Rs215b new taxes imposed to placate IMF

Dar announces Rs85b cut in spending to shrink fiscal deficit

ISLAMABAD:

Finance Minister Ishaq Dar on Saturday announced major fiscal adjustments worth Rs300 billion in the next fiscal year budget, including the latest fiscal tightening measures demanded by the International Monetary Fund (IMF) in a final effort to clinch a much-delayed rescue package.

The new measures were announced by the finance minister while winding up a debate on the budget for fiscal year 2023-24 in the National Assembly. These include increasing tax burden on the salaried class and withdrawing the $100,000 asset-whitening scheme.

Dar shared some of the details during his address in the National Assembly and avoided lifting the curtain from a host of new tax measures that the government has agreed to take to revive the $6.5 billion stalled programme.

The announcement suggests that the government has accepted the majority of the demands put forward by the IMF, including an increase in the petroleum levy rate to Rs60 per liter. It also enhanced stipends for the Benazir Income Support Programme (BISP) beneficiaries. As a result, the BISP proposed budget has been increased from Rs450 billion to Rs466 billion.

Read Govt softens stance to meet IMF terms

Pakistan and the IMF had detailed negotiations for the last three days as a last effort to complete the pending review," the finance minister told the lower house of parliament.

Dar announced raising a further Rs215 billion in new taxes and a net Rs85 billion cut in expenditures to shrink fiscal deficit, which he proposed on June 9 while unveiling the Rs14.6 trillion budget. The size of the budget is now partially adjusted upward by Rs20 billion.

That will revise the revenue collection target to Rs9.415 trillion -- which will require recovering at least Rs2.215 trillion extra from the economy -- and put total spending at Rs14.480 trillion, Dar said. "These changes will make our fiscal deficit much better," he said.

“We have ensured that the new tax will not affect the poor," he claimed, and said the petrol levy will be raised from Rs50 to Rs60, and will be capped at the new ceiling for any future changes.

He also announced lifting of restrictions on imports enforced in December in a bid to cut current account deficit, which has been one of the major concerns by the IMF to release the funds.

The review came a day after Prime Minister Shehbaz Sharif met with IMF Managing Director Kristalina Georgieva on the sidelines of the Global Financing Summit in Paris. There is less than a week to go before the IMF’s Extended Fund Facility agreed in 2019 expires on June 30.

وزیر خزانہ کا قومی اسمبلی اجلاس میں اظہارِ خیال،

پوری قوم کو بتانا چاہتا ہوں مشکل مالی حالات کی کئی وجوہات ہیں،

پچھلی حکومت کی ملک دشمن پالیسیوں کی وجہ سے ملک کی معشیت پر برے اثرات مرتب ہوئے ہیں،

نو مئی جیسے واقع سر فہرست ہیں،

ان ریاست مخالف سرگرمیوں نے جلتی پر تیل کا کام… pic.twitter.com/mlxjHuubgt

— National Assembly 🇵🇰 (@NAofPakistan) June 24, 2023

With the fresh increase, the government has proposed Rs438 billion in new tax measures so far to be recovered from people and companies from the next fiscal year.

Dar said the proposed federal development budget and salaries and pensions of the civil servants will be protected from the Rs85 billion cut in spending.

Senior FBR officials said that the new measures include increase in tax rates for the salaried class and businessmen. “The current income tax rate for the slabs starting from 20% and onwards for the salaried and non-salaried business classes have been proposed to be increased by 2.5%.”

At present, people earning Rs200,000 per month have been paying 20% in income tax, which is now further increased to 22.5%. Likewise, the tax rates of the higher slabs have also been increased by 2.5%.

Another government functionary said that Rs30 billion additional taxes will be recovered from the salaried and the non-salaried individuals in the next fiscal year.

It has also been proposed to impose federal excise duty (FED) on the sale of fertilizer at 5% ad valorem and an increase of FED on juices from 10% to 20%. The FBR official said that at least Rs45 billion will be recovered from the imposition of new tax on fertilizer.

“These are the neck-breaking negotiations and we have finally done it,” said Minister of State for Finance Dr Aisha Pasha, who remained a strong proponent of the continuation of the IMF programme. She said that the Memorandum for Economic and Financial Policies (MEFP) has almost been finalised and “final touches are being given to it”.

Dr Aisha, who played a pivotal role in convincing the prime minister to agree to the IMF terms, hoped that the Staff Level Agreement and the board meeting to approve the 9th review worth $1.2 billion will be completed before June 30 -- the last date of the current programme.

In another move, the government has also proposed to significantly increase the rate of withholding taxes on the sale and purchase of properties which, the FBR officials said, would generate additional Rs35 billion in the next fiscal year. It also introduced a new tax on vehicles of above 2,000 categories.

The government would have avoided burdening the salaried class and farmers with more taxes, had it adopted some of the recommendations given in the Reform and Revenue Mobilization Commission report. In one of the proposals, the RRMC said by ending the minimum tax status of the exporters, the government could have generated around Rs250 billion.

Someone influenced the FBR to play politics with the RRMC report, said a member of the RRMC on the condition of anonymity. The top five revenue proposals of the RRMC report could have yielded Rs635 billion from the elite as against imposing IMF-dictated Rs215 billion additional taxes that would burden 250 million Pakistanis, he added.

The government has also agreed to withdraw the $100,000 amnesty scheme after the IMF had strongly opposed it, according to a member of the federal cabinet.

Dar said the government had completed all prior actions and achieved compliance on the fund’s demand but Pakistan’s case could not be put in front of it due to the external financing gap.

The minister said that it was decided by Pakistan and the IMF to give a “last final push” to move the review forward, following which detailed negotiations were held with an IMF delegation in the last three days to complete the 9th review.

The minister said the revenue collection target for the FBR was increased from Rs9.2 trillion to Rs9.415 trillion. This will require at least 31% increase in collection over this year’s optimistically expected collection of Rs7.2 trillion. The share of the provinces would be increased to Rs5.39 trillion from Rs5.276 trillion, he added.

“Due to all of the above measures, there will be an improvement in the overall budget deficit,” Dar said.

He said that Prime Minister Shehbaz Sharif had held two meetings with IMF Managing Director Kristalina Georgieva in which he had reiterated Pakistan’s commitment to complete the fund’s programme.

“Finally… what happened to the geopolitics pretext,” commented Pakistan’s former ambassador to the US Dr Maleeha Lodhi on twitter after the news of narrowing down differences between Pakistan and the IMF. She was referring to the finance minister’s claim that “they” wanted to make Pakistan Sri Lanka and were playing geopolitics with Pakistan.

Esther Perez Ruiz, IMF representative for Pakistan, had earlier said Pakistan needed to satisfy the IMF on three counts, including the budget for the upcoming fiscal year, before its board will review whether to release the pending tranche.

At the start of his speech, Dar announced lifting restrictions on all imports enforced in December in a bid to cut the current account deficit, which has been one of the major concerns by the IMF to release the funds. Dar further said that no further restrictions will be imposed on the imports.

The finance minister said that the scope of the new windfall income tax of 50% has now been restricted till the tax year of 2020-21 as against the earlier proposal of 2018-19. He also said that the applicability of the Rs2,000 tax on fans will be with effect from January 2024.