Pakistan Tehreek-e-Insaf government has tabled the Finance (Supplementary) Bill 2021 in the National Assembly and Senate within a span of one week amid strong opposition. Dubbed as a mini-budget by the opposition, the bill has proposed amendments to tax laws to raise a hefty Rs375 billion in taxes. These include the end of tax exemptions worth Rs343 billion on nearly 150 items.
Proposed amendments to income tax, sales tax and federal excise laws are part of the International Monetary Fund’s (IMF’s) conditions for the clearance of Pakistan’s sixth review of the $6 billion Extended Fund Facility (EFF) by the financial institution. A positive review will pave the way for the disbursement of a tranche of around $1 billion.
In recent months, the government has taken a slew of measures to meet a list of IMF conditions for the revival of the EFF, which lay dormant due to the government’s inability to impose these measures earlier in the face of opposition. It is unfortunate that the current dispensation has focused on temporary economic relief through IMF loan facility but failed to take the longer route of expanding the tax base, reducing losses in the power, increasing penalties for non-filers, imposing fair taxes on capital gains in agriculture and real estate sectors and imposing heavier duties on luxury items other than food items. The current measure will add to the already rising inflation.
According to news reports, Finance (Supplementary) Bill 2021 proposes a uniform 17 percent General Sales Tax (GST) on goods and new duties to raise Rs343 billion in revenue. The bill proposes taxes on a wide variety of imported machinery, food items, medicines, auto sector and services.
If this bill passes, the prices of essential food items such as meat and poultry are likely to go up as there will be an increase in tax on local poultry and cattle feed from seven percent to 17 percent and an increase in sales tax on imported machines used in the poultry sector from 10 percent to 17 percent. The bill also proposes an increase in general sales tax, from 10 percent to 17 percent, on dairy items sold in branded packaging.
Medicines could also get expensive as the legislation proposes the withdrawal of tax exemptions worth Rs160bn on the pharmaceutical sector. In a major step, the government has proposed to slap 17 percent GST on raw materials for pharmaceutical products for revenue worth Rs45 billion. Although the FBR said raw material would be zero-rated and it would refund the amount, once such measures are imposed, the economy takes time to adjust.
What’s most striking is that a 17 percent sales tax has also been proposed for imported raw material used for making infant food and premixes for growth stunting. The already high priced infant formula is likely to get even more expensive after the amendment. While taxing the premixes for growth stunting is contrary to Prime Minister Imran Khan’s vision of ending children’s growth stunting in Pakistan.
The bill also proposes a five percent sales tax on imported laptops and a 17 percent tax on imported magazines and journals. A 17 percent tax has been proposed for personal computers, sewing machines, matchboxes, iodised salt, red chilli and contraceptives.
In addition, the bill proposes an increase in federal excise duty of both locally manufactured and imported vehicles, including electric vehicles, as well as an increase in advance income tax. The cellular industry will also be affected as the bill proposes the imposition of a uniform sales tax of 17 percent on imported mobile phones priced above $200. Advanced tax on cellular services will also be increased from 10 percent to 15 percent. There are also chances of an increase in the price of locally manufactured mobile phones with the government proposing a 17percent sales tax on imported machines for mobile phone manufacturing.
Pakistan Muslim League-Nawaz (PMLN) President Shehbaz Sharif has said that if the mini-budget is approved, then the new year will be the worst year of inflation for Pakistan. “Mini-budget will make the situation worse instead of making it better,” the official PMLN Twitter handle quoted Sharif as saying.
These measures would have been welcomed had they been taken in normal circumstances, intending to reform the economy while giving ample time to the people and businesses to adjust. But these are not normal times. The people are still reeling from the impact of the hike in petroleum products, electricity and natural gas introduced in the short span of three months. New taxes may act as a straw on the already overloaded camel’s back.
As a result of government measures, the Consumer Price Index (CPI) jumped to 12.3 percent in December 2021 from a year earlier, according to the Pakistan Bureau of Statistics. Edible items were the main contributor to the latest increase. In November, consumer inflation based on the annual increase in the CPI was 11.5 percent.
It is unfortunate that the government is working on the IMF’s agenda and not working on a well thought out economic reform agenda. Despite the upward inflationary trend, the government continues to take measures to meet IMF conditions for extending a loan to Pakistan, without taking into consideration how these measures will impact ordinary citizens. The latest hike, imposed on January 1, increased the prices of key petroleum products by Rs4 per litre with petrol reaching Rs144.82 and diesel Rs141.62 per litre. It is well known that an increase in petrol prices have an overall inflationary impact on the economy. To top it off, the government has now introduced the Finance (Supplementary) Bill 2021.
Analysts say inflation is likely to go up further in the remaining months of the fiscal year due to the withdrawal of tax exemptions, increase in energy tariffs and higher petroleum levy. They expect average inflation to be close to 11 percent at the end of the current fiscal year.
The numbers are alarming, but the government representatives are busy painting a rosy picture by comparing the price hike in Pakistan with the rest of the world. If it hadn’t been so serious, it would be funny because comparing Pakistan’s economic performance with countries with a higher GDP does not make sense. The people in those countries have the power to spend.
Just this week Prime Minister Imran Khan expressed satisfaction with the performance of his economic team and asked them to tell the people that there is no inflation in the country. Upper class and upper middle class with disposable incomes may not feel the impact of government measures but the nearly 40 percent of the population that lives below the poverty line and a squeezing middle class has been feeling the heat. Even bare survival has become difficult for the poor, while more and more people are slipping below the poverty line.
That the people are disillusioned with the current government is evident from the local government elections and by-elections held in the country in recent months. If free and fair elections are held, signs are that the PTI will be ousted in the next general elections to be held in 2023. But if the government continues to press the public by imposing ill-thought measures, it will not be long before the people take to the streets and force it to resign before the end of its term.