ISLAMABAD: Finance Minister Ishaq Dar has stated that changes— imposition of additional taxes of Rs215 billion and a Rs85 billion cut in expenditure in 2023-24—in the federal budget presented on June 9 were made after a discussion with the International Monetary Fund (IMF).

While briefing the National Assembly Standing Committee on Finance on Friday, the minister stated that when the budget was presented it was stated that no new tax would be imposed.

However, he added that for securing an agreement with the IMF, the government had to impose new taxes.

“We had to make changes in the winding-up speech in view of the conditions of the IMF. Some concessions granted on June 9 were taken back in the amended Finance Bill 2023,” he said.

Pakistan will look to impose Rs215bn additional taxes after IMF talks: Dar

Under the IMF programme, giving tax exemptions or preferential tax treatments or amnesty scheme is banned. “ It is banned to grant any new tax exemption till we are in the IMF programme,“ Dar said.

He said that the previous government withdrew from its commitment with regard to the points of agreement with the IMF due to which Pakistan had not been able to get a loan from any institution, including the IMF.

He said that when he arrived at the end of September, the IMF was requested to visit for the review in November but the arrival of the IMF staff mission was delayed and they came on January 31. The staff-level agreement could not be reached in time, which created problems.

The finance minister added that the coalition government combined the seventh and eighth reviews but external financing issues led to a delay in the completion of the review. He said that Pakistan had a Plan-B and the country would not have defaulted even without the IMF.

If they were not in the IMF programme, the government would not have imposed new taxes in the budget, he said.

The meeting was told that the IMF agreement is available on the website of the Ministry of Finance. The Minister of Finance said that it is written in the IMF document that Pakistan will not give any kind of tax amnesty.

The finance minister said that the government successfully persuaded the IMF to agree to the deal. He added that the prices of petroleum products have been increased to complete the 7th and 8th reviews of the IMF. This is Pakistan’s 23rd programme with the IMF. Tehreek-e-Insaf took the 22nd programme from IMF but it did violate the agreed terms and conditions, he added.

Copyright Business Recorder, 2023

ISLAMABAD: The Senate Standing Committee on Finance has told the Federal Board of Revenue (FBR) that the Finance Bill 2022-23 empowers the bureaucracy to formulate zero taxation regime for the business community.

The Senate Standing Committee on Finance met on Thursday under the chairmanship of Senator Saleem Mandviwalla. It was given a briefing on the inclusion of budget recommendations of the Senate in the budget 2023-24.

The committee observed that the Finance Bill 2022-23 empowers the bureaucracy to formulate zero taxation regime.

Finance Bill: NA discusses Senate suggestions

The committee was briefed by a senior official of the FBR that separate rules will be prescribed for the said purpose.

The committee was informed that the provision will come into play where any case, based on risk profiling is selected for transfer of pricing audit.

The committee maintained that any rules prescribed must be transparent in nature and in the larger public interest rather than self-seeking benefits.

The committee noted that the Finance Bill has extended income tax exemption expiring on June 30, 2023, to June 30, 2024, for residents of erstwhile Fata/Pata which was rejected by the committee.

The committee was told that the government has decided to extend the exemption for one year with the aim of development of the area and ensure employment of the local people.

The committee was told by the official of the Finance Ministry that the Finance Division has received 55 recommendations and the FBR stated that it received 97 proposals and 77 of them were made part of the finance bill, whereas, partial implementation was done on 15 recommendations.

The committee was informed that Rs35 billion has been allocated for USC, of which, Rs5 billion are for the Prime Minister’s Package.

The Finance Division informed the committee that Rs5 billion has been allocated for Prime Minister’s Laptop Scheme and tax was imposed on bonus shares.

The committee recommendations related to the privatisation of loss-making enterprises, increased budget allocation for the health sector, funds for rehabilitation of flood victims, availability of food items at subsidised rates, rise in TV fee from Rs35 to Rs50 per month in electricity bills and mechanism for subsidies on fertilizers, solar energy production and daily food items were fully adopted, however, the ministry partially adopted recommendations such as grant of tax holidays to export industry, laptops schemes etc, explaining that government is providing all necessary support to the IT sector and export-oriented industries.

The matter regarding a decision taken by the Cabinet for closing of Small and Medium Enterprise (SME) Bank was disposed of with the recommendation to the Cabinet to review the matter in the interest of the weak business community and employment associated with it.

It is briefed that the federal cabinet approved the winding down plan of the SME Bank in the best interest of depositors and to minimise the financial losses to the national exchequer.

The committee was further informed that as of 30June 2023, the bank successfully paid an amount of Rs5.227 billion to its depositors and is actively following up with the remaining customers to withdraw their deposits.

Briefing on the matter of imported vintage cars still parked at dry port for clearance was also taken up, the committee lamented that even after the exemption of customs duty, regulatory duty, additional customs duty, Federal Excise Duty, sales tax, and withholding tax by the federal government on 3rd July 2018, the cars have not been released and urged to expedite the matter.

The Revenue Division apprised the committee that since the matter involved the requirements of the IPO 2016, which falls in the domain of the Ministry of Commerce, therefore, it was decided that the matter be taken up in the Senate Committee on Commerce along with the Commerce Ministry and raise the matter with the federal cabinet for relaxation on the IPO (Import Policy order).

The committee also stated that it received letters from some sector that selective LCs are being opened even after all the restrictions are lifted.

The committee also discussed the launch of Pakistan’s first ever digital currency as reported by various newspapers, however, the SBP stated that nothing has been decided yet as it was carefully watching and looking at the central banks which had launched it.

On Hawala/Hundi, the committee remarked that $6 to 8 billion of remittances on an annual basis come through Hundi business. However, the SBP said that remittances of $27 billion were recorded in the last financial year, and the government is taking measures to increase the flow of remittances through the banking channel.

Copyright Business Recorder, 2023

ISLAMABAD: The Power Division has reportedly not yet secured the federal cabinet’s nod for an increase in the base electricity tariff by Rs4.96 per unit across the country for FY 2023-24 to be applicable from July 1, 2023, well-informed sources told Business Recorder.

The Power Division, sources said, has prepared its summary for the federal cabinet on the basis of the National Electric Power Regulatory Authority (Nepra)’s determination, which implies an increase of Rs4.96 per unit will be applicable across the board.

However, vulnerable categories of consumers, ie, lifeline consumers will be extended subsidy approved in the federal budget 2023-24.

Base power tariff hiked by Rs4.96

The sources said, a team of Central Power Purchasing Agency–Guaranteed (CPPA-G), on Monday, gave a detailed presentation to additional secretary (Power Division-II) who deals with tariff issues on different scenarios to be presented to the Cabinet (political people) for seeking nod increase in base tariff.

The purpose of the meeting was preparing a case that lifeline consumers will be given a subsidy of Rs150 billion and the poorest of the poor will get more share in the subsidy.

Insiders claim that the Power Division wanted an increase in the base tariff of around Rs10 per unit so that the impact of Quarterly Tariff Adjustments (QTAs) and Fuel Charges Adjustment (FCA) during the year, can be minimised.

However, with an increase in base tariff by Rs4.96 per unit means that heavy QTAs and FCAs will also be passed on to the consumers as no one knows where the devaluation of the rupee will stop. Capacity payment of power plants, QTAs and FCAs are entirely linked to rupee-dollar parity.

The sources said notification of the new base tariff will be issued soon after formal approval from the federal cabinet, adding that recovery of the new base tariff will be recovery in entirety not in phase like it was done in 2021.

According to the Nepra, the total Power Purchase Price (PPP) of Discos for the FY 2023- 24, (after excluding the share of KE), works out as Rs2,866, 159 million, which includes Rs840,462 million for fuel and variable O&M cost and Rs2,025,697 million as capacity charges including Use of System Charges (UoSC) of NTDC and PMLTC and Market Operator Fee (MoF) of CPPA-G.

The capacity charges translate into Rs6,460.81/kW/month based on the projected average monthly MDI of 26,128 MW. Thus, the capacity charges work out as around 71 per cent of the total projected PPP of XWDISCOs, whereas, energy cost is around 29 per cent of the total projected PPP.

In terms of average per unit PPP Discos on unit purchased basis i.e. before adjustment of allowed T&D losses of XWDISCOs, capacity charges work out as Rs16.22/kWh, whereas, energy charges are Rs6.73/kWh, totaling to Rs22.95/kWh for the FY 2023-24. The national average power purchase price works out as 22.42/kWh.

After notification of the new base tariff, the average tariff will become Rs29.78 per unit from July 1, 2023. The government intends to recover Rs477 billion from consumers during the current fiscal year.

The sources further stated that no notification is issued so far with respect to the increase in peak hours by two hours, meant to put more burden on consumers.

In 2022, the Pakistan Tehreek-e-Insaf (PTI) government raised the base tariff by Rs7.91 per unit in three phases due to which the base tariff jumped to Rs24.82 per unit from Rs16.91 per unit.

This implies the government had to increase the base tariff by Rs4.96 per unit to raise the current base tariff of Rs24.82 per unit to Rs29.78 per unit from July 1, 2023.

The assumptions for the increase in base tariff were as follows: (i) RLNG price, Rs3,554 per ton; (ii) imported coal at Rs42,584 per unit from Rs1,951 per unit; (iii) local coal Rs13,070 per unit from Rs1,220 per ton; (v) gas Rs1,103 per MMBTU; (vi) furnace oil Rs109,947 per ton; (vii) US dollar to PKR, Rs286; (viii) Pak-CPI, 17.07 percent; (ix) US-CPI, 2.45 percent; (x) KIBOR, 19.4 percent; and (xi) LIBOR, 4.5 percent.

Copyright Business Recorder, 2023

EDITORIAL: The International Monetary Fund (IMF) board approved the 3 billion dollar Stand-By Arrangement (SBA) to Pakistan on 12 July, a standard outcome subsequent to reaching the staff-level agreement (29 June 2023).

The three upfront bullet points in the press release issued by the Fund are telling. The first highlights the SBA objectives from the Fund’s perspective, which are overstated given the state of the economy today and the nine-month duration of the programme.

Thus, while the SBA will support immediate efforts to stabilise the economy and guard against shocks, in other words, avert the looming default, yet the claim that it would create the space for social and development spending to help the people of Pakistan is unlikely to materialise within the next nine months.

