Wednesday October 27, 2021

FBR considers withdrawing Rs334 bn GST exemptions

Pakistan paid back $1 billion this week on the maturity of international bonds

October 15, 2021

ISLAMABAD: The Federal Board of Revenue (FBR) is contemplating different options for withdrawal of Rs 334 billion General Sales Tax (GST) exemptions in a staggered manner.

The withdrawal of exemptions on imports having an estimated cost of Rs178 billion and on local supplies that cost Rs156 billion are in order to strike a staff-level agreement with the IMF.

These are two major heads where the government could identify areas where the GST exemptions could be withdrawn. However, GST exemptions on basic food items and medicines would be protected.

On Personal Income Tax (PIT), there are 11 slabs and one proposal under consideration is to bring down slabs to 6 or 7 where the minimum taxable ceiling of Rs0.6 million might be adjusted upward while the rate of higher-income brackets might be increased. The hike in power tariff to the tune of Rs1.40 per unit might be notified after the agreement with the IMF.

Federal Minister for Finance Shaukat Tarin is expected to hold a meeting with the IMF’s Managing Director (MD) Kristalina Georgieva on Thursday (today) in Washington, DC. However, things are still unclear whether Pakistan and the IMF will be able to strike a staff-level agreement or not. The review talks may be extended if both sides remained unable to strike any staff-level agreement on the completion of the sixth and seventh reviews under the $6 billion Extended Fund Facility (EFF).

Pakistan paid back $1 billion this week on the maturity of international bonds, so Islamabad required dollar inflows for meeting net international reserves (NIR) targets.

Top official sources said that the IMF was asking for stringent taxation measures but Pakistani authorities were making last-ditch efforts to convince the IMF for delaying taxation measures on account of withdrawal of sales tax exemptions and adjustment into Personal Income Tax till the announcement of the next budget 2022-23 or implementation of these steps in a staggered manner. For instance, the GST exemption of Rs300 billion could be withdrawn in two or three phases, starting from Rs100 to Rs150 billion on an immediate basis. The IMF may grant go ahead on completion of the sixth review only and the EFF completion period may also be extended. But these are just mere proposals, so nothing is yet finalized.

For striking the staff-level agreement, the withdrawal of GST exemptions would be one of the major conditions and there were options to work out those exemptions that could be abolished through a Presidential Ordinance at the first stage, and then a bill would be introduced into the National Assembly.

The total cost of GST exemptions has been estimated at Rs578 billion. The GST exemption under 6th Schedule on (Imports) has estimated cost of Rs178.8 billion, Exemption under 6th Schedule on Local Supplies (after 30pc adjustment) Rs156 billion, reduced Rates Under 8th Schedule (2pc) Rs90 billion, reduced Rates Under 8th Schedule (5pc) Rs27 billion, and reduced Rates Under 8th Schedule (10pc) Rs69.5 billion. Through the withdrawal of Sales Tax on cellular mobile phones under 9th Schedule can fetch revenues of Rs27 billion.

The sales tax zero-rating under the Fifth Schedule of the Sales Tax Act has revenue impact of Rs12.887 billion. In case the major sales tax zero-rating under the Fifth Schedule of the Sales Tax Act, the FBR might be able to generate additional revenues of Rs12 billion. A major revenue amount could be netted with the imposition of 17 percent General Sales Tax on five leading export sectors. The cost of tax exemptions has been increasing with every passing fiscal year, putting increased pressure on policymakers to withdraw these concessions to powerful sectors. The cost of sales tax exemptions stood at Rs578.456 billion in 2020-21 against Rs518.814 billion in 2019-20, reflecting an increase of Rs59.642 billion; income tax, Rs448.046 billion against Rs378.03 billion, showing an increase of Rs70.016 billion, and cost of customs duty exemptions was Rs287.771 billion in 2020-21 against Rs253.111 billion in 2019-20, reflecting an increase of Rs34.66 billion.

