The GIDC dent

“Anything that can go wrong will go wrong”, Murphy’s Law is surely applying on the PMLN’s government. There is another dent on the macroeconomic stability as the Supreme Court has rejected government’s petition against the Peshawar High Court’s ruling of declaring Gas Infrastructure Development Cess Act unconstitutional.
As the name suggests, GIDC was introduced in 2012 to collect taxes for development of IP, TAPI gas pipelines and any other infrastructural related such as LNG gas terminal and its connection to the nationwide supplies. Since both the pipelines’ projects have been shelved temporarily while there is no progress on any other infrastructure; all the taxes collected in the previous years (Rs131bn) have been consumed for budgetary support which is against the essence of the levy.
Additionally, there is another lacuna as gas is a provincial subject and any tax imposed by Federal Government is in encroachment to provincial domain and GIDC has remained controversial ever since its inception. However, the IMF was keen on government to levy this tax in order to enhance fiscal revenue. That is why Dar naively enhanced the GIDC target to Rs145 billion (0.5% of GDP) in FY15 as compared to FY14 collection of Rs88 billion under the head.
There was additional burden on the general industry with a levy of Rs300/mmbtu; but on the pressure of lobbies in the various industries and for right reason to facilitate growth, the tax was slashed to half for general industries with more relief to power sector (levy slashed to Rs100/mmbtu) and cement sector was completely exempted. Rs50 billion from the target was straightaway evaporated to limit at Rs95 billion. On the flip, it’s good for the exports and other industries as this will result in higher earnings.
Now the decision is not only to withdraw existing levy but also to transfer back the entire amount that is collected so far under GIDC in the last three fiscal years amounting Rs131 billion has to be reimbursed. This may be difficult to implement as various industries passed the burden on to the end consumers. Government may contest against it and is likely that it may not have to pay back.
The problem is that how will the gap of 0.5 percent of GDP be bridged in an already stressed budget. The IMF will not be amused with the decision and surely push the government to impose an alternate tax. It won’t be an easy task given the PML-N government is in a tight spot.
The fund has not completed the fourth review yet probably based on government not increasing power tariff by a mere four percent. To add the ado, Imran’s movement of civil disobedience makes the fund more reluctant to release fifth trance. The annulment of GIDC would make the government’s case even worse.
The causality in the process would be the curtailment of federal development budget. With higher share of provinces, federal PSDP has been shrinking in the past and it is budgeted at Rs525 billion in FY15. It will surely be much less and it’s going to dent the growth target. However, higher exports and earnings of other industries due to removal of the levy may partially offset the setback coming from lower PSDP.
The government needs to ponder upon the mechanism to develop LNG terminal through some other model. Public private partnership seems to be the best way.