The revised budget, revised as a prior SBA condition, envisages a rise in budgeted revenue from 9.2 to 9.4 trillion rupees with the earlier target premised on GDP growth of 3.5 percent (which the Fund downgraded to 2.5 percent and that too after downgrading the government’s claim of plus 0.3 percent growth last fiscal year to negative 0.5 percent), import growth of 8.9 percent in dollar terms (which necessitated the 23 June withdrawal of administrative restrictions by the State Bank though their implementation is not possible due to paucity of foreign exchange reserves), and a rise in current expenditure in the revised budget uploaded on the Finance Division website from the 9 June budget documents – from 13.319 trillion rupees to 13.344 trillion rupees in spite of claiming an 85 billion rupee reduction.

It is unlikely that the increase of 13.8 billion rupees for social protection in the revised budget will be enough to provide for the growing numbers being pushed below the poverty line (due to concomitant SBA conditions including raising utility rates, petroleum levy) and a rise in Benazir Income Support Programme from 450 billion rupees to 466 billion rupees.

Any further rise in the discount rate, with the Fund press release noting that an appropriately tight monetary policy aimed at disinflation must continue, that may well increase the budgeted borrowing costs as the government remains the largest borrower in the market, with private sector credit shrinking by over 80 percent last fiscal year compared to the year before. A higher budget deficit may well translate into higher inflation.

The second bullet point reiterates serious concerns over the implementation of flawed policies, or missteps as earlier stated by the Fund, dating back to end September early October 2022.

The press release notes that steadfast policy implementation will be critical for Pakistan and include greater fiscal discipline (no doubt a not so oblique reference to the 110 billion rupees subsidy to exporters announced on 6 October last year), a market determined exchange rate to absorb external pressures (rather than continuing to control the interbank rupee-dollar parity with disastrous consequences on remittance inflows through official channels estimated at around 4 billion dollars last year).

And the Fund urges further progress on reforms to the energy sector (hopefully long-term that would tackle poor governance rather than passing on the buck to the consumers), climate resilience (though climate change division has been budgeted 4050 million rupees in the current year as opposed to 4073 million rupees in the revised estimates of last year) and business climate, which is likely to continue to be held hostage to a high policy rate and an eroding rupee value vis-a-vis the dollar.

The release of 1.2 billion dollars would be immediate while two other successfully completed quarterly reviews will lead to disbursal of the remaining two tranches.

If the reviews are held quarterly then the next one will be due mid-October, which will be undertaken either with the caretakers or deferred till after elections, though it is unlikely that the programme will be derailed for two reasons: (i) barring the incumbent, no finance minister since 2019 has violated the agreement with the Fund (though there have been waivers and digressions due to Covid-19 and floods) with the Managing Director statement referring to “uneven policy implementation under the Extended Fund Facility combined to halt the post-pandemic recovery, sharply increase inflation and significantly depleted internal and external buffers”; and (ii) the caretakers do not have the mandate to amend/alter any of the SBA conditions.

What is unprecedented in the press release is a long statement by the Managing Director of the IMF, appreciating the implementation of all prior conditions, though without their implementation the SBA would not have been approved, and emphasising the need to accelerate structural reforms which may be taken as a warning as without these politically challenging reform measures, the country may well find itself back in the uncomfortable position of facing default with inability to access any external borrowing source (be it from friendly countries or multilaterals/bilaterals, borrowing from the foreign commercial banking sector or issuing debt equity).

Copyright Business Recorder, 2023

ISLAMABAD: Finance Division is yet to notify strategy for release of funds with regard to PSDP, interest payment, repayments of domestic and foreign loans and supplementary grants for Current Financial Closure.

Finance Division, in an Office Memorandum (OM) on strategy for release of funds for recurrent budget for 2023-24 has noted that in pursuance of the provisions of the Public Finance Management Act, 2019, Rule 3(9) of the Cash Management and Treasury Single Account Rules, 2020 and Financial Management and Powers of Principal Accounting Officers Regulations, 2021, the funds release strategy for recurrent budget for the Current Financial Year (CFY) 2023-24 is being issued for implementation with immediate effect and until further orders:

The funds for recurrent budget of the Divisions / Attached Departments / Sub-ordinate and other offices i.e. Autonomous Bodies, Authorities, Commissions etc shall be released for CFY by Finance Division for Demands for Grants I Appropriations at 20% for Quarter 1, 25% for Quarter 2 & Quarter 3 each, and 30% for Quarter 4.

Ministries, Divisions: Direct payment through SBP linked to prior approval

Finance Division has issued following instructions to all the Ministries/ Divisions/ Organization: (i) Employees Related Expenses (ERE) and pension payments at 25% for each Quarter;(ii) non-ERE expenditure at 15% for Quarter 1, 25% for Quarter 2 & Quarter 3 each and 35% for Quarter 04;(iii) for Rent of Office and Residential Buildings, commuted value of pension, Encashment of LPR and PM Assistance Packages at 45% during 1 half of CFY and 55% in 2nd half of CFY;(iv) Subsidies, Grants and Lending shall be released by Finance Division to PAOs on case to case basis;(v) cases relating to international and domestic contractual and obligatory payments beyond the above prescribed limits shall be considered on case to case basis by Budget Wing, Finance Division and shall require prior approval of the Finance Secretary; and (vi) the PAO or Head of Department or Head of Sub-ordinate Office shall not make any re-appropriation of allocated funds from ERE to any other head of account (Non-ERE) except with the prior concurrence of Finance Division through Expenditure Wing.

In order to keep prudent fiscal discipline and sanctity of the budgetary allocations, the guidelines and instructions given below shall be strictly followed by Finance Division, all Principal Accounting Officers, Head of Departments, Head of Sub-ordinate offices and Autonomous bodies and all Accounting Organizations and Offices.

Subsidies: (i) The PAOs concerned shall prepare quarterly funds requirement plans within allocated budget for CFY and shall share with relevant Wings of Finance Division before start of each quarter; (ii) Finance Division will review the quarterly requirement plan for subsidies and will convey its views and comments to the PAO concerned within two weeks; while firming up its views and comments Finance Division shall consider, inter alia, fiscal space as well as cash balances availability;(iv) release of funds by the PAO for subsidies shall be made in accordance with the funds requirement plans, as modified in light of Finance Division’s comments; and (v) sanction for expenditure will be issued by PAO concerned and copy will be sent to Budget Wing, Finance Division for entry in SAP System.

Grants-in-Aid: (i) the PAO or Head of Attached Department or Head of Sub-ordinate Office shall ensure that the Annual Budget of the Organizations / Autonomous Bodies / Authorities / Commissions / Funds / Boards which are established, managed and controlled by the federal government shall be approved by the competent authority under respective Statutes, Rules and Regulations;(ii) a certificate to the effect of such approval shall be submitted to Budget Wing, Finance Division.

The details of such approved budgets shall also be shared with the Finance Division (Expenditure Wing). Organizations / entities shall provide detailed budget information i.e. on detailed object classification, along with details of their own receipts. PAOs shall ensure that such certificates as well as approved budgets in respect of CFY reach Finance Division by August 31, 2023;(iii) PAOs shall not approach Finance Division for meeting any expenses Public Entities / Organizations / Authorities and Bodies, which are provided grant in aid, by ensuring proper distribution and adequate allocation of funds to such Public Entities Organizations / Authorities and Bodies out of the total funds placed at their disposal during CFY;(iv) sanction of expenditure for Grants by the PAOs shall be made with prior concurrence of the Expenditure Wing of the Finance Division.

The cases of Grants reflected in the Finance Division’s Demand for Grant will be processed by the relevant Wings of Finance Division; (v) the allocation and disbursement of funds to the public and private authorities / institutions / bodies / associations/ foundations and others are required to be regulated and linked to outputs, outcomes and performance of the entities; and (vi) Grants-in-Aid should be non-recurring in nature and funds shall be disbursed only to meet any justified shortfall for a limited period of time.

Lending: (i) budgetary funds on account of Loans and Advances and Investments to Provincial Governments, Public Sector Entities and others shall be provided with the condition that all due re-payments to the federal government on these accounts have been made as per schedules/maturities. If all due re-payment has not been made, at source deductions shall be ensured by Provincial Finance and Corporate Finance Wings.

Foreign Exchange Payments: (i) adequate budgetary allocations on account of Foreign Exchange Component (Rupee Cover) shall be ensured by all relevant PAOs and conveyed to Economic Affairs Division and Finance Division; and (ii) funds for foreign exchange payments shall require prior approval of theExternal Finance Wing of Finance Division. While examining requests for suchfunds, External Finance Wing shall consider availability of Foreign Exchange.

Commitment Control:Finance Division has issued Commitment Control Guidelines on 4 March, 2022. Annual and multi-annual commitments for procurement of goods, services and civilworks by all PAOs and accounting organizations and offices shall be recorded through SAP System.

Austerity Measures: (i) Austerity measures issued by Expenditure Wing. Finance Division on February 27, 2023, shall be fully adhered to until and otherwise specified by competent authority by all Principal Accounting Officers, Heads of Attached Departments, Heads of Sub-Ordinate Offices and Autonomous Bodies and all Accounting Organizations and Offices.

General Guidelines and Instructions: (i) Section 23 of the Public Finance Management Act, 2019 provides that no authority shall incur or commit any expenditure from the “Federal Consolidated Fund” until the

same has been sanctioned by the National Assembly and the expenditure has been provided for the financial year through: (a) schedule of authorized expenditure in terms of Article 83 of the Constitution of Pakistan; (b) supplementary grant or technical supplementary grant as Article 84 of the Constitution duly approved by the federal government; (c) re-appropriation as per section 2 (u) and 11 of the Public Finance Management Act, 2019;(ii) all payments shall be made through pre-audit system by the Accounting Organizations and Offices or through Assignment Account Procedure or any other procedure issued by the Finance Division; (iii) no direct payment through the State Bank of Pakistan (SBP) shall be made by any office, except with the prior approval of the Finance Secretary as per Rules 3(2) and 3(3) of the Cash Management and Treasury Single Account Rules, 2020; (iv) approved Direct Payments shall be booked and recorded by the Accounting Organizations and Offices and Federal Treasury Offices immediately after receipt of intimation from SBP; (v) the special purpose funds or any other fund established, managed or controlled by the Ministries, Divisions, Departments and Organizations of the federal government shall be regulated in accordance with Section 32 of the PFM Act, 2019 read with the Cash Management and Treasury Single Account Rules, 2020;(iv) quarter wise budget allocation and release will be uploaded on the MoF& AGPR Servers by the Finance Division within above stated release limits. No payment shall be made over and above the limits by any accounting organization/office except with the prior approval of the Finance Division.

