Ishaq Dar, the finance minister, formally unveiled a Rs. 170 billion mini budget on Wednesday. It included some highly inflationary measures but exempted traders and commercial banks from any new taxes, undermining the coalition government’s argument that it should burden the sectors that could bear it the most.
Given that the finance minister had recently pledged to impose substantial taxes on them as punishment for “currency manipulation,” the case of commercial banks was even more obvious.
He had claimed prior to last year that the government will raise additional taxes to recoup the roughly Rs. 50 billion in unauthorized profits produced by the banks.
Taxes To Apply in Mini Budget
The Finance (Supplementary) Bill 2023 also included certain policies that have historically failed to generate substantial amounts of cash through taxes, like the implementation of a 10% advance income tax on public and private events.
“Pakistan has reached an understanding with the International Monetary Fund (IMF) during January 31-February 9th staff-level visit and the most important element of it was to introduce Rs. 170 billion worth additional taxes,” Dar said.
The minister made it clear in his first budget speech in the last six years that the additional 170 billion rupees in taxes had not been imposed to make up for any deficit in revenue from the Federal Board of Revenue’s (FBR) yearly target of 7.470 trillion rupees.
He went on to say that as a result of these actions, the FBR’s target to has been raised to collect Rs. 7.640 trillion in taxes.
Dar asserted that the IMF program would contribute to currency stability and economic stability. “Through the IMF program, our foreign exchange reserves will increase and the exports, foreign remittances will also improve and issues regarding opening of LCs [letters of credit] will also cease,” he added.
The staff-level agreement with the IMF, according to the minister, would be reached once both parties had approved the Memorandum for Economic and Financial Policies (MEFP). He said that on Wednesday, the virtual talks on the draft MEFP would start.
According to the minister, the new taxes have been levied to balance out the predicted reduction in the circular debt flow, from Rs. 755 billion to Rs. 336 billion. The sources indicate that these extra steps will have a net annual impact of about Rs. 550 billion.
Pakistan had pledged to keep the circular debt flow to just Rs. 75 billion, but the Power Division unceremoniously announced that if no additional steps were taken, the flow would really be Rs. 952 billion.
The revenue of traders was not taxed by the government; this is a sector that is still severely undertaxed because of its close ties to the Pakistan Muslim League-Nawaz (PML-N), which is currently in power.
Dar presented the legislation in both the National Assembly and the Senate. Later, both houses were postponed until Friday (tomorrow). The general sales tax (GST) rate had gone up by 1% to 18%, he declared.
In just four and a half months, this would bring in an additional Rs. 55 billion through taxes for the government, money that might have been recovered from commercial banks by taxing their foreign exchange earnings.
The minister added that it had been agreed to put a 25% GST on previously prohibited luxury goods.
The administration wanted broad authority to raise the GST rate on any good or service listed in the third schedule of the Sales Tax Act at any time.
85 different categories of imports were prohibited by the government under SRO 598 from May 2022. The items on the list included carpets, personal care products, office supplies, pet food, footwear, furniture, home appliances, meat, mobile phones, musical instruments, guns and ammo, and automobiles.
The government wants to raise the local coal and potassium chlorate GST to 18%. For mobile phones costing between $201 and $500, the GST rate has been raised to 18%, and for phones costing more than $500, it has been raised to 25%.
It has been proposed to levy Active Taxpayers List individuals 10% advance adjustable income tax and non-ATL individuals 20% of the amount spent on social events and gatherings.
Comparable taxes were previously imposed, but it did not produce the anticipated outcomes. As a result, the tax was eliminated by the government more than two years ago.
In order to raise Rs. 5 billion in additional taxes, it has proposed to impose an advance adjustable income tax of 10% on the sale consideration for off-market disposals of shares.
Additionally, the government has suggested raising the federal excise duty (FED) on first, business, and club class international flights to 20% of the gross fare or Rs. 50,000 per ticket, whichever is higher.
The FED on cement has increased from Rs. 1.50 per kilogram to Rs. 2 per kilogram, which results in a price increase of Rs. 25 for a 50-kg bag. Additionally, the government raised the price of cigarettes.
The FBR announced the new FED rate at Rs. 16,500, an increase of Rs. 10,000 or 153% over the previous charge of Rs. 6,500 per 1,000 cigarettes or 1,000 sticks.
For costly brands, the FED rate per cigarette has increased from Rs. 6.5 to Rs. 16.50. Additionally, the affordable brand’s minimum price restriction was raised from Rs. 6,600 to above Rs. 9,000.
The per-1000 cigarette tax for less expensive brands that cost less than Rs. 9,000 has also been increased from Rs. 2,550 to Rs. 5,050. The tax rate for this group has increased by 98%. The tax on cigarettes has gone up from Rs. 2.55 to Rs. 5.05.
The government raised the FED rate for sugary drinks and other beverages from 13% to 20%. Juices would be subject to a 10% FED in the initial phase, according to a proposal.
Speaking to the lower chamber of parliament, Dar contrasted the performance of the Pakistan Tehreek-e-Insaf (PTI) government from 2018 to 22 with that of the PML-N government from 2013 to 18.
He said that while former prime minister Nawaz Sharif was in office, the GDP per person rose and the market value of the Pakistan Stock Exchange (PSX) reached $100 billion.
However, he added, the market cap of the PSX fell to $26 billion during the PTI administration, demonstrating a lack of investor confidence under the previous administration.
He also lambasted the PTI administration for sharply raising the national debt. However, he expressed optimism that the nation would once more make progress in that direction.
“But it is our responsibility to adopt the measures and give sacrifices. The prime minister will demonstrate frugality and the cabinet will also reduce its expenses.”
He claimed that the fiscal deficit and the current account deficit were the two main problems affecting the economy.
“We are committed to controlling and reducing both these deficits under the IMF program,” he said, stressing the need for a “national economic agenda and to agree on a charter of economy”.
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