Meanwhile, Federal Minister for Finance and Revenue Shaukat Tarin on Thursday expressed hope for successful outcome of top level negotiations between Pakistan and IMF, for putting the $6 billion Extended Fund Facility (EFF) back on track.

“I believe that the progress we have made to date is really encouraging and as we say Inshallah I see this happening now in this visit,” the federal minister said in an interview at United States Institute of Peace on ‘Pakistan’s Economic Future.’

The minister said that the concluding 6th round of talks with IMF was the most important part of his visit to the United States, adding that many virtual meetings already took place while the technical level discussions had also been concluded.

The minister said his government thought that IMF’s demand to increase power tariffs would trigger inflation, adding that this point was made in technical discussion with the Fund, which was also informed that the increase in tariff would be made gradually to avert any abrupt impact on inflation.

He said there were some problems on power side, including excessive capacity, for which the government had to pay, adding, performance of distribution and generation companies was also being improved. He said all this was being successfully negotiated with the IMF.

He said Prime Minister Imran Khan took over an economy which was struggling in 2018 with $20 billion current account deficit, unsustainable fiscal deficit, adding that he had to go for tough IMF programme besides taking some politically unpopular decisions including currency devaluation, increasing discount rate and increasing utility prices.

He said the government during COVID-19 kept investing in two productive sectors, agriculture and industry as well as housing.

He said during Fiscal Year 2021, the growth was recorded at over 4.00 percent as compared to negative half percent growth the previous year, showing V-shaped recovery. He said the country had around 60 percent population below the age of 30 years who needed jobs, so the government revitalised agriculture, industry, exports, housing and believed that economy would grow by over 5.00 percent.

He said trade and economic operations between India and Pakistan were suffering, adding that Imran Khan had offered so many times to India that if they took one step Pakistan would take two steps, urging Indian government to respond positively.

He said at political level, there was a need to provide some space for economics and welfare of people of both the countries. He cautioned that Taliban government was running out of cash and if the world did not come to support them on humanitarian grounds, there would be complete chaos, which would spill over to Pakistan and other countries.

He said Pakistan had major strategic partnership with US and its friendship with China would not affect its relations with US.

“We are open and want to do business with China, US, Europe, Japan, Korea. We are open country. There should be no misconception,” he cleared.

On China Pakistan Economic Corridor (CPEC), the minister said Pakistan needed to build infrastructure to attract foreign investments.

Since Pakistan was not in a position to build such huge infrastructure, so China provided funds and helped us in building roads, railways, power generation and other infrastructure which generated economic activity.

To a question, the minister said there were a few projects where companies from China, United States and Pakistan were engaged in joint ventures and collaborating with each other.

This cooperation could be enhanced. he added.

The minister again made it clear that Gwadar port was not China-centric, saying that it was open to everybody including Japanese, South Koreans and Europeans.

He said if anybody wanted to have business with African countries and Central Asia States, Gwadar is the right place.

The minister said the government wanted to attract investment form different counties and that was why it had developed infrastructure.

He said that Gwadar is a big opportunity as it is a unique territory covering Gulf, Central Asian Republics and even distance to China was also short from this port.

Any country could come and invest and Pakistan had been making efforts to attract people from different countries to invest in economic zones and was also approaching overseas Pakistanis for the purpose.

However, he said, peace and stability in Afghanistan was needed, adding that stable Afghanistan was good for all, urging world community to help make Afghanistan manageable for benefit of all.

The minister said Pakistan had met 26 out of 27 Financial Action Task Force (FATF) conditions and the 27th one was also half met.

He said that any other country meeting such conditions would have been removed from the grey list, however, Pakistan was being punished by some countries for different reason, not economic reasons.

“Frankly it is same mantra that Pakistan is a terrorist state.”

He said adding that the country which lost 80,000 people and suffered $150 billion loses and had been suffering for 40 years was being blamed continuously.