The strategy for release of funds with regard to PSDP, Interest Payment, Repayments of Domestic and Foreign Loans and Supplementary Grants for CFY shall be issued by Finance Division separately.

Copyright Business Recorder, 2023

ISLAMABAD: The fiscal year 2024 budget advances a primary surplus of around 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from under taxed sectors, including the construction and agriculture sectors, said the International Monetary Fund (IMF).

The Fund on its website uploaded, “Frequently Asked Questions on Pakistan,” which included the key policy recommendations to increase revenue mobilisation.

The fund stated that going forward, the authorities plan to continue strengthening revenue administration efforts, together with support from the World Bank, the Asian Development Bank, and the IMF. Work on creating a Compliance Risk Management framework in fiscal year 2023 will enable improvements in tax compliance in fiscal year 2024.

Budget on June 9: Expand tax base urgently, PM asks economic team

It further stated that the stand-by-arrangement (SBA) aims to stabilize the economy and address the needs of the Pakistani people by providing an anchor for policies to address domestic and external imbalances and a framework for financial support from multilateral and bilateral partners. Policy efforts under the SBA-supported program centre on the careful implementation of the fiscal year 2024 budget; restoring a market-determined exchange rate to absorb external pressures and eliminate FX shortages; and appropriately tight monetary policy aimed at disinflation.

Policy actions also include continued reform efforts to improve energy sector viability, strengthen State Owned Enterprises (SOEs) and governance, and build climate resilience. Steadfast policy implementation is critical for Pakistan to address its large financing needs, support the most vulnerable, especially from high inflation.

The new SBA protects the most vulnerable by further increasing the fiscal year 2024 Benazir Income Support Program (BISP) envelope to maintain the generosity of BISP programs in real terms. The SBA also increases development spending to enhance infrastructure and climate resilience.

Additionally, policy actions to place inflation on a downward path towards the SBP’s target will help protect the purchasing power of the most vulnerable through continued monetary policy tightening and the easing of price pressures caused by the shortage of basic goods following the removal of import restrictions and FX rationing.

The fund further stated that Pakistan’s high vulnerability to natural disasters underscores the importance of climate adaptation policies. The authorities plan to accelerate critical adaptation measures, including strengthening flood safety projects and transforming the agri-food system.

They are also working on an action plan to enhance the investment efficiency of climate-related projects for cabinet approval by year-end. Over the medium term, the National Adaptation Plan, to be developed with support from UNEP, would also help enhance policy efforts towards the resilience of particularly vulnerable and exposed sectors, including agriculture, power, and transport infrastructure.

Copyright Business Recorder, 2023

“…the FBR’s revenue target has been increased to Rs 9,415 billion, requiring a 31% increase over collection of Rs 7,180 billion in the recently concluded financial year… The task seems to be onerous and mammoth, as in the last eight years, the FBR’s revenue has, on average, grown at a pace of around 14% per year.

Although the current growth targets are very close to those achieved in 2021-22 (29%), yet the underlying assumptions about GDP growth, inflation, LSM and import growth are quite adverse as compared to that year”—Achieving enhanced revenue targets, Dr. Hamid Ateeq Sarwar, former Member Tax Policy, Federal Board of Revenue (FBR).

An outstanding officer of FBR, presently working with an international donor agency, in his above quoted brilliant analysis of underperformance of the apex revenue authority, while suggesting different ways and means to achieve what he called “enhanced targets”, has not made an effort to determine the actual potential of tax revenues, which is not less than Rs 16 trillion, at federal level alone vis-à-vis prevalent monstrous tax gap.

The problem with our tax managers is that they always analyze the target assigned on the basis of existing taxpayers, who file returns and statements, but conveniently ignore the overwhelming majority having taxable incomes and/or supply taxable goods, but are either not registered with FBR or commit open defiance even after withholding of taxes at source.

In the Tax Gap Report 2022 available on its website, FBR claims that its in-house researchers (sic!) adopted “the top-down and bottom-up approaches to estimate the tax gap”. The Report says: “The topdown approach relies on the National Accounts Data and Supply-use Tables and is used to estimate the Sales Tax gap. The bottom-up approach relies on the microsimulations and is used to estimate the Income Tax and Customs Duty gap”.

The methodology adopted in the Report to determine tax gap is faulty and flawed. The Report does not take into account the huge informal economy relying on official figures, which are admittedly not trustworthy. A detailed analysis of the same will be made in a separate article.

This one is restricted to highlighting the real tax potential/gap. The Report says that it “measures the compliance gap and does not account for tax expenditure”. The term “compliance gap” itself is questionable. FBR has failed to tap the real tax potential by analysing simple data of unique mobile users.

It is pertinent to mention that according to Pakistan Economic Survey (2022-23), labour force increased from 65.5 million in FY 2017-18 to 71.76 million in FY 2020-21 and the number of employed persons increased from 61.71 million to 67.25 million during the same period. According to information provided by Pakistan Telecommunication Authority (PTA) on its website, total cellular subscribers as on May 31, 2023 were 192 million (81.03% mobile teledensity).

Out of the total mobile subscribers, 124 million were broadband subscribers (54.43% mobile broadband penetration), 3 million fixed telephony subscribers (1.09% fixed teledensity) and 127 million broadband subscribers (53.65% broadband penetration). Not less than 120 million unique mobile users (many having multiple SIMs) were thus paying advance/adjustable income tax of 15% (earlier it was 12.5%) from July 1, 2022.

The number was not less than 110 million as on June 30, 2022 and about 105 million at the close of June 2021. It means that FBR could have found at least 20 million taxable persons from this database alone—all were paying advance/adjustable income tax.

The number of individual tax filers on FBR’s Active Taxpayers Lists (ATL) is even less than 4% of unique mobile users paying advance income tax under section 236 of the Income Tax Ordinance, 2001. These facts/data prove beyond any doubt that presently, the entire taxable population and even those having no income or income below taxable limit are paying advance/adjustable income tax at source as mobile users.

In case all unique mobile users paying advance tax file income tax returns, there would be refunds payable to at least 90 million individuals having no income or income below taxable limit though cost to claim would be much higher than their withheld tax—sadly, FBR does not acknowledge them as “taxpayers” and is not even ready to pay refunds to existing income tax filers.

(To be continued tomorrow)

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023

ISLAMABAD: Finance Division has barred all Ministries/ Divisions from direct payment through State Bank of Pakistan (SBP) sans prior approval of Secretary Finance as per Cash Management and Treasury Single Account Rules, 2020.

These instructions were issued by Rana Obaidullah Anwar, Joint Secretary Budget-III, titled strategy for release of funds for development budget for financial year 2023-24.

According to Finance Division, in pursuance of the provisions of the Public Finance Management Act, 2019, Rule 3(9) of the Cash Management and Treasury Single Account Rules, 2020 and Financial Management and Powers of Principal Accounting Officers Regulations, 2021, the funds release strategy for Development Budget for the Current Financial Year (CFY) 2023-24 is being issued for implementation with immediate effect and until further orders.

Recurrent budget: Finance unveils strategy for release of funds

The funds for Development Budget shall be released by Planning, Development and Special Initiatives (PD&SI) Division out of the PSDP allocation for CFY for approved projects at 15% for Quarter 1, 20% for Quarter 25% for Quarter 3, and 40% for Quarter 4.

Of total PSDP allocation of Rs 950 billion for FY 2023-24, 15% funds released for Q1, FY 2023-24 (Domestic)(Rs 131 billion), against surrendered amount for SDGs during FY 2022-23. Rs 20.26 billion released for approved SDGs schemes for FY 2023-24 Rs 41 billion, available funds for remaining PSDP Schemes during Q1, FY 2023-24, Rs 69.74 billion.

Funds amounting to Rs. 11.5 billion are to be further released in respect of foreign exchange component during Q1, FY 2023-24. While executing development projects PD&SI Division and the PAOs concerned shall ensure implementation of the provisions contained under Chapter-III of the Public Finance Management Act, 2019.

Finance Division has issued the following instructions to all the concerned Ministries/ Divisions and Departments and Organizations: (i) PD&SI Division shall devise quarterly sector-wise/ project-wise/ Division-wise strategy for release of funds for PSDP within the appropriations approved by the National Assembly and included in the Schedule of Authorized Expenditure in terms of Article 83 of the Constitution of Pakistan; (ii) Any proposal for change to the limits prescribed at (i) above shall be considered by the Budget Wing, Finance Division on case to case basis and shall require prior approval of the Finance Secretary; (iii) release of funds for approved projects in a Demand for Grant and Appropriation shall be made by the PAO in each Quarter within above limits.

The PAO shall ensure availability of sufficient funds for Employees Related Expenses for each project; (iv) PAOs/ Heads of Attached Department/ Heads of Sub-ordinate Office or Project Director shall not make any re-appropriation of funds from ERE to Non-ERE heads of account except with the prior concurrence of Ministry of Planning, Development and Special Initiatives; (v) adequate budgetary allocations on account of Foreign Exchange Component (Rupee Cover) shall be ensured by all relevant PAOs and conveyed to Economic Affairs Division and Finance Division; (vi) funds for foreign exchange payments shall require prior approval of the External Finance Wing of Finance Division.

While examining requests for such funds, External Finance Wing shall consider availability of Foreign Exchange; (vii) section 23 of the Public Finance Management Act, 2019 provides that no authority shall incur or commit any expenditure from the “Federal Consolidated Fund” until the same has been sanctioned by the National Assembly and the expenditure has been provided for the financial year through: (a) schedule of authorized expenditure in terms of Article 83 of the Constitution of Pakistan; (b) supplementary grant or technical supplementary grant as per Article 84 of the constitution duly approved by the Federal Government; or (c) re-appropriation as per section 2 (u) and 11 of the Public Finance Management Act, 2019; (viii) all payments shall be made through the pre-audit system by all the Accounting Organizations and Offices or through Assignment Account Procedure or any other procedure issued by the Finance Division.

