tomorrow). He announced that the general sales tax (GST) rate had been increased by 1% to 18%.
This would give Rs55 billion additional revenue to the government in just four and half months – a sum that the government could have recovered from the commercial banks by taxing their foreign exchange earning pool.
The minister also announced that it had been decided to impose 25% GST on luxury items, which were earlier banned. The government proposed to get sweeping powers to increase the GST rate anytime on any item mentioned in the third schedule of the Sales Tax Act.
Under the SRO 598 of May 2022, the government had banned import of 85 types of goods. The list included carpets, cosmetics, stationary goods, dog and cat food, fish, footwear, fruits, juices, furniture, home appliances, meat, mobile phones, musical instruments, arms and ammunition and vehicles.
The government has proposed an increase in the GST on local coal and potassium chlorate to 18%. It has increased the GST rate to 18% on mobile phones valuing from $201 to $500 and to 25% of phones having value of over $500.
A 10% advance adjustable income tax has been proposed to be charged from the persons on Active Taxpayers List and 20% for non-ATL of the amount paid for social functions and gatherings. A similar tax was also levied in the past but it failed to yield the desired results. Therefore, the government abolished the tax over two years ago.
It has proposed to impose an advance adjustable income tax of 10% on sale consideration on off-market disposal of shares aimed at generating Rs5 billion in additional taxes.
The government has also proposed an increase in the federal excise duty (FED) on international air travel in club, business, and first classes at 20% of the gross amount or Rs50,000 per ticket, whichever is higher.
The FED on cement has been increased from Rs1.50 per kilogramme to Rs2 per kg, which will increase the 50-kg bag price by Rs25. Besides, the government also increased the 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 over 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.
The government increased the FED rate on sugary drinks, beverages to 20% – up from 13%. It has been proposed that the FED on juices would be set at 10% in the first phase.
Addressing the lower house of parliament, Dar compared the performance of the PML-N government during the 2013-18 period and the Pakistan Tehreek-e-Insaf (PTI) government during 2018-22 period.
He said that during former prime minister Nawaz Sharif’s tenure, the per capita GDP increased, while the Pakistan Stock Exchange’s (PSX) market capitalisation stood at $100 billion.
However, the PSX’s market cap declined to $26 billion during the PTI government, he said, adding that the decrease showed a lack of investor confidence during the previous government. He also criticised the PTI government for significantly increasing the country’s debts.
However, he expressed the hope that the country would again move towards development. “But it is our responsibility to adopt the measures, and give sacrifices. The prime minister will demonstrate frugality and the cabinet will also reduce its expenses.”
He said that the economy was plagued by two major issues: fiscal deficit and current account deficit. “We are committed to controlling and reducing both these deficits under the IMF programme,” he said, stressing the need for a “national economic agenda and to agree on a charter of economy”.
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