ISLAMABAD: As part of its attempts to restart the stalled International Monetary Fund (IMF) scheme, the Government of Pakistan Tehreek-eInsaf (PTI) has decided to enact a new law to abolish income tax deductions used by the private sector to collect about Rs200 billion in additional taxes.
In order to meet the IMF’s demand for additional tax measures, the government was considering either proposing a finance bill in the National Assembly or promulgating a presidential order next month, the Federal Board of Revenue (FBR) sources said.
According to the consultations, however the regulatory amendments would not be implemented immediately; instead the date of application could be from the next financial year the sources stated.
Sources from the finance ministry said that the prime minister had again refused to raise the electricity tariff by Rs1.48 per unit and that it had also been sent to the IMF. One of the four main demands of the IMF to restart the loan programme is the growth in energy rates.
The proposed plans for the introduction of the new tax policies for the next fiscal year were aimed at fulfilling the IMF’s requirement of eliminating income tax deductions and at the same time, not automatically burdening corporations with extra taxes as a result of the adverse economic effect of Covid-19, the sources said.
They added that the administrative staff of the FBR and the IMF were active in the finalisation of the tax deductions and income tax credits which could be revoked under the new regulations.
IMF officials and Pakistani authorities have been negotiating clause-by-clause exemptions from corporate income tax, the sources said. FBR sources said the authorities were negotiating with the IMF the deductions from corporate income tax, tax credits and some exemptions applicable to oil and gas exploration and production firms under the Fifth Schedule of the Income Tax Ordinance.
These initiatives would raise an additional Rs200 billion in taxes, but how much of the concessions would be revoked quickly, the sources said, was not final.
A deficit of over Rs350 billion against the annual tax target of Rs4.963 trillion has been forecast by the IMF. The nation, however, decided to bridge some of the gap by increasing petroleum levy collection and the cessation of gas infrastructure growth, the sources said.
The IMF was supposed to complete negotiations on the exemptions by next week, the sources said.
However any change in the tax system will be implemented only after the economy recovers from the detrimental effects of coronavirus, as we are working on tax reforms,’ said Kamran Afzal, Special Secretary and Spokesman for the Ministry of Finance.
Afzal said government objectives were that previous actions and institutional benchmarks could also be in line with the economic growth in order to restart the IMF programme. At the earliest, the government was working to complete the IMF review, he said.
The IMF mission will visit Pakistan in a few weeks and have a structured framework for the ongoing discussions, announced Dr Abdul Hafeez Shaikh, Prime Minister of Finance, at a joint press conference with Shibli Faraz, Minister of Information, on Wednesday.
Once again, Shaikh had proclaimed economic triumph, citing changes in several metrics, leading to reports that the government was preparing the ground for fulfilling the requirements of the IMF.
However, Teresa Daban Sanchez, IMF Resident Representative in Islamabad, told The Express Tribune that due to the Covid-19 crisis, IMF missions to all member countries including Pakistan, are temporarily suspended.
After February of this year the IMF has delayed the execution of the $6 billion bailout programme and has set four conditions for its recovery.
This include an increase in energy tariffs, new taxation steps to meet the annual target of Rs4,963 trillion, the passage of the Nepra Act and the introduction to parliament of the SBP Amendment Bill 2020.
The expense of tax exemptions was calculated in FY20 at Rs1.15 trillion by the FBR. The sales tax exemption was the largest at Rs519 billion, corresponding to 45% of the total exemptions, relative to Rs378 billion in revenue tax, or one-third of the total exemptions.
The cost of exemptions was calculated at Rs253 billion in customs duties. Sources said that there would be no removal of all income tax deductions. Exemptions associated with pensions and mutual trusts would still not be revoked.
But it is important to remove tax incentives for investment in balancing, modernising and upgrading plants and equipment.
For her views on the government’s decision to enact regulations now but implement it from next fiscal year the Express Tribune sent questions to the IMF resident delegate. “During the ongoing discussions, no interaction with the press is envisaged,” Teresa Daban Sanchez answered.