Separate Assignment Account shall be opened for each project; (ix) no direct payment through State Bank of Pakistan (SBP) shall be made by any office, except with the prior approval of the Finance Secretary as per Rules 3(2) and 3(3) of the Cash Management and Treasury Single Account Rules, 2020; (x) the provisions of Public Finance Management Act 2019, the Financial Management and Powers of Principle Accounting Officers Regulations 2021 and instructions issued by Planning Commission shall be strictly adhered to by all the POAs and the Accounting Offices; (xi) the instructions with regard to supplementary grants shall be issued by the Budget Wing, Finance Division, separately; (xii) there shall be no requirement of ways and means clearance from Budget Wing of Finance Division for the release of development budget; (xiii) Quarter-wise budget allocation and release will be uploaded on the MoF and AGPR Servers by the Finance Division, within the release limits.

No payment shall be made over and above the limit by any accounting organization/ office except with the prior written approval of the Finance Division; and (xiii) Development Wing of Finance Division shall coordinate and oversee the mattes relating to release of funds for development budget and other ancillary matters.

Finance Division has further clarified that since development budget is released to PD&SI Division, therefore, PAO may approach the PD&SI for any issues related to authorization as well as distribution of funds between the approved projects/ schemes.

Copyright Business Recorder, 2023

ISLAMABAD: The Ministry of Industries and Production (MoI&P) Tuesday said it is still clueless about lifting of restrictions on forex payments by the State Bank of Pakistan (SBP) in real terms, saying that with inflows of dollars a breathing space will be available which was not there for nearly 8-10 months.

Testifying before the Senate Standing Committee on Industries and Production, presided over by Senator Khalida Ateeb, Additional Secretary MoI&P, Asad Rafique Chandna said there is no indication from SBP about lifting of restrictions as of today.

“We are hoping that after agreement with the IMF breathing space will be available to the economy as plants are shut down and people are being deprived of their jobs,” Chandna added.

Sufficient inflows of USD mandatory: Relaxation on retiring of LCs not ‘unrestrained’: official

Senator Zeeshan Khanzada inquired from the Ministry of Industries and Production about future prospects of lifting of SBP restrictions on foreign exchange as the entire industry is waiting for final outcome of IMF-GoP pact. He further maintained that there are expectations that by July 14-15, 2023, it will be clear if agreement with IMF is finalized.

Additional Secretary MoI&P said that when dollars will come situation will improve as recent Letters of Credit (LCs) were not being opened due to which goods were not cleared from the ports and importers were facing demurrages. In addition, more duties have been imposed in the budget 2023-24.

“Things are now out of control but we hope that with new IMF program a breathing space will be available to the economy,” Chandna maintained.

The Committee also discussed issues being faced by Pakistan Steel Mills (PSM) including retrenchment, theft etc. However, the Committee decided to hold a meeting in Karachi to discuss PSM in totality in the presence of Management and Union as the officials representing PSM could not satisfy the Committee members.

Additional Secretary MoI&P briefed the Committee that the government had approved Rs 19.656 billion for retrenchment of 5282 employees (workers and officers) in PSM.

A tranche of Rs 14.218 billion was released out of which Rs 12.051 billion has been disbursed to 4734retrenched employees Furthermore, Rs 1.55 billion was disbursed to employees who opted for VSS. The Committee was further informed that 1591 employees did not process their case to receive their dues.

For seeking permission to retrench remaining 50.1 per cent staff as per law, PSM has filed a petition before Sindh Labour Court. The Supreme Court of Pakistan on September 9, 2022 passed direction to the Labour Court to decide the case expeditiously. Case is pending at argument stage in Labour Court. Next hearing of the case will be July 25, 2023.

Senator Khalida Ateeb questioned as to whether the new appointments after the retrenchment have been made or not to which officials failed to respond. She directed the Pakistan Steel Mills Officials to provide complete details of employees before the retrenchment in the next meeting.

Furthermore, Senator Khalida Ateeb highlighted the alleged copper theft worth around 10 billion rupees from Pakistan Steel Mills. Officials stated that the FIA is investigating the matter and the final report will be submitted before the committee once the investigation completed.

Senior General Manager, Utility Stores Corporation (USC), Anayat Daula informed the Committee that USC is facing dearth of sugar at its utility stores as prices quoted in three or four previous tenders were on the higher side. USC’s monthly sugar requirement is 30,000 MT.

Copyright Business Recorder, 2023

ISLAMABAD: Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “CCC” from “CCC-” while saying the upgrade reflects Pakistan’s improved external liquidity and funding conditions following its Staff-Level Agreement (SLA) with the IMF on a nine-month Stand-by Arrangement (SBA) in June.

Fitch typically does not assign Outlooks to sovereigns with a rating of “CCC+” or below, it added.

“We expect the SLA to be approved by the IMF board in July, catalysing other funding and anchoring policies around parliamentary elections due by October. Nevertheless, programme implementation and external funding risks remain due to a volatile political climate and large external financing requirement,” the rating agency noted.

Pakistan, IMF reach staff-level agreement on new $3bn stand-by arrangement

It further stated Pakistan has recently taken measures to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, including import financing restrictions. These issues held up the last three reviews of Pakistan’s previous IMF programme, before its expiry in June.

Most recently, the government amended its proposed budget for the fiscal year ending June 2024 to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February. The authorities appeared to abandon exchange-rate management in January 2023, although guidelines on prioritising imports were only removed in June.

Pakistan has an extensive record of going off-track on its commitments to the IMF. We understand the government has already made all the required policy actions under the SBA. Nevertheless, there is still scope for delays and challenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the programme.

The IMF board approval of the SBA will unlock an immediate disbursement of $1.2 billion, with the remaining $1.8 billion scheduled after reviews in November and February 2024. Saudi Arabia and the United Arab Emirates have committed another $3 billion in deposits, and the authorities expect $3-5 billion in other new multilateral funding after the IMF agreement.

The SBA should also facilitate the disbursement of some of the $10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans ($2 billion in the budget).

The authorities expect $25 billion in gross new external financing in fiscal year 2024, against $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors.

The government funding target includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could prove challenging, although some of the loans not rolled over in fiscal year 2023 could now return. The $9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in fiscal year 2023.

Pakistan’s current account deficit (CAD) has narrowed sharply, driven by earlier restrictions on imports and FX availability, tighter fiscal and economic policies, measures to limit energy consumption and lower commodity prices.

Pakistan posted current account surpluses in March-May 2023, and we forecast a CAD of about USD4 billion (1 per cent of GDP) in FY24, after USD3 billion in FY23 and over USD17 billion in FY22. Our forecast CAD is lower than the USD6 billion in the budget, on the assumption that not all of the planned new funding will materialise, constraining imports.

The CAD could widen more than we expect, given continued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs, and reconstruction needs after last year’s floods. Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves.

Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favourable parallel market exchange rates.

The rating agency stated that liquid net FX reserves of the State Bank of Pakistan have hovered around USD4 billion since February 2023, or less than a month of imports, down from a peak of more than USD20 billion at end-August 2021.

The collapse in reserves reflected large CADs, external debt servicing and earlier FX intervention by the central bank. We expect a modest recovery for the rest of FY24 on new external financing flows, although these flows will also lead to a renewed widening of the CAD.

Fitch Ratings further stated that protests by supporters of former prime minister Imran Khan and his PTI party sharply intensified in May as Khan was briefly arrested on corruption charges, culminating in attacks on army facilities. In the ensuing crackdown, a large number of PTI members were arrested, with several high-ranking PTI politicians quitting politics. Nevertheless, the enduring popularity of Khan and PTI creates policy uncertainty around elections.

“We expect the consolidated general government (GG) fiscal deficit to widen to 7.6% of GDP in FY24, from an estimated 7.0% in FY23, driven by higher interest costs on domestic debt, which accounts for the difference between our forecast and a GG deficit of 7.1% of GDP in the revised FY24 budget statement (with a lower figure of 6.5% in the medium-term fiscal framework). Fiscal consolidation will drive a slight improvement in our forecast GG primary deficit to 0.1% of GDP in FY24, from 0.5% of GDP in FY23”, it added.

The GG debt/GDP of 74 percent at FYE23 is in line with the median for “B”, “C” and “D” rating category sovereigns and debt dynamics are broadly stable owing to high nominal growth over the medium-term. Nevertheless, debt/revenue (over 600 percent) and interest/revenue (nearly 60 per cent) are far worse than that of peers.

The finance minister recently said that Pakistan would seek maturity extensions on loans by non-Paris club bilateral creditors while reaffirming the government’s commitment to timely debt service. We understand that such maturity extensions would mostly relate to loans and deposits by China, Saudi Arabia and the UAE, which are already regularly rolled over.

In 2022, the prime minister and former finance minister raised the possibility of seeking debt relief from non-commercial creditors, including the Paris Club, but the authorities now appear to have moved away from this.

Should Paris Club debt treatment be sought, Paris Club creditors are likely to require comparable treatment for private external creditors in any restructuring. Pakistan has an ESG Relevance Score (RS) of “5” for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption.

These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a WBGI ranking at the lower 22nd percentile. Increasing likelihood of default, for example, renewed deterioration in external liquidity conditions that could result from delays in IMF disbursements, or indications that the authorities are considering debt restructuring.

The rating agency stated that factors that could, individually or collectively, lead to positive rating action/upgrade include; strong performance against IMF programme conditions, ensuring continued availability of funding, rebuilding of foreign-currency reserves and further easing of external financing risks.

Copyright Business Recorder, 2023

EDITORIAL: The much hyped attempt by the International Monetary Fund (IMF) team to seek a consensus on the nine-month (12 July to 12 April 2024) 3 billion dollar Stand-By Arrangement (SBA) scheduled for Board approval on the 12 of July, tomorrow, has elicited comments from political pundits and economists alike.

The Fund’s objective is undoubtedly to ensure that the set of conditions agreed under the SBA will have a buy-in from all those likely to be in government during the duration of the programme – caretakers who have no mandate to impose additional taxes in the event that there is a shortfall in the budgeted revenue measures or fail to adhere to the condition of not seeking any supplementary grant during the year which will necessitate staying within the budgeted amount for each item; or the next possible elected government Pakistan Muslim League-Nawaz (PML-N), Pakistan People’s Party (PPP) or Pakistan Tehreek-e-Insaf (PTI)) to pledge to follow all SBA conditions.

The major flaw in this argument is that all programme conditions, prior as well as those that have been agreed to be implemented once the SBA is approved which will then be uploaded by the Fund after Board approval, are premised on not only the Fund’s in-depth knowledge of the state of Pakistan’s economy (determined after sharing of data) but also of key economic linkages that may be unique to Pakistan.

