Stuck between a rock and a hard place; govt to impose Rs170b additional taxes

ISLAMABAD: After a deadlock in negotiations for over 5 months and a week worth of negotiations, the Federal government has surrendered before the International Monetary Fund (IMF) by imposing Rs 170 billion in new taxes, on almost every already taxable item in the mini budget.

The day started with the issuance of SRO 179 (I), by the revenue division of the finance ministry, announcing an increase of 1% in the sales tax receivable on all the taxable items under subsection 1, section 3 of the Sales Tax Act, 1990. This includes a range of taxable items including imported goods. According to one official, this includes almost every item except food and health and this will bring a new wave of inflation which has already neared 30 percent.

Prior to that an increase in the FED on cigarettes was also announced that is estimated to cause a 150% nominal raise in the FEDs on cigarette sales since last year. The government has increased more than 150 percent FED on per stick cigarette from Rs6.5 per cigarette to Rs16.5. Similarly, FBR has also approximately increased FED by 100%, per stick from Rs2.55 to Rs5.05 for less expensive brands. A revenue of Rs. 115 billion is expected to be generated from the aforementioned steps. 

However, the government aims to increase its revenue by more than 170 billion, in accordance with the conditions that have been set by the IMF mission. Therefore, for the remaining Rs. 55 billion, the Finance (supplementary) Bill 2023, was tabled in front of the parliament by the finance minister Ishaq Dar. The decision to present the bill in front of the parliament was taken on the “advice” of the President Arif Alvi. 

According to the bill tabled in both, the upper and the lower house, the government has further increased rate of sales tax from 17 to 18 percent on other sales taxed items, including mobile phones, locally produced Coal, Potassium Chlorate (explosives, fireworks, safety matches, and disinfectants), aerated as well as sugary drinks, Air tickets. It has also imposed an advance income tax on the bills of weddings and gatherings, and a percentage of tax on the sale of the shares of a private limited company in the secondary market.

The Finance (Supplementary) Bill, 2023:

It is important to note that the political stakeholders were made party to the increase in only a handful of taxes, proportionally 32% of them through the aforementioned bill. The rest were enacted after the Federal Cabinet’s approval, through SROs.

In his speech at the National Assembly, the Finance Minister Ishaq Dar claimed that the new taxes were meant for high ticket items only however a strong case, contrary to that claim can be made.

In the bill, government has introduced new provisions in the Sales Tax Act, 1990 with regard to collection of goods specified in the third schedule such as Fruit juices and vegetable juices, Ice Cream, Aerated waters or beverages, Syrups and squashes, Cigarettes, Toilet soap, Shampoo, Toothpaste, Shaving cream Perfumery and cosmetics, Tea, Powder drinks, Milky drinks Toilet, Shoe polish and shoe cream, Cement sold in retail packing and a dozen items. According to the bill, the FBR will issue a notification in the official gazette.

According to the Finance supplementary bill, the government has increased sales tax from 17 to 18 percent on locally produced Coal, a subsequent impact of which is bound to be seen in commodity prices.

Energy minister Khurram Dastagir told the media yesterday that Pakistan plans to increase domestic coal-fired power capacity to 10 gigawatts (GW) in the medium-term, from 2.31 GW currently.

Apart from this, the government has already increased electricity prices under the circular debt management plan to curtail mounting circular debt worth of Rs 952 billion.  

In addition, the government has also increased tax from 17 to 18 % on Potassium Chlorate which is used in products such as explosives, fireworks, safety matches, and disinfectants.

According to the Finance supplementary bill, the government has also increased sales tax from 17 to 18 and 25 percent on different categories of mobile phones.

The FBR will charge 18% sales tax on CBUs mobile phones exceeding $ 200 but not exceeding $ 350. Similarly, the FBR will also charge 18% sales tax on CBUs mobile phones ranging from $ 350 to $ 500. The sales tax rate on mobile phones exceeding $ 500 shall also charge 25% from 17%.

In another amendment, The government has also inserted a new section by amending income tax ordinance with regard to acquiring a capital asset.

Explaining the new insertion, one official said that the government has imposed 10 % tax on the sale of Private Limited Company’ further shares into third persons, other than the public listed companies.

According to the bill, the government has also imposed 10 % advance tax on the total amount of the bill from a person arranging or holding a function in a marriage hall, marquee, hotel, restaurant, commercial lawn and club.

Explaining this section, officials in the FBR said that the government has restored the advance tax on functions and gatherings besides widening the definition of functions.

Functions include any wedding related event, a seminar, workshop, a session, an exhibition, a concert, a show, a party or any other gathering held for such purpose.

On the other hand, officials explained that the government has increased FED from thirteen to twenty percent on aerated drinks such as Coca Cola, Pepsi and others.

Meanwhile, the government has also imposed a 10 % FED on the retail price of sugary fruit Juices.

Furthermore, the government has also increased Rs50,000 FED per ticket on international flights (other than economy class) issued on or after the date of commencement of the Finance (supplementary) bill 2023.

Inflation expectations, higher than targeted:

Pakistan is yet to recover from the cost push impacts of inflation that were observed due to the sudden devaluation of rupee against the dollar. The monetary policy has consistently been working towards targeting inflation however, the inflation expectations of the country have become even harder to tame, following the announcement of the “mini-budget”.

Senior economist Katrina Ell of Moody’s Analytics told Reuters on Wednesday, “Our view is that an IMF bailout alone isn’t going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management”. She further stated that, “There’s still an inevitably tough journey ahead. We’re expecting fiscal and monetary austerity to continue well into 2024”.

While the IMF bailout package is necessary to stay afloat for Pakistan, the taxations like aforementioned ones, and power hikes are going to have a detrimental impact on the CPI inflation of the country. A figure that might remain in the 33% ballpark according to Moody’s analytics. As of January, inflation in Pakistan was recorded at a little over 27%.