In light of an unexpected relief in tax measures from the International Monetary Fund, the government has decided to take a proactive approach and implement tax and non-tax measures from Feb 15 instead of March 1 — the purported deadline proposed by the global lender — to secure quick release of $1.2 billion tranche.
Ahead of the start of much-delayed talks, the government was expecting that the IMF would ask for approximately Rs400 billion in tax and non-tax measures, but as policy-level talks came to a close, both sides agreed on an Rs170 billion collection from tax and non-tax measures in the next four and a half months. Official sources privy to talks told Dawn that the Federal Board of Revenue (FBR) has already drafted two ordinances to impose Rs100 billion in new taxes and Rs100bn in flood levy on imports. “We were expecting more demands from the Fund in the areas of taxes”, the sources said, adding things have changed in the last two days of policy-level negotiations.
However, the sources did not elaborate on ‘the change of heart’ from the IMF side. The only justification that came was that the Fund might have considered the flood’s effects on the overall economy. Moreover, FBR is getting extra billions from the massive rupee depreciation as well. Despite floods, the government will have to discontinue the Kissan Package along with power subsidy in the export sector from March 1. As per agreed FBR tax measures, the government will generate around Rs70bn in the next four and half months from raising the general sales tax from 17per cent to 18pc. The collection alone is 41.2pc of the agreed tax and non-tax measures of Rs170bn.
Other tax measures include raising withholding tax rates, increasing tax rates of regulatory duties on imports of luxury and non-essential items, and further increase in the federal excise duty on the tobacco sector. “We have already completed our home-work and identified the areas for additional taxation measures”, the sources said.
Finance Minister Ishaq Dar will pick from the basket of proposed tax measures, the sources said, adding there is flexibility now for the finance minister to choose among the sectors as well as rationalize tax rates. On the non-tax measures side, a flood levy will be imposed. “The levy is discussed with the IMF during the policy level negotiations”, the sources said, adding the rate of levy and its implementation will be decided by the finance minister. The FBR will collect the flood levy for the government at the import stage.
As a policy, according to the sources, IMF did not support tax measures at the import stage. However, the government will push for the levy to implement because its collection will not be shared with the provinces. Under the petroleum development levy (PDL), IMF has already projected a shortfall of over Rs300bn.
The flood levy will be used to bridge the PDL shortfall, the sources said, adding no commitment was made for further increase in the PDL. However, the government will increase Rs5 as PDL on diesel from Feb 15 and another Rs5 per liter from March 1. This will be in addition to the passing of international price impact along with the currency depreciation. According to sources, the finance minister will decide the quantum share of FBR tax measures and non-tax measures (flood levy) in the total amount of Rs170bn to be collected in the next four months.
Pakistan and IMF technical teams held several rounds of talks for 10 days which ended with an understanding to complete formalities for the staff-level agreement. At the end of the talks, Pakistan received a draft Memorandum of Economic & Fiscal Policies (MEFP).
Further discussions on the draft will start on Monday to fine-tune it. This will be followed by a signing of the letter of intent and the announcement of the staff-level agreement which will be placed before the executive board of the IMF for formal approval.
After the approval of this from the board, Pakistan will receive $1.2bn from the Fund. This will also pave way for the bilateral amount from friendly countries including China awaiting a green signal from the IMF.