While data fudging especially those that relate to the general public (inflation and unemployment) are not unusual yet some economic linkages assumed by the Fund for Pakistan are simply not pertinent.

An obvious example is IMF’s insistence that adjusting the policy rate would impact on domestic inflation – an argument based on conventional economic theory that applies to many countries but not to Pakistan.

Raising the policy rate to the existing 22 percent is actually raising inflation indirectly, given that the government is the major borrower, with private- sector credit having contracted in the outgoing year by over 80 percent due to the high policy rate, which in turn raised the: (i) debt servicing component of the budget and therefore the budget deficit, an inflationary policy; and (ii) the government re-injects this borrowing into the economy for current expenditure that again is highly inflationary.

The Fund’s approach is reminiscent of repeated calls for a ‘charter of economy’, whereby a consensus on economic policies as opposed to objectives across the extremely acrimonious political divide has been repeatedly sought mainly by PML-N politicians. And, while the overall stated objective of all political parties is to achieve strong economic fundamentals, yet given the proclivity of our administrations, past and present, civilian and military, to support flawed economic policies and to sustain the elite capture that the country remains subjected to, that have resulted in steadily worsening macroeconomic fundamentals that have reached a crisis point today.

In his maiden speech as leader of the opposition, Shehbaz Sharif, had proposed a ‘charter of economy’, ignored by the PTI government, while Ishaq Dar, as the Finance Minister during 2013-17, repeatedly called for such a charter or accord, yet such calls have raised the hackles of many an independent economist.

Ishaq Dar as the finance minister followed the disastrous policy of keeping the rupee overvalued which led to the highest-ever current account deficit in 2018, and loss of remittance inflows of around 4 billion dollars in 2022-23; the three previous administrations offered amnesty schemes that have acted as disincentives to honest taxpayers, while delays in raising tariffs to achieve full cost recovery by massively raising subsidies have raised budget deficits.

The PPP has been prone to use state-owned entities as recruitment bureaus for its supporters which led to many an entity suffering massive losses that now require subventions from the budget on a regular basis.

There are numerous recent examples whereby all three national parties when in power have taken measures that indicate political considerations are paramount instead of economic imperatives.

At the same time, while many of the structural reforms supported under the Fund programmes must be implemented, if Pakistan is to improve sectoral performance, particularly in the energy and tax sectors, yet not all their prescriptions can be supported.

The way out of this logjam is to appoint a finance minister able to think out of the box, which implies policy decisions based on empirical studies rather than on an IMF prescription – a job requirement that would require an economist, preferably someone from outside the pool of previous finance ministers/advisers as well as retired or serving professionals in multilaterals who are hamstrung by their stints in these organisations and not fully familiar with the peculiarities of the country’s economy and the obtaining ground realities.

Copyright Business Recorder, 2023

EDITORIAL: The gap between the boom-and-bust cycle is contracting in Pakistan, indicated by the staff-level agreement on a 3 billion dollar Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) that, economists agree, will be followed by a longer term Extended Fund Facility (EFF) due to sustained fiscal imbalance.

While the boom-bust cycle is defined in terms of a rise (boom) in output accompanied by rising investor interest and job opportunities followed by a bust (decline) occurring due not only to worsening economic fundamentals but also market perceptions of investors and consumers of possible saturation.

In Pakistan, irrespective of whether the country is on a Fund programme or not, the economically viable objective of achieving full- cost recovery has never been achieved by implementing structural reforms that would compel an administration to improve the performance of key sectors, particularly power and tax sectors, but instead through passing on the buck to the consumers through raising base tariffs/charges.

The power sector has remained a source of serious concern even after 23 Fund programmes with a circular debt of over 2.5 trillion rupees today; and sadly the suspended EFF, with 2.6 billion dollars remaining undisbursed, and the SBA, envisages raising utility rates - through the annual rebasing exercise, the quarterly tariff adjustments as well as passing on the imported fuel cost rise on to the consumers.

In addition, the power sector is further hampered by economically unviable decisions taken by previous administrations in terms of approval of projects reliant on expensive fuel and agreeing to contracts that overwhelmingly favour the independent power producers.

The tax structure continues to rely heavily on indirect taxes – with over 70 percent of all direct tax collections sourced to withholding taxes on services/goods or in the sales tax mode that allows it to be passed on like an indirect tax.

And while the Fund insists on raising total revenue, the budget for the current year relies on raising taxes on existing tax payers rather than on widening the tax net to include traders for entirely political considerations. And relying on petroleum levy, another indirect tax, to generate revenue to the tune of 869 billion rupees in the current year, in spite of a massive decline in consumption due to high inflation, reflects an optimism that maybe misplaced but which is concerningly rooted in the fact that petroleum levy is not part of the divisible pool of taxes and therefore not to be shared with provinces.

The governments, incumbent as well as all previous administrations, have never resisted their compulsion to raise current expenditures, in an effort to retain political support of key stakeholders. The budget for fiscal year 2023-24 envisages a 26.5 percent rise in current expenditure from the revised estimates of last year and a 53 percent rise from what was budgeted last year.

The rise in this non-development expenditure is a major contributor to inflation today. The rising disconnect between revenue and expenditure is met through borrowing from: (i) external sources all of which were locked to reaching a staff-level agreement with the Fund since October 2022 that include pledged support from bilaterals/multilaterals, issuing debt equity (Eurobonds/sukuk) and borrowing from commercial banks abroad at reasonable rates; and (ii) domestic commercial banks that crowds out private sector borrowing and therefore constrains growth - while the high discount rate of 22 percent has raised the budgeted debt servicing component of current expenditure - and accessing the savings of households deposited in National Savings Centres.

So far the SBA staff-level agreement has led to a buoyant stock market and the arrest of rupee slide vis-a-vis the dollar (though gains have become marginal within a week of the announcement) as fears of a looming default have receded.

However, it is relevant to note that neither of these indicators foretells a rise in output (boom) as the private sector continues to grapple with a rise in its input costs or a decline in rising poverty levels as the poor and the lower income earners remain unaffected as they remain locked in a struggle to barely eke out a living.

It is, therefore, imperative that we realise and accept the fact that while we may have ‘dodged the bullet’ by getting the staff level agreement on a standby arrangement with the IMF but we are still mired in a debt trap. In other words, we have successfully averted default and postponed the hour of reckoning by gaining some time.

To avoid default it is essential that the government brings about a massive reduction in its expenditure and undertakes reforms in the tax structure, takes bold decisions on state enterprises that bleed the budget and close down divisions/ministries on subjects that are the domain of the provinces.

However, with the Caretakers scheduled to take over by the second week of August, with no mandate to make amendments in the budget or undertake structural reforms, one would hope that they do not engage in any over-spending relative to the budgeted allocation that may queer the pitch for the incoming elected government and render the IMF SBA in disarray.

Copyright Business Recorder, 2023

ISLAMABAD: The government has taken a significant documentation measure by allowing credit/debt card payments at a reduced sales tax rate of five per cent in restaurants/eateries.

Under the Finance Act, 2023, a lower rate of five per cent sales tax would be charged on dining out and credit or debit card payments. Among other documentation measures, the said decision would also be instrumental in discouraging cash payments and cash transactions at restaurants. Now, the restaurants would not be able to retain the digitally paid sales tax by the consumers.

Official sources told Business Recorder that the decision of the FBR has been implemented from July 1, 2023 which would encourage digital payments and encourage consumers to conduct documented transactions. The restaurants would be bound to collect the reduced rate of sales tax of five per cent in cases where the customers prefer to make payments through credit or debit cards.

On digital payments: services tax on restaurants in ICT reduced in federal budget

The move would also encourage voluntary compliance of the general masses to use the debt and credit cards payments at a lower rate of five per cent. However, the FBR would also ensure to enforce the said documented measure through its field formations.

The reduced rate of five per cent tax included services provided by restaurants including cafes, food (including ice cream) parlours, coffee houses, coffee shops, deras, food huts, eateries, resorts, and similar cooked, prepared or ready-to-eat food service outlets, etc.

The tax rate has been set at five per cent where payment against services is received through debit or credit cards, mobile wallets, or QR scanning subject to the condition that no input tax adjustment or refund shall be admissible.

On the other hand, 15 per cent sales tax would be applicable where payment is received in cash at the restaurants.

Copyright Business Recorder, 2023

Calls for delineating a ‘charter of economy’ have become a trend in Pakistan. The leaderships of almost all political parties and business chambers have been repeatedly underscoring the need for a ‘charter of economy’.

In early 2019, the then leader of Opposition in National Assembly, Shehbaz Sharif of Pakistan Muslim League-Nawaz (PML-N) while expressing his deep concern over the country’s state of economy, offered his party’s support to the government.

He stated: “The government should keep aside its ego and head towards a charter of the economy,” adding that “the on-going situation should create a sense of responsibility towards the economy and we should realise that it is time to make it our top priority. The government has not chalked out any economic policy or strategy until now. A strong and stable economy is the only way to ensure national security.” In mid of June 2023, Shehbaz Sharif, now as the Prime Minister of Pakistan, again gave a call for a ‘charter of economy’.

He stated: “The country’s economy direly needs reforms which, in turn, could be undertaken in a stable political environment as economic development was intrinsically linked to political stability.

It is here that the ‘charter of economy’ appears to be the only way forward for our political parties to achieve prosperity for our people.” In his budget 2023-24 speech, the prime minister said: “It represents the beginning of the process to fix the economy’s long-term ailments.”

This week, the Lahore Chamber of Commerce & Industry (LCCI) announced a proactive step in addressing Pakistan’s economic challenges by sending an invitation to the heads of all political parties requesting their presence at the LCCI to participate in a comprehensive discussion on the crucial topic of ‘charter of economy, adding that in order to address these concerns, the LCCI has formulated a draft of the charter, which serves as a guiding framework for economic governance.

The announcement stated: “The aim of this charter is to establish a minimum agenda that all political parties can include in their respective manifestos. By doing so, it ensures a level of consistency and continuity in economic policies, regardless of which party forms the government.

‘Charter of economy’ is designed to create a working consensus among political parties on key economic issues. It provides a set of guidelines for policy formulation and implementation, addressing areas such as fiscal management, investment promotion, job creation, trade and commerce, and social welfare.”

Earlier, ‘charter of democracy’ (COD) was the trend. Incidentally, the nation is celebrating this year the 17th anniversary of COD, cited by sponsors as a momentous occasion that marks a significant milestone in Pakistan’s democratic history as Benazir Bhutto and Nawaz Sharif, came together to sign this historic document in 2006, solidifying their commitment to a shared vision for the country’s future.

