Securing IMF deal alongwith expanding tax net

ByAsrar Raouf

Former Civil Servent


June 28, 2022

Although the country is rife with negative sentiments expressed by many financial quarters but it looks very likely that the restoration of IMF programme is in the offing. Keeping in view the erratic policies followed by successive government in respect of managing the economy almost all international financial institutions have become wary while dealing with Pakistan. Unfortunately, instead of the tendency to adopt double-dealing as the primary method to tackle financial difficulties, Pakistani financial managers consider it to be an essential part of their negotiation strategy that is deeply resented by donor agencies. The reason for pursuing such harmful practice probably is the utmost duress experienced by financial managers in the process as they are pulled in opposite directions by the overt and covert governance axes. It is a problematic aspect of managing economic affairs in Pakistan and has caused serious distrust in the entire process and doubts are harboured about it by both internal and external interlocutors.

After an intense haggling, however, it is now reported that IMF and Pakistan have almost reached an understanding on the budget for 2022-23 with the Pakistani side agreeing to generate Rs.436bn more taxes and increase petroleum levy gradually up to Rs.50 per litre. It is also reported that the IMF mission will finalise monetary targets with the State Bank over the next couple of days and, in the meantime, share the draft of a Memorandum of Economic and Financial Policy (MEFP).

The MEFP would also contain certain prior actions that would be necessary for implementation before the IMF board takes up Pakistan’s case for approval and the subsequent disbursement of about $1bn next month. This development implies that the government of Pakistan is required to look for new avenues to increase burden on the rich and may impose taxes on gifts, increase rates for corporate and salaried sectors as well as allow unconditional import of gold to bring it into the tax ambit. In addition, many supplementary measures are also under considerations to fill in the gap in revenue needed to balance the fiscal deficit that is the main concern of the IMF.

The government is hard-pressed by the concern showed by a wide cross-section of people who are convinced that every dispensation in the country upholds the interest of the elites holding disproportionate power in the economic affairs of the country. They express such sentiments with quite a degree of fury and allege that most of the problems faced by the low-income groups is that almost all fiscal space is hogged by the strongly entrenched rich class that is callous enough not to concede any space to them. They are now constrained to give a message to the less-privileged classes that the elite class is also paying more than usual annual tax contributions. This is a much needed message that has taken a long time to come but it is yet to be seen how much this welfare intention is transformed into solid measures partially alleviating the difficulties faced by the common man.

In this context, the government plans to enhance tax burden on the rich, it may partially reverse an earlier decision to increase income tax rate for commercial banks to 45% and instead bring it down to 42%. It must be kept in view that the FBR had proposed an increase in the cumulative income tax rate for the commercial banks to 42% from 39%, including super tax but the federal cabinet had increased the rate to 45%, which it has now agreed to lower to 42%. It is also on the table that the income tax rate for both salaried and business individuals can be steeply increased for those who earn over Rs.1 million a month but the problem here is that there are hardly 12,000 people who have declared their monthly income of over Rs.1 million. It is also mentioned that that the FBR was again considering the proposal to levy windfall tax for certain sectors by increasing their corporate income tax rate from current 29% to 32% and in some cases to 35%. The sectors that the government may target comprise steel, cement, sugar, automobile, gas and exploration firms, oil refineries as well as marketing companies. However, finally the government has imposed 10 per cent super tax on the above mentioned sectors.

In this respective, as an alternative, the minimum income tax rate for these sectors could be increased to 1.5% against the standard rate of 1.25%. In some cases, the rate is even lower than the standard rate that could also be increased further. The FBR collects approximately Rs.140 billion a year as minimum tax on turnover as majority of the companies declare losses to evade taxes. It should be kept in consideration that the government has committed with the Asian Development Bank and the World Bank to gradually phase out the minimum turnover tax, which is incapacitating the government to increase the standard minimum tax rate. The corporate tax rate is 29% and if the FBR increases it by 1%, it will generate extra Rs.8 billion a year. Another proposal is to introduce slabs in case of newly introduced 2% Poverty Alleviation Tax over Rs.300 million in incomes that has been grudgingly conceded.

Seriously hamstrung by the lack of substantial avenues to generate revenue, one of the proposals under consideration is to allow unconditional import of gold and start collecting taxes at the import and their domestic sales. The general import of gold is banned in Pakistan and the Import Policy Order links its imports with the condition that importer will arrange his own foreign exchange for the purpose. Due to this condition, almost all of the gold being sold in Pakistan is either smuggled or the recycled one is being sold by domestic households. There are 29,000 registered jewelers in the country but only 22 have installed point of sales machines that are interlinked with the FBR system as almost every jeweler encourages the buyers to pay in cash to avoid the tax net. The government intends to impose 2% customs duty and 2% adjustable income tax on the import of gold and want 3% sales tax on the retail stage of gold and silver. In addition, there is also a proposal to charge 1% withholding tax on sale of gold by the consumers at the jewellery shops. If brought into practice, this measure can help generate billions of rupees in taxes in addition to minimising smuggling.

The financial managers are also pondering changing the definition of relative in order to bring a major portion of the wealth that remains outside the tax net due to exchange of gifts that are exempted from tax. The FBR has estimated the annual cost of gifts at around Rs.1.2 trillion and a major portion of it can be taxed by limiting the definition of the relatives who can exchange tax-free gifts. The gifts received from relatives, defined as an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or a spouse of the individual or of any person are exempted from taxation. The definition was relaxed last year when it was still broad but limited to grandparents, parents, spouse, brother, sister, son or a daughter. Now, the proposal is to limit the definition of the relative to only husband, wife and children. TW


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