Fifth mini-budget in five months, higher taxes imposed on oil

ECC approves Rs1.5 billion Ramazan package and PIA leases

ISLAMABAD: In an unprecedented move, the federal government in its desperation to generate tax revenues on Thursday introduced a fifth mini-budget in as many months and imposed additional ad hoc taxes on petroleum products, which would have the combined effect of raising prices by as much as 4.5% on such items.

Through the new measures, the Economic Coordination Committee (ECC) of the Cabinet raised the general sales tax on high speed diesel (HSD) from 32% to 34%. Sales tax on petrol, kerosene, light diesel oil (LDO) and high-octane blended component (HOBC) increased from 18% to 20%, said one official at the Federal Board of Revenue. In addition, the government approved a 2% ‘regulatory duty’ on crude oil, petrol, and furnace oil. It also approved a 2.5% regulatory duty on HSD. These duties are in addition to the 5% it already imposed on furnace oil to recoup revenue losses from lower global oil prices.



The move appears to be motivated by the government’s upcoming negotiations with the International Monetary Fund for the release of the next loan tranche of over $500 million – which are due to start on Friday (today).

The government has historically relied on the energy sector for over 25% of its total revenues. With global oil prices  dropping, the finance ministry claims it needs to raise rates to keep its revenues steady. However, some analysts believe that the government has levied more in additional taxes than it would have lost had tax rates remained constant.

The net effect of the four mini-budgets prior to Thursday’s move is close to Rs101 billion in additional revenues for the government, while Finance Minister Ishaq Dar has acknowledged that the net effect of lower oil prices on tax revenues was only Rs68 billion.

Sources in FBR told The Express Tribune that the tax machinery was crumbling due to increasingly unchecked corruption – a reason that the government does not admit to publicly. Iftikhar Vohra, the president of the Karachi Chamber of Commerce and Industry said last week that the FBR was settling tax notices in exchange for Rs50,000 to Rs300,000 in bribes. The FBR did not deny the allegations.

The FBR insists that the increase in GST rates and regulatory duties would generate only Rs10 billion revenues in the remaining two months of the fiscal year. However, the tax body has in the past used misleading information even when testifying before Parliament on the matter of mini-budgets.

Dar had told Parliament that four mini budgets would generate only Rs48 billion in additional taxes. However, in a report to the IMF the government said that these additional measures would generate revenues equal to 0.35% of Gross Domestic Product or Rs101 billion.

The move would further deny the benefits of falling global oil to domestic consumers. There will also be an increase in the cost of electricity generation.

In the earlier mini budgets, the government increased the standard 17% GST rate on petroleum products, levied regulatory duties on steel products and scrap metal, introduced a regulatory duty on mobile phone, levied an additional 5% regulatory duty on furnace oil, increased the withholding tax on non-filer contractors, service providers, and importers. It also increased import duty on luxury items.

Ramazan Package

The ECC also approved Rs1.5 billion Ramazan package as compared to the Rs1.4 billion approved last year. The Finance Division would provide upfront payment of Rs1 billion to the Utility Stores Corporation to buy the items before Ramazan. These include flour, sugar, ghee, oil, pulses including dal channa, dal moong, dal mash, dal masoor, white gram,  baisen, dates, basmati rice, sela rice, broken rice, squashes and syrups (900 ml bottle), black tea, milk, and spices.

PIA fleet payments

The ECC approved the release of the remaining $36 million for the induction of 15 aircraft on a dry lease in the fleet of the state-owned Pakistan International Airlines. In its December 6, 2014 meeting, the ECC had approved in principle, an amount of $52 million and provided the first tranche of $16.4 million for these aircraft. The PIA has arranged to acquire ten A-320 and five ATR-72 aircraft on dry lease.

Published in The Express Tribune, May 1^st, 2015.