Pakistan’s major political parties, PML-N and PPP, marked the 17th anniversary of COD. This framework is aimed at enhancing governance, democracy, human rights, and judicial independence. It advocates constitutional reforms, transparent elections, devolution of power, and national security.

While ‘charter of economy’ is yet to be born, the achievements of COD (charter of economy) in favour of state governance and sanctity of democratic structure of the country can well be judged from the current happenings at our state institutions, who are the custodians of the nation’s democracy.

How far has COD worked in people’s interests? An answer to this question can be found in the report of Pakistan Business Council, which has highlights:

“Pakistan is, by most accounts, the “sick man” of South Asia. Per capita earning of Pakistanis has slipped to the lowest in the sub-continent. Despite an agriculture base, 40% of our children are stunted. The pandemic exposed the critical shortfalls in our healthcare. 44% of children do not attend school regularly.

The majority that do receive mediocre education. Large parts of major cities are slums, lacking basic utilities, including safe drinking water. An estimated 5 million people are unemployed and we struggle to find jobs for the 2 million that reach the age of employment each year. The country has deindustrialized prematurely.

We have lost our share of world exports. The economy is consumption based, reliant on imports even for basic goods. Pakistan suffers from one of the highest electricity tariffs in the world. It also has one of the lowest productivity rates.

Our agriculture is in a poor state. Not only are food shortages leading to an unbearable burden of inflation, unchecked, they threaten food security. Recurring external account crises have compromised the country’s economic autonomy.

Successive governments have failed to broaden the tax base. Existing tax payers carry a disproportionate burden. Billions in tax refunds, rebates and duty drawbacks are owed to exporters and other businesses. For paucity of funds, the state fails to meet its obligations to improve the quality of life of its citizens.”

In articulating the proposed ‘charter of economy’’, the Pakistan Business Council focuses on five major thrusts:

Lift the standard of living of the vast majority of population in the low to middle-income strata;

Fix the state of our agriculture to provide food security and protect people from inflation;

Reverse the premature deindustrialization through a “Make-in-Pakistan” approach to promote jobs, value-added exports and import substitution. Reskill for the future;

Formalize the economy, deregulate, transform the civil service and reform the NAB law.

In the present atmosphere of acrimony bordering at times on animosity and mistrust between rival political parties, where vote politics overrides all other considerations, including national interest, democratic principles and people’s interest, the concept of a ‘charter of economy’ or a ‘charter of democracy’ is merely an illusion and an exercise in futility.

If anything which can work in the present scenario is a ‘character of economy’ whose ownership is in the hands of the business fraternity as the sole stakeholders, whereas, the ‘charter of democracy’ part, which is related to the peoples’ interest, is in the hands of the philanthropists of the country who are performing exceptionally well in education, healthcare and poverty alleviation. The peoples’ hopes rest on them.

Copyright Business Recorder, 2023

A new Section 99D has been introduced in the Income Tax Ordinance 2001 (“ITO”) through the Finance Act 2023 (“FA 23”) that seeks to tax windfall income, profit and gains of companies due to any economic factor or factors that resulted in such windfall income, profit and gains.

Moreover, sub-section (2) of Section 99D empowers the Federal Government (“FG”) to issue a notification to determine windfall income, profit or gains, and economic factor(s) including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy in income, profit or gains on account of foreign currency fluctuation.

In the Finance Bill 2023, this tax was proposed to be levied on every person. However, in the FA 23 it has been restricted to only companies. Moreover, even though the Federal Board of Revenue (FBR) has been empowered to notify the sectors on which this section will apply to, corresponding amendments have been made in the Fourth Schedule (Insurance), Fifth Schedule (Exploration and production of petroleum, and exploration and extraction of mineral deposits), and the Seventh Schedule (Banking Companies).

However, it is surprising that even though Section 99D itself is restricted to only companies, there has been a corresponding amendment in the Fifth Schedule (Exploration and production of petroleum, and exploration and extraction of mineral deposits), through which provisions of Section 99D have been made applicable to the taxpayers under the Fifth Schedule. Interestingly, the Fifth Schedule applies to any person and not just to companies.

Therein lies a potential inherent contradiction in the application of Section 99D itself. This corresponding amendment should have read “companies” instead of “taxpayers” in order to remain within the scheme of Section 99D itself.

Moreover, the FG has been empowered to prescribe vide a notification in the Official Gazette, inter-alia, sectors on which Section 99D will be applicable, determine windfall income, and economic factors, provide for scope, payment and time of tax payable under Section 99D.

The said notification is supposed to be placed before the National Assembly within 90 days of its issuance or by 30th June of the Financial Year, whichever is earlier. However, a better and more appropriate way would have been to get approval from the National Assembly and then issue the said notification. As this mitigates any uncertainty and ambiguity that can arise should the National Assembly refuse to approve the notification tabled by the FG before it.

With that being said, it may be that similar to the major tax measures introduced last year (Super tax, deemed income and the Capital Value tax), this windfall tax is likely to be challenged before the concerned High Courts by the aggrieved taxpayers.

First, let’s discuss what windfall taxes are. Windfall is defined in the Black’s Law Dictionary (10th Edition) (“Black’s Law dictionary”) as “an unanticipated benefit, usually. In the form of a profit and not caused by the recipient”.

Moreover, wind-fall profits tax, is defined in the Black’s Law dictionary as “A tax imposed on a business or industry as a result of a sudden increase in profits”. Although there is ample history of windfall taxes being levied in various countries, however, in this article some recent examples of windfall taxes levied in other jurisdictions are discussed.

The United Kingdom introduced a windfall tax on the profits of oil and gas companies on 14th July 2022, through the Energy (Oil and Gas) Profits Levy Act 2022 (“EPLA”), earned from 26th May 2022 till 31st March 2028. The windfall tax rate is set at 35% for now. It is pertinent to note that oil and gas companies that do business in the UK continental shelf are already taxed at 40%.

The said windfall tax is in addition to this 40%, making the overall tax rate a whopping 75%. This windfall tax on profits of oil and gas companies has been levied as the European and the UK wholesale gas prices were at a record high during 2022, and are expected to remain really high in the coming years. This is driven by global circumstances, including growing demand for energy post Covid-19 and the Russia-Ukraine war.

Due to these circumstances, the HMRC has stated in its policy paper on the said windfall tax published on 21 November 2022 that “Oil and gas producers are making extraordinary profits and this is expected to continue.

In response, the government is raising the rate of the levy from 25% to 35%, bringing the headline tax rate for the sector to 75%, and extending the duration of the levy. This ensures oil and gas companies that will benefit from the prolonged period of increased prices continue to pay their fair share of tax.”

In addition, the UK has also proposed a temporary levy to tax excess profits of electricity generators in the UK. The final draft of this levy has been published along with the Spring Finance Bill 2023. This windfall tax is proposed to be levied at 45% on exceptional receipts of the electricity generators. Exceptional receipts are proposed to be defined as those receipts in excess of the benchmark price of £75 Megawatt per hour, adjusted in line with the Consumer Price Index.

Moreover, the excess profits tax is limited to companies with electricity output of more than 50 gigawatt hours, and where the exceptional receipts exceed £10 million per year. This excess profits tax is proposed to be levied on electricity generators as because electricity prices have risen, many UK generators of electricity have earned significantly increased revenues for their power, as for structural reasons, the price of electricity is tied to the price of natural gas. The electricity generators that have realised revenues well in excess of normal commercial returns the Electricity Generator Levy will apply to.

Moreover, in India, a windfall tax has been levied through imposing customs duty/cess on the energy sector; petroleum crude (domestic production), petrol (exports), diesel (exports), and aviation turbine Fuel (exports).

The duty is a fixed tax/duty imposed on the aforesaid. In response to a question raised by Shri Pasunoori Dayakar and Dr. G. Ranith Reddy, in the Lok Sabha on 8th August 2022, Shrimati Nirmala Sitharaman on August 8, 2022, Minister of Finance (“FM”), India, stated that “domestic producers of petroleum crude like ONGC sell their crude at international parity price.

As international crude prices rose sharply, these crude producers were making super normal profits. The prices of diesel, petrol and ATF rose even more sharply, which led to extraordinary cracking margins (difference between the product price and the crude price) on exports of these products.

The cess/duties were imposed in this background”. This statement underlines the economic rationale behind imposing the said windfall tax/duty on these commodities.

If we compare the design of the windfall tax in the UK to that of Pakistan, it is clear that the windfall tax in Pakistan is intended to be broader than the windfall tax in the UK, as one of the economic factors included in Pakistan impost includes currency fluctuation. However, windfall income, profit and gains have not been defined in the Income Tax Ordinance (ITO), the FG has been empowered to define it through a notification.

The UK windfall tax is clearly applicable on the income of the corporations which are within the purview of their ringfence corporate tax regime (a special regime for taxing the energy companies in the UK tax law).

Moreover, as stated earlier, the Pakistani windfall tax applies to those companies which have earned a windfall gain, income, and profit due to currency fluctuation. Currently, Banks will be affected by this tax as they may have reported windfall profits on account of currency fluctuation. However, the currency exchange companies have been left out for now, even though they may have made windfall profits on account of currency fluctuation as well.

(To be continued on Monday)

Copyright Business Recorder, 2023

LAHORE: The Lahore Chamber of Commerce & Industry (LCCI) held a significant seminar titled “Post Budget Session - Federal Budget 2023-24: Implications and Way Forward.”

The event, chaired by LCCI President Kashif Anwar, aimed to shed light on the various aspects of the recently passed federal budget and its potential implications. Distinguished speakers, including President of the Institute of Chartered Accountants of Pakistan (CFA), Muhammad Ali Latif, and renowned Chartered Accountants Rafaqat Hussain and Faisal Iqbal Khawaja, shared their insights and perspectives on the budget’s amendments, tax implications, and relief measures.

President Kashif Anwar commenced the seminar by highlighting the numerous new amendments introduced in the federal budget. He expressed concerns about the imposition of various new taxes, and he lamented that several relief initially announced during the budget speech were later withdrawn. President Anwar emphasized that the primary objective of the seminar was to enlighten attendees about the different aspects of the Federal Budget 2023-24.

