Despite strong protests by the Opposition parties, the Pakistan Tehreek-i-Insaf government managed to get two controversial bills — one withdrawing tax exemptions worth Rs343b, and the other granting the State Bank of Pakistan complete autonomy — passed by the National Assembly to meet International Monetary Fund conditions for the revival of its $6b funding programme.
The government proved its majority in the National Assembly by pushing through the mini-budget and the SBP Amendment Bill, both of which were vital to meet IMF loan conditions. The ease with which the bills passed was surprising, as cracks had been reported within the ruling coalition and even the PTI itself. Just hours before the assembly session, there were reports of conflict between top PTI leaders which extended to Prime Minister Imran Khan. But none of these divisions were visible when the actual vote took place. While the government did withdraw a few taxes, including an exemption for nanbais and “small” shops selling different types of bread and other basic baked items, most of the bill remained unchanged, including taxes on larger containers of baby formula.
Finance Minister Shaukat Tarn dourly defended the Finance Supplementary Bill — popularly termed “mini-budget” — and the SBP Amendment Bill, putting the blame on his predecessor and the SBP governor for acquiescing to the austere IMF conditions last year for a $500m tranche.
Under the mini-budget, the government has decided to withdraw sales tax exemptions worth Rs343 billion. The decision has been taken to fulfil the International Monetary Fund’s conditions for Pakistan to qualify for the $1 billion tranche under the Extended Fund Facility. The mini-budget has imposed a 17% General Sales Tax (GST) on 144 goods and services which were exempted under different schedules of the Sales Tax Act, 1990.
Federal Board of Revenue (FBR) Chairman Dr Ashfaq Ahmed has revealed that the IMF demanded a withdrawal of exemptions worth Rs700 billion, with Pakistan agreeing to only Rs343 billion. This means that the Ministry of Finance was forced to enact these measures as a result of increasing pressure from the IMF. The authorities concerned and the FBR could have set these exemptions at Rs200-250 billion for essential goods during the annual budget for fiscal year 2020-21. Neither are the objectives of these exemptions mentioned nor is any legal framework for the provisions presented.
During initial negotiations between the IMF and the PTI government, the imposition of additional income tax on the salaried class worth Rs225 billion was declined. Income tax exemptions are a major concern since many individuals pay little or no tax on their income. Many of these exemptions are exploited by the elite, bureaucrats and politicians. Income tax exemptions are estimated to be at Rs448.046 billion.
Under Articles 77 and 165 of the Constitution of Pakistan and the PFM Act 2019, taxes are to be imposed by law, but tax policies are driven by SROs which have no legal justification and are implemented by the government to favour certain segments of society. The government and the FBR should rethink such policies which are both discriminatory and unsustainable. SRO-based exemptions should be withdrawn.
Economic experts and Opposition leaders have highlighted the negative inflationary impacts of the bill on the low-middle-income segments of the population. It is clear that the producers will pass on the burden to the final consumer, irrespective of their income, while the producers continue to earn higher profits due to the sales of inelastic products.
In the course of his speech, the finance minister admitted that the withdrawal of certain tax exemptions, which would directly or indirectly affect the common people, amount to Rs71b, a hefty burden indeed. This was in sharp contrast to his earlier statement that such taxes amounted to only Rs2b.
The PTI government’s spokesmen have taken the line that the mini-budget was unavoidable. Their refrain is that with the country facing an existential crisis on accumulation of massive debt because of chronic fiscal and current account deficits spawned by the state’s inability to tax wealthy lobbies and decades of the ruling classes’ profligacy, the government had little room to manoeuvre.
Lately, both budget and external account deficits have entered the danger zone. In the given circumstances, Pakistan’s re-entry into the IMF funding programme was inevitable to ensure the stability of the dollar. It is a well-known fact that a partnership with the IMF gives a green signal to other creditors — multilateral, bilateral and commercial — to start lending to Pakistan.
There are tell-tale indications that Pakistan will not be able to exit the IMF in the medium-term even after the completion of the current programme. Once the present facility is over, it may seek another bailout from the lender of last resort since our ruling elite is not ready to give up its lavish lifestyle and establish an all-encompassing regime of austerity.