Taxation and IMF deal

ByAsrar Raouf

Former Civil Servent


July 8, 2022

Pakistani economic policy makers are being pushed into tight spot by the tough IMF conditions and it appears quite clear that the chances of any relaxation are remote. The economic planners have tried to spread the taxation net and have gone for one-time super tax though this measure is open to debate as it is widely believed that such measures fall short to create significant inroads into the taxation avenues that are desperately needed. The general impression is that the corporate sector is not contributing enough and that super tax is not going to bring in high levels of revenue earnings. It is pointed out that an increase in corporate tax rates as they possess the required wherewithal to avoid taxation through litigation. This avenue of enhancing tax revenue through such measures is more of a cosmetic attempt at trying to convey a message to the less-privileged classes that they are not the only ones to bear the financial burden of running the state. This step may open up real opportunity once it is confirmed that the burden of super tax is not ultimately shifted towards the common man as there are serious fears expressed in this context.

Anyway the coalition government is planning to include five more sectors including real estate brokers, builders, car dealers, restaurants and salons in the tax network. It is also reported that the government would bring professionals including designers, lawyers and doctors into the tax net. The economic planners proclaim that macroeconomic stability is the first step and it would be followed by efforts to achieve economic self-sufficiency. This effort is being resorted to as the economic downturn is taking place much faster than expected. In this context super tax may prove to be a helpful measure as it may slowly drum in the requirement of the rich regularly contributing. It is now the time to push the haves of the country to come into the revenue collection mainstream and voluntarily pay one-time taxes as they would be beneficial to the economy. In this context the IMF structural benchmark pertains to the Personal Income Tax (PIT) reforms that were agreed to by the PTI-led government. The coalition government has agreed to reverse the relief of Rs.47 billion for the salaried class and also slapped a Rs.33 billion net addition resultantly a total of Rs.80 billion tax was imposed on the salaried class through the revised Finance Bill 2022-23.

On the other hand, IMF is breathing down the neck of the economic planners and is just not relenting. Now Pakistan will have to take at least two more prior actions to secure two combined tranches of about $1.85 billion from the International Monetary Fund (IMF) by the end of July or early August. Top government sources said these prior actions — which will be in addition to a series of structural benchmarks for the performance review — would be necessary for the Fund’s executive board to approve the merger of the seventh and eighth quarterly reviews of the 39-month, $6bn loan programme that originally began in July 2019. Accordingly, heavily influenced by the IMF the National Assembly approved the passage of the Finance Bill, 2022, commonly known as the federal budget, with a majority vote after taking it up clause by clause. There was virtually no opposition to the passage of the bill as had happened last year.

It was pointed out that the passage of the budget for the fiscal year 2022-2023 brings the government one step closer to the revival of the stalled (IMF) programme. The suggested measure to impose a Rs.50 levy on petroleum products was approved along with approval of amendments for collecting sales tax from traders through electricity bills and imposing a 5 per cent tax on the services of IT and software consultants. An amendment to take back the relief provided to the salaried class was also approved. Under the new rates, no tax will be imposed on those earning less than Rs.0.6 million per year. Meanwhile, those earning between Rs.0.6 million to Rs.1.2 million will have to pay a fixed tax of 2.5 per cent of the amount exceeding Rs.0.6 million. Those earning Rs.1.2 million to Rs.2.4 million will have to pay a fixed tax of Rs.15,000 plus 12.5 per cent of the amount exceeding Rs.1.2 million. Further, the NA approved an amendment for imposing a super tax between 1-4 per cent on the income of those earning between Rs.150 million to Rs.300 million. It also approved imposing a 10 per cent super tax on large-scale industries.

Under the bill, a levy between Rs.100-Rs.16,000 was imposed on the import of mobile phones depending on its value. For mobile phones having a cost-and-freight (C&F) up to $30, it will be Rs. 100. For phones more than $30 and less than $100, it will be Rs.200. In the same way, for phones costing up to $200, it will be Rs.600. For phones up to $350, it will be Rs.1,800. For phones costing up to $500, the rate of levy will be Rs.4,000. Meanwhile, for phones worth up to $700 it will be Rs.8,000, while for phones more than $701 it will be Rs.16,000. Duty on the import of equipment for the film industry, including projectors, loud speakers and 3D glasses, was abolished.

After implementing the conditions, the IMF would present Pakistan’s request for the approval of the loan tranche and revival of the programme to its executive board – a process that may consume another month. In its draft Memorandum for Economic and Financial Policies (MEFP) document, the IMF has proposed to club the two pending programme reviews – the 7th and 8th – but did not indicate that it would also approve loan tranches of $2 billion. The MEFP will form the basis for the staff level agreement that now Pakistani authorities will try to achieve at the earliest. The IMF has asked Pakistan to end the government’s role in setting the fuel prices after the bitter experience of giving fuel subsidies of over Rs.300 billion as the IMF has set a prior condition that the fuel prices will be deregulated and automatically adjusted to recover the actual cost of buying from the consumers.

The government’s taxes will be over and above the global prices. This means the petrol price may daily change at the filling station. At present, the government fortnightly determines the fuel prices; a discretion that the IMF now wants to be ended. The IMF has set prior action of notifying over Rs3.50 per unit increase in electricity prices from July. The Economic Coordination Committee (ECC) of the cabinet has already approved to increase the electricity tariffs by Rs.7.91 per unit in three phases but its final notifications remained pending. The IMF has also asked Pakistan to set up an anti-corruption task force to review all the existing laws that were aimed at curbing graft in the government departments. However, these amendments were necessary to put a check on the National Accountability Bureau (NAB) that has crippled decision making as well as the mishandling of the bureaucracy, politicians and business circles. TW


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