The government will introduce the Finance (Supplementary) Bill 2021 and the State Bank of Pakistan (Amendment) Bill 2021 in the parliament for approval on Tuesday to ensure its sixth review of the $6 billion Extended Fund Facility (EFF) gets cleared by the International Monetary Fund’s (IMF) executive board on Jan 12, paving the way for the disbursement of about $1 billion tranche.
According to Finance and Revenue Adviser Shaukat Tarin, all fiscal, monetary and reform measures agreed with the IMF as prior actions had been completed. All arrangements were in place to ensure that the entire package, including the supplementary finance and State Bank of Pakistan (SBP) bills, is approved by the cabinet during its meeting on Tuesday.
“We will take it to the parliament the same day in the afternoon,” he said.
An official earlier said the government was ready to get the Finance (Supplementary) Bill 2021 passed by the National Assembly to ensure there is reasonable time before the IMF board’s meeting. The IMF’s directors traditionally require two weeks to review the memorandum of economic and fiscal policy measures.
Tarin had committed to the IMF that Pakistan will complete all five “prior actions” before requesting for a meeting of the board of directors to approve the revival of $6bn EFF suspended in April this year.
Under those prior actions, the government, through the supplementary finance bill will, effect a net fiscal adjustment of almost Rs550bn during the remaining part of the current fiscal year through a 22 per cent cut in development funds, about Rs360bn worth of withdrawal of tax exemptions with a revised tax target of Rs6.1 trillion and increase in petroleum levy on major petroleum products by Rs4 per litre per month.
Making an upfront announcement about the five prior actions to secure approval of the IMF board for the disbursement of about $1.06bn and revival of the IMF programme in January, Tarin said recently the government would also ensure “approval” of the parliament to grant autonomy on matters of monetary policy, exchange rate and recruitments to the SBP, which would remain answerable to the parliament as it was now.
These prior actions included State Bank of Pakistan (Amendment) Bill, withdrawal of tax exemptions and increase in energy tariff. The action pertaining to tariff adjustment has already been taken while bills to end tax exemptions and give autonomy to the SBP have been finalised.
Under the supplementary finance bill, the Federal Board of Revenue (FBR) is seeking amendments to all the three key tax laws relating to customs, sales tax and income tax, besides the services tax law for the federal capital.
The underlying purpose of the reform exercise, as pushed through by the international lenders, is to “rebuild the tax system on ideal principles of taxation and without any distortions” as far-reaching structural and administrative reforms had already been initiated by the present government to “achieve economic and financial stability through inclusive reforms and sustainable economic growth”.
In terms of revenue generation, withdrawal of exemptions and removal of different rates under the sales tax law appear to be the biggest sources of additional tax. There is a long list running in hundreds of items that would attract higher sales tax rates and application of fresh tax.
“Under the Sales Tax Act 1990, zero-rating under the Fifth Schedule is proposed to be streamlined and certain entries are to be withdrawn,” documents suggest. “Exemption regime under Sixth Schedule is proposed to be curtailed including the pharmaceutical sector and restricted to import and local supply of essential commodities only.”
Moreover, “reduced rates of sales tax under Eighth Schedule on certain items are proposed to be streamlined in order to achieve equity in the tax system”.
There are hundreds of items in the schedule on which different sales tax rates at 1pc, 2pc, 5pc, 6pc, 7pc, 8pc, 10pc and 12pc are applicable at present instead of the standard sales tax rate of 17pc.
“Likewise, sales tax on the import of completely built high-end mobile phones under Ninth Schedule is proposed to be rationalised,” the FBR chairman said, adding that the “scope of Tier-I retailers is also proposed to be rationalised”.
Under the Islamabad Capital Territory (Tax on Services) Ordinance 2001, a few notifications issued from time to time prescribing reduced rates in respect of some services were not consolidated, which is now being done in the schedule to the ordinance.
The summary reports that “minimal amendments in the Income Tax Ordinance 2001 are aimed at promoting digital economy, documentation and facilitation measures”. Additionally, advance tax on foreign drama serials is proposed to be introduced and slightly enhanced on cellular services.
Disclosure of information in respect of high-level public officials is proposed in the income tax law in line with the requirements of the development partners, rule of law and integrity.