The cat is finally out of the bag. The Finance Bill (infamous mini-budget) and the SBP (State Bank of Pakistan) Amendment Bill have been tabled in parliament and both are expected to become law after debate in parliament. Passing bills in the National Assembly can take around 2-3 weeks. The Pakistan case may not be presented at the IMF (International Monetary Fund) board meeting on January 12, but likely later in January.
The bill will become law after passing through the National Assembly, after obtaining the non-binding recommendation of the Senate Standing Committee. The SBP amendment bill will go through the steering committee of the National Assembly, before going through the lower house. However, the SBP bill is expected to be passed by the Senate (or a joint session of Parliament). Thus, it would take longer to become law, and the IMF review will have to be completed without it.
A review of the finance bill shows that it is focused on eliminating exemptions / concessions in the sales tax law, especially Schedules 5, 6 and 8. There are some exceptions – such as the right federal excise (FED) on cars, car tax revenues and on phone calls, where tax rates have been increased; but these were not required by the IMF. In these two elements, the objective of the FBR (Federal Revenue Office) is to increase taxes, to reduce the import bill by increasing the prices of cars and to discourage hoarding of new cars.
Many of the concessions and exemptions withdrawn are aimed at removing distortions and the gross impact would be much greater than the net impact. About 80 percent of the impact of removing exemptions is adjustable and reimbursable, mainly for pharmaceuticals and capital goods (machinery). The Ministry of Finance claims they are not inflationary. However, tax experts fear that, given the fragile reimbursement payment history, manufacturers may pass the impact on to consumers.
Government officials say that in the pharmaceutical sector, the reported amount of sales is about a quarter of the actual. Since the importation of raw materials will no longer be exempt, manufacturers would have to report correct sales to claim refunds. But nobody talks about hanky-panky at the import stage where importers agree with customs to play with the declaration and import quantities. The actions taken are fair (as advocated by the IMF) if the problems in other parts of the chains are addressed. But in Pakistan, tax evasion and tax evasion usually find ways to reverse the intended impact.
One of the most controversial and criticized items is the imposition of 17% GST (from scratch) on infant formula. The argument against this is that it would discourage the use of infant formula and could have a negative impact on infant development in a country where rates of stunting and wasting are already alarming.
The government people can say that the price of infant milk is high and it is used by the middle class. If so, the tax should only apply to imported milk. There are brands producing in Pakistan which price is almost half of imported brands. Some would say that the tax is intended to encourage mothers to breastfeed. It’s true; but it should be remembered that 40 percent of women in Pakistan are undernourished (deficient in zinc and iron), and breastfeeding cannot fully compensate for the loss of nutrition vita. The government should consider a tax review on the locally produced formula and on the importation of its raw material.
The sales tax on cell phones, laptops and solar panels has been increased. This will obviously increase the prices of these products. In the case of phones, the tax is imposed on prices above $ 200 and the lower middle class mainly uses cheaper phones. However, the tax on laptops could discourage its use. Here the government has been lenient in increasing the GST from zero to 5 percent (not 17 percent). On the other hand, taxing solar panels is not good.
The use of renewable energies cannot be overestimated. It is not a taxing environment and has no outstanding fuel import bill. SBP encourages its use and offers concessional financing. But FBR taxes it. If FBR can get the IMF not to raise taxes on tractors and formal real estate structures (FPIs), it should have considered solar panels as well. Perhaps its lobbying is too weak in Islamabad.
There are a number of other items as well, but many of them should be taxed. The government is removing the exemptions in accordance with IMF conditions. And what the IMF says is correct because a lot of them are misused. Earlier (last year) the corporate tax exemptions were removed. Now it’s sales tax.
Next in line is the Personal Income Tax where lawyers, doctors, architects and consultants have fun. The auto industry is one area where the government has acted on its own. Here, the government’s confused state of mind is evident. The thinking of the Ministry of Finance is clearly different from that of the Ministry of Industry. The taxes here go against the essence of the new auto policy. The government is sending all the wrong signals to investors.
In the budget, the government reduced the sales tax on cars to 1,000 cc to promote the penetration of locally assembled small cars. Auto players have developed investment plans with this in mind. Now, within six months, the government is removing it. This can be described as an inconsistent policy.
Likewise, the FED on cars has been reduced to deepen local car penetration to 500,000 per year, from around 200,000. Now the FED has been raised again. The premise for imposing these taxes is to reduce the import bill. If the import bill goes down, will the government cut the FED again in the next budget?
This is the summary of the money bill. Given the already high inflation, any further increase has a higher marginal nip. Like any other economic pain, that will pass too. But will the regime in place survive the pain of fiscal adjustment? This is the big question in Islamabad.
Commercial copyright recorder, 2022