Asrar Raouf describes various angles of Fuel price reduction & financial management
After a long wait, the coalition government finally announced Fuel price reduction that is currently being provided to people at exorbitant rates. PM Shehbaz Sharif announced the reduction of prices in an address to the nation mentioning that the price of petrol has been slashed by Rs.18.50 per litre and diesel by Rs.40. 54 per litre. He stated that the reduction in oil prices in the global market has made it possible for the government to reduce them in Pakistan as well. It is required to be kept in view that the government had increased the price of petrol by Rs.14.85 per litre on 30 June 2022 that was the fourth such raise in the last 35 days, taking the cumulative amount of all hikes since 26 May 2022 to nearly Rs.100. It is perceived that much desired reduction in fuel price is to be announced in conjunction with the IMF that is concerned that rising fuel prices have pushed up inflation that is running in double digits. It is however commented that this measure may be resorted to shore up the dwindling support of the people for the by-elections in Punjab where the rising prices have become a serious campaign issue.
It is also reported that staff level agreement has been reached by the IMF and Pakistan to revive the stalled IMF programme and the agreement will be subject to the IMF board’s approval. It is mentioned that this agreement will pave the way for potential release of $1,177 million taking total disbursements of the programme to $4.2 billion. Moreover, the programme’s size will increase by an additional $1 billion and its tenure will be extended to June 2023. The priorities of the revived programme are reported to be control government expenditures and enhance revenue collection, bringing the primary balance to a surplus of 0.4%. The goal will be to control the government’s borrowing needs and enhance fiscal space for expanding social support schemes.
IMF has also asked to revitalise Pakistan’s energy sector, which has been plagued with cash flow issues through structural inefficiencies. The IMF estimates that the circular debt grew by an estimated Rs.850 billion in FY22 because of lax policy implementation. The IMF expects the government to closely follow the agreed-upon plan, ensuring timely adjustments of the power tariff. IMF has also stressed the need for prudent policy action to ensure that the medium-term inflation target of 5-7% is achieved. It also highlighted the importance of exchange rate flexibility for reserve-building to sustainable levels.
IMF has stressed the importance of poverty alleviation through Pakistan’s social safety programmes, including BISP, UCT Kafalat Scheme, and SFSD. The IMF staff took note of Pakistan’s plan to implement an electronic asset declaration programme and review anti-corruption institutions to ensure improved governance and reduced corruption. It is expected that the agreement will ensure improved investor confidence by enhancing Pakistan’s ability to successfully tackle economic issues as the agreement will unlock nearly $15 billion worth of financing avenues from international lending institutions and allied countries.
In the meanwhile the financial team is carrying out financial adjustments both in the fiscal and monetary aspects. These adjustments are described as rationaliising and streamlining various flows of income flows are also supportive of the main thrust of the IMF conditionalities thereby facilitating the impending partnership between the global lender and Pakistan. Apparently, most of the conditions set by the IMF are reported to be acceded to and partly implemented by the coalition dispensation. It was noted that due to delay in finalising IMF agreement, the dollar has consistently risen in the currency market though the inflow of $2.3 billion from China on 23 June changed the scenario as the rupee recovered Rs.4.70 in a single session but dollar snapped the rupee’s rising streak and gained Rs. 2.38 on 5 July, the first appreciation in the new fiscal year and since then, the dollar has continued to rise.
It must be mentioned in this context that the Federal Board of Revenue (FBR) is trying its utmost to fulfill the conditionalities laid down by the IMF and has made significant changes in the advance tax of capital gains on disposal of immovable property, paving the way for imposing an inheritance tax. Through taking this step the FBR has brought inherited and gifted property under its tax net through an amendment in the Finance Act 2022 to enforce advance tax on seller and buyer and collection of Capital Gains Tax (CGT) on such properties. Though this step may net in extra income lows yet many critics purport it to be the euphemism for Inheritance Tax that they consider it to in violation of constitutional provisions as the federal government cannot collect Capital Gains Tax on inherited property or gifts.
Keeping in view the contentious nature of this measure the FBR clarified that the advance tax has been introduced for the purposes of providing a mechanism for collection of capital gains tax on disposal of immovable property. It was added that the actual quantum of capital gain and tax payable thereon is to be computed at the time of filing of return of income further pointing out that Section 236C is not an independent provision and does not operate in isolation. Since Capital Gains Tax has been imposed only on disposal of properties held for a period up to two years, therefore, advance tax is also to be collected from sellers who held the immovable properties for a period up to two years.
However, according the Finance Act, 2022 has increased the rate of withholding tax to 2 percent for filers and 4 percent for non-filers and made it applicable on all properties sold irrespective of the holding period. The withholding tax collected from a person selling a property which is not liable to capital gains tax will be forced to pay an amount of tax that he cannot adjust against his capital gains tax liability and if he has no other income tax to pay at the time of filing income tax return, he will be forced to seek refund after a protracted effort. It is also pointed out that the sub-section (4A) of section 37 has been omitted with the result that Capital gains tax is imposed on the difference of sale price and the purchase price of the property. In some cases, such as properties acquired through inheritance or gift, the purchase price is zero and the entire sale price would become the capital gain that would increase the burden of taxation.
In another development the federal financial managers have agreed to sign an MOU with the provinces for generating a revenue surplus of Rs.750 billion in the current fiscal year for curtailing the budget deficit at 4.9 per cent of GDP. This measure was taken to comply with the IMF conditionality asking for fiscal consolidation to slash the budget deficit and bring it down. It however remains to be seen how much revenue surplus was generated by the provinces in the last fiscal year 2021-22 and it will be revealed when the fiscal accounts for the last financial year are firmed up by the end of the month.
It is worthwhile to mention that the KP expressed reservation about carrying out this measure but the renewed efforts of the federal government has removed the KP objections. For getting this hitch removed the federal government assured the KP government that their problems of Net Hydel Profit and increased share in the NFC would be addressed. However, the KP’s government also raised objections over Punjab’s decision to waive off electricity billing of 100 units which, according to estimates of KP government will require a subsidy of Rs.148 billion. TW