Chartered Account-ant Rafaqat Hussain delivered a detailed presentation on the budget, focusing on the tax structure. Hussain revealed that income tax accounted for a significant portion, standing at 45% of all taxes. Additionally, he highlighted that customs duty accounted for 13%, federal excise duty constituted 6%, and sales tax made up 36% of the total tax revenue.

Hussain also mentioned that unbranded dairy products would be exempt from taxes. Notably, he mentioned that following an agreement with the International Monetary Fund (IMF), all amendments relating to the Information Technology (IT) sector had been reversed.

Copyright Business Recorder, 2023

ISLAMABAD: The Ministry of Finance on Thursday unveiled the strategy for the release of funds for the recurrent budget for the financial year 2023-24.

According to the Ministry of Finance’s notification, the funds for the recurrent budget of the Divisions/Attached Departments/Sub-ordinate and other offices i.e. Autonomous Bodies, Authorities, Commissions etc shall be released for the current fiscal year by the Finance Division for demands for grants/appropriations at 20 percent for quarter 1, 25 percent for quarter 2 and Quarter 3 each, and 30 percent for quarter 4.

The notification stated that the Employees Related Expenses (ERE) and pension payments at 25 percent for each quarter. Non-ERE Expenditure at 15 percent for quarter 1, 25 percent for quarter 2 and quarter 3 each, and 35 percent for quarter 4.

For Rent of Office and Residential Buildings, commuted value of pension, Encashment of LPR and PM Assistance Packages at 45 percent during 1sthalf of 2023-24 and 55 percent in 2nd half of 2023-24. Subsidies, grants and lending shall be released by the Finance Division to the PAOs on a case-to-case basis. Cases relating to international and domestic contractual and obligatory payments beyond the above-prescribed limits shall be considered on a case-to-case basis by Budget Wing, Finance Division and shall require prior approval of the finance secretary.

The PAO or Head of Department or Head of Sub-ordinate Office shall not make any re-appropriation of allocated funds from ERE to any other head of account (non-ERE) except with the prior concurrence of the Finance Division through the Expenditure Wing.

The PAOs have been provided additional funds to meet the funding requirements of the Adhoc Relief Allowance 2023 announced in the budget for 2023-24, under a separate Cost Centre in each Demand for Grants. The PAOs are, advised to re-appropriate these funds, in consultation with Expenditure Wing, Finance Division, only for the purpose of Adhoc Relief Allowance 2023, to Cost Centres of divisions/attached departments/subordinate offices within respective demands for grants no later than 31stAugust 2023.

Subsidies: The PAOs concerned shall prepare quarterly funds requirement plans within the allocated budget for 2023-24 and shall share with relevant wings of the Finance Division before the start of each quarter.

The Finance Division will review the quarterly requirement plan for subsidies and will convey its views and comments to the PAO concerned within two weeks. While firming up its views and comments Finance Division shall consider, inter-alia, fiscal space as well as cash balances availability. Release of funds by the PAO for subsidies shall be made in accordance with the funds’ requirement plans, as modified in light of the Finance Division’s comments. The sanction for expenditure will be issued by PAO concerned and a copy will be sent to Budget Wing, Finance Division for entry into the SAP System.

Grants-in-Aid: The PAO or head of the attached department or head of the subordinate office shall ensure that the annual budget of the organisations/autonomous bodies/authorities/commissions/funds/boards which are established, managed and controlled by the federal government shall be approved by the competent authority under respective statutes, rules and regulations.

A certificate to the effect of such approval shall be submitted to Budget Wing, Finance Division. The details of such approved budgets shall also be shared with the Finance Division (Expenditure wing). Organizations/entities shall provide detailed budget information i.e. on detailed object classification, along with details of their own receipts.

PAOs shall ensure that such certificates as well as approved budgets in respect of CFY reach Finance Division by 31th August 2023 PAOs shall not approach Finance Division for meeting any expenses of public entities/organizations/authorities and bodies, which are provided grant in aid, by ensuring proper distribution and adequate allocation of funds to such public entities/organizations/authorities and bodies out of the total funds placed at their disposal during CFY.

Sanction of expenditure for grants by the PAOs shall be made with the prior concurrence of the Expenditure Wing of the Finance Division. The cases of grants reflected in the Finance Division's Demand for Grant will be processed by the relevant wings of the Finance Division.

The allocation and disbursement of funds to the public and private authorities/ institutions/bodies/associations/foundations and others are required to be regulated and linked to outputs' outcomes and performance of the entities' grants-in-aid should be non-recurring in nature and funds shall be disbursed only to meet any justified shortfall for a limited period of time.

Lending: Budgetary funds on account of loans and advances and investments to provincial governments, public sector entities and others shall be provided with the condition that all due re-payments to the federal government on these accounts have been made as per schedules/maturities. lf all due re-payment have not been made at source deductions shall be ensured by provincial finance and corporate finance wings.

Foreign Exchange Payments: Adequate budgetary allocations on account of Foreign Exchange Component (Rupee Cover) shall be ensured by all relevant PAOs and conveyed to the Economic Affairs Division and Finance Division. Funds for foreign exchange payments shall require prior approval of the External Finance Wing of the Finance Division. While examining requests for such funds, the External Finance Wing shall consider the availability of foreign exchange.

Commitment Control: The Finance Division has issued Commitment Control Guidelines on 4th March2022. Annual and multi-annual commitments for procurement of goods, services and civil works by all PAOs and accounting organizations and offices shall be recorded through SAP System.

Austerity Measures: Austerity measures issued by Expenditure Wing, Finance Division vide letter No1/1/2016-Exp-lv dated 27 -02-2023, shall be fully adhered to until and otherwise specified by the competent authority by all principal accounting officers, heads of attached departments, heads of subordinate offices and autonomous bodies and all accounting organizations and offices.

General Guidelines and lnstructions: Section 23 of the Public Finance Management Act, 2019 provides that no authority shall incur or commit any expenditure from the "Federal Consolidated Fund" until the same has been sanctioned by the National Assembly and the expenditure has been provided for the financial year through: a) Schedule of authorized expenditure in terms of Article 83 of the Constitution of Pakistan, b) Supplementary grant or technical supplementary grant as Article 84 of the Constitution duly approved by the Federal Government; or c) Re-appropriation as per section 2 (u) and 11 of the Public Finance Management Act, 2019.

All payments shall be made through the pre-audit system by the Accounting Organizations and Offices or through the Assignment Account procedure or any other procedure issued by the Finance Division. No direct payment through the State Bank of Pakistan (SBP) shall be made by any office except with the prior approval of the Finance Secretary as per Rules 3(2) and 3(3) of the Cash Management and Treasury Single Account Rules, 2020.

Approved Direct Payments shall be booked and recorded by the Accounting organizations and offices and Federal treasury offices immediately after receipt of intimation from the SBP.

The special purpose funds or any other fund established, managed or controlled by the ministries, divisions, departments and organizations of the federal government shall be regulated in accordance with section 32 of the PFM Act, 2019 read with the Cash Management and Treasury Single Account Rules, 2020.

Quarter-wise budget allocation and release will be uploaded on the MoF and AGPR Servers by the Finance Division within above stated release limits. No payment shall be made over and above the limits by any accounting organization/office except with the prior approval of the Finance Division.

The strategy for the release of funds with regard to the PSDP, interest payment, repayments of domestic and foreign loans and supplementary grants for CFY shall be issued by Finance Division separately.

Copyright Business Recorder, 2023

ISLAMABAD: The Ministry of Finance on Thursday unveiled the strategy for the release of funds for the development projects for the financial year 2023-24.

According to the Ministry of Finance’s notification, the Planning, Development and Special Initiatives (PD&SI) Division will release funds for the development budget out of the Public Sector Development Programme (PSDP) allocation for the current fiscal year 2023-24 for approved projects at 15 percent for quarter 1, 20 percent for quarter 2, 25 percent for quarter 3, and 40 percent for quarter 4.

The notification stated that in pursuance of the provisions of the Public Finance Management Act, 2019, Rule 3(9) of the Cash Management and Treasury Single Account Rules, 2020 and the Financial Management and Powers of Principal Accounting Officers Regulations, 2021, the funds release strategy for Development Budget for the Current Financial Year (CFY) 2023-24 is being issued for implementation with immediate effect and until further orders.

Development: NEC approves ‘megabudget’

The total PSDP allocation for 2023-24 is Rs950 billion. The 15 percent funds released for Ql, fiscal year 2023-24 (domestic) would be Rs131 billion. Funds released against surrendered amount for SDGs during the fiscal year 2022-23 stand at Rs20.26 billion. Funds released for approved SDGs schemes for 2023-24 is Rs41 billion.

The available funds for remaining PSDP schemes during Q1, fiscal year 2023-24 would be Rs69.74 billion. Funds amounting to Rs11.5 billion are further released in respect of foreign exchange component during Q1, fiscal year 2023-24, the notification stated.

While executing development projects PD&SI Division and the PAOs concerned shall ensure the implementation of the provisions contained under Chapter-III of the Public Finance Management Act, 2019.

The PD&Sl Division shall devise quarterly sector-wise/project-wise/division-wise strategy for the release of funds for the Public Sector Development Programme (PSDP) within the appropriations approved by the National Assembly and included in the Schedule of Authorized Expenditure in terms of Article 83 of the Constitution of Pakistan.

Any proposal for change to the limits prescribed shall be considered by the Budget Wing, Finance Division on case to case basis and shall require prior approval of the finance secretary.

The release of funds for approved projects in a Demand for Grant and Appropriation shall be made by the PAO in each Quarter within above limits. The PAO shall ensure the availability of sufficient funds for employees related expenses for each project.

PAOs/Heads of the Attached Department/Heads of Sub-ordinate Office or project Director shall not make any Re-appropriation of funds from ERE to Non-ERE heads of account except with the prior concurrence of the Ministry of Planning, Development and Special Initiatives.

Adequate budgetary allocations on account of the Foreign Exchange Component (rupee cover) shall be ensured by all relevant PAOs and conveyed to the Economic Affairs Division and the Finance Division.

Funds for foreign exchange payments shall require prior approval of the External Finance Wing of the Finance Division. While examining requests for such funds, the External Finance Wing shall consider the availability of Foreign Exchange.

Section 23 of the Public Finance Management Act, 2019 provides that no authority shall incur or commit any expenditure from the “Federal Consolidated Fund” until the same has been sanctioned by the National Assembly and the expenditure has been provided for the financial year through: a) Schedule of authorized expenditure in terms of Article 83 of the Constitution of Pakistan; b) Supplementary grant or technical supplementary grant as per Article 84 of the constitution duly approved by the Federal Government; or c) Re-appropriation as per section 2 (u) and 11 of the Public Finance Management Act, 2019.

All payments shall be made through the pre-audit system by all the accounting organizations and offices or through assignment account procedure or any other procedure issued by the Finance Division. Separate Assignment Account shall be opened for each Project. No direct payment through the State Bank of Pakistan (SBP) shall be made by any office, except with the prior approval of the Finance Secretary as per Rules 3(2) and 3(3) of the Cash Management and Treasury Single Account Rules, 2020.

The provisions of the Public Finance Management Act 2019, the Financial Management and Powers of Principal Accounting Officers Regulations 2021 and instructions issued by the Planning Commission shall be strictly adhered to by all the PAOs and the accounting offices.

The instructions with regard to supplementary grants shall be issued by the Budget Wing, Finance Division, separately. There shall be no requirement of ways and means clearance from the Budget Wing of the Finance Division for the release of the development budget. Quarter-wise budget allocation and release will be uploaded on the MoF and AGPR Servers by the Finance Division, within the above-stated release limits.

No payment shall be made over and above the limits by any accounting organisation/office except with the prior written approval of the Finance Division.

The Development Wing of the Finance Division shall coordinate and oversee the matters relating to the release of funds for the development budget and other ancillary matters. Since the development budget is released to the PD&SI Division, therefore, PAOs may approach the said division for any issues related to authorisation as well as distribution of funds between the approved projects/schemes.

Copyright Business Recorder, 2023

Now, if the rationale, intention and equitability have to prevail, the following will be the answer: the tax super tax levied by the Finance Act, 2022 will be applicable for tax year 2023 and increased or enhanced rate of 10 percent from 4% will be levied from Tax year 2024.

In this connection it is important to note that these principles have been correctly applied in the case of banks which have December 31 as the year-end by making such an increase applicable for the Tax Year 2022. It is concluded that the Lahore High Court’s decision is fundamentally wrong and has not appreciated the matter in proper context.

Tax on Bonus Shares

The Finance Act 2023 has brought in an anti-business idea by taxing bonus shares issued by the companies, public or private, in the hands of shareholders. In the author’s view, the issue of bonus shares cannot be an income in the hands of the shareholder even if it is deemed so in the Ordinance on the basis of wider ambit of ‘income’ as used in the Constitution. Nevertheless, this is not the subject under discussion in this article.

Super tax and tax on bonus: misinterpretation of basic accounting—I

This article deals with another absurdity being the taxability of an existing unrealised/notional wealth by charging tax on bonus shares at the market price. This amply illustrates the fact that the lawmakers have not taken into account full facts or they have improper understanding of the subject. It was only for this reason that this absurd law, which remained in force from 2014 to 2018, could not get implemented.

As per our information, there was complete stalemate on the issue of bonus shares and whenever such shares were issued the demand raised by the department was stayed.

In one of the cases, Sindh High Court incorrectly held the validity of tax on issue of bonus shares. This is a tax that greatly disturbs the corporate business environment. The absurdity of the matter is explained in the following paragraphs.

Market value of listed shares depends, inter alia, on the existing reserves and future profitability of the company. This means that the market value of any share held by a shareholder is the wealth if the shareholder has not realised.

The difference between the cost of such shares and their market value is an income but that remains unrealised until the same is realised in the form of capital gains. If the market value is taxed in any manner then it is effectively the taxation of wealth not of income. The wealth under the Constitution can only be taxed under Entry 50 of the Fourth Schedule to the Constitution not as ‘income’.

Even that portion of wealth, which is the difference between the face value and the market value, is not taxable as Entry 50 only gives the right to tax the cost/value of assets even under the wealth tax or any kind of tax on assets.

When bonus shares are issued there is effectively no change in that wealth. Only the number of shares is increased while value per share decreases. Thus naturally, the market value of the individual share decreases but the aggregate value effectively remains the same.

The present law which is the replica of the law introduced in 2014 is absurd and legally not tenable. Under this process every company, quoted on stock exchange, issuing bonus shares to the shareholders of the company, shall withhold 10 percent of the bonus shares to be issued. This is withholding in kind, not in cash.

Afterwards, there are two options with the shareholder. Firstly, he can get his 10% shares by making a payment to the company as a tax equal to the market value of shares. If the shareholder does not take the ownership of shares by making payment then the company shall dispose of the shares in the market and deposit the proceeds as tax paid by the shareholder.

The question is whether or not the government can collect tax equal to the market price of the shares when (a) price is notional not realised and (b) an asset which existed before that declaration. This absurdity is explained with an illustration as under:

1. ShareCapital 100

2. Reserves 100

3. Number of Shares 10

4. Face Value Rs 10

5. Market Price Rs 30.

A company decides to issue bonus shares for each share held by the shareholder. In this situation, the expected price after the bonus share will be Rs 15 as, on account of this reason, the number of shares is doubled and there is no other change. In this case, under the present law, the government is withholding shareholder’s 1 share being 10 percent of the total shares issued. If the shareholder wants to get those shares then he is asked to pay Rs 15, which is the price of 1 share after the bonus share.

The question is whether or not the government can make the shareholder poorer by Rs 15 on account of tax on bonus shares as before the issuance of bonus shares the value was Rs 300 (30x10), which will become 285 as the shareholder has paid tax of Rs 15 as tax. This equation can be well understood if we consider that the shareholder does not pay the tax and the company sells the bonus shares in the market.

In this case the position will emerge as 10+9=19 X 15=285. This raises the primary question whether or not it is a wealth tax under Entry 50 or taxes on income. In no situation can it be treated as taxes on income at least to the extent of Rs 5 out of Rs 15 for the reason that these were the reserves, which will invariably be available to the shareholders.

In the past for this primary and fundamental difference, ‘face value of bonus shares’ was taken as income, though wrongly, on the premise that reserves which existed in the financial statements are the ownership of the shareholders; therefore, these can be treated (whether or not distributed) as income of the shareholder.

To conclude, it is obvious that the market value basis of taxation is fundamentally wrong. Those who have made law are not fully aware of this mechanism and they have some misperception about unrealized income. No law in this manner exists anywhere in the world.

Notwithstanding these technical aspects, it is a simple view of the author that the tax law in Pakistan, which is contained by way of Income Tax Ordinance, 2001, can only tax the realised or actual income. There is no point in taxing notional and unrealized incomes in the hands of shareholders.

It is also to be noted that in the books of the company issuing bonus shares, irrespective of the market price reserves, will be debited with the amount equal to the face value of bonus shares. Thus a shareholder cannot be burdened more than what has been effectively capitalised by the company.

It is important to note that if that system is applied then the government will only receive only 10% tax on dis posal of bonus shares. On the other hand, if there is an actual disposal of bonus shares then the gain is taxable at the higher rate of 15%. This desire to tax bonus shares in this manner has not been admired or approved of. It is, therefore, suggested that the whole idea of taxing bonus shares be dropped as it is a fact that during the period from 2014 to 2018 when this tax was payable there was effectively no bonus issue. Even if the idea is carried through, the concept of charging bonus shares at market value in this indirect manner is economically, commercially and legally wrong.

In the case of unlisted companies the manner of taxability is fundamentally contradictory to corporate law. Shares of a private limited company issued as bonus shares cannot be sold like the shares of a listed company. Thus the whole process laid down under Section 236 Z is wrong in a practical sense for a private limited company. This shows that those who have laid down this provision have not taken into account the respective provisions of the corporate law.

It is important to note that in the case of private limited companies the tax department under the law can never acquire the right to hold shares and sell the same in the market. That would be illegal. It is therefore suggested that this provision be stayed from operation for the time being under the power conferred to the Federal Government and if any taxability is to be made then the same should be limited to the face value of bonus shares.

(Concluded)

Copyright Business Recorder, 2023

ISLAMABAD: The Federal Board of Revenue (FBR) will “sell” federal excise rules, general orders and departmental instructions/ rulings to the general public, according to the updated tax laws issued on Wednesday.

The FBR has notified the updated Sales Tax Act, 1990 and Federal Excise Act up to June 30, 2023, to incorporate amendments made in the sales tax/ federal excise laws through the Finance Act 2023.

The FBR, on Wednesday issued the amended Sales Tax Act, 1990 and the Federal Excise Act 2005.

FBR unveils updated ST and FED laws

All changes made through the Finance Act 2023 have been reflected through the revised Sales Tax Act, 1990 and the Federal Excise Act 2005.

Under the amended Federal Excise Act, all rules, shall be collected, arranged and published along with general orders and departmental instructions and rulings, if any, at appropriate intervals and sold to the public at reasonable price or may be placed regularly on the official website maintained by the Board.

The updated Federal Excise Act revealed that 20 percent FED would be applicable on sugary fruit juices, syrups and squashes, waters whether or not containing added sugar or artificial sweeteners, excluding mineral and aerated waters.

The updated Act said that where taxable supplies are made to a person who has not obtained registration number, or he is not an active taxpayer, there shall be charged, levied and paid a further tax at the rate of four percent of the value.

The revised Sales Tax Act stated that Directorate General of Digital Initiatives shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors and Assistant Directors and such other officers as the Board may, by notification in the official Gazette, appoint.

The amended law has also issued a detailed procedure on Alternative Dispute Resolution.

The Act has specified that any person who manufactures, possesses, transports, distributes, stores or sells goods or class of goods as specified by the Board with counterfeited tax stamps, banderols, stickers, labels or barcodes or without tax stamps, banderols, stickers, labels or barcodes, such (specified goods) shall be liable to outright confiscation.

The review of the updated Act revealed that the sales tax zero-rating will apply on imports or supplies made by, for or to a qualified investment as specified at Serial No.1 of the First Schedule to the Foreign Investment (Promotion and Protection) Act, 2022 for the period as specified in the Second Schedule to the said Act.

Sales tax exemption would be available on supplies and imports of plant, machinery, equipment for installation in tribal areas and of industrial inputs by the industries located in the tribal areas, as defined in the Constitution, as made till June 30, 2024.

The sales tax exemption has been allowed on the supplies of electricity, as made from the day of assent to the Constitution (Twenty-fifth Amendment) Act, 2018, till June 30, 2024 to all residential and commercial consumers in tribal areas, and to such industries in the tribal areas which were set and started their industrial production before May 31, 2018 excluding certain sectors.

Copyright Business Recorder, 2023