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

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

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

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

ISLAMABAD: The Capital Development Authority (CDA), on Tuesday, approved the budget for the financial year 2023-24 which is Rs150,948.20 million.

The estimated expenditure of the CDA will be Rs150,095.74 million. An amount of Rs852.46 million will be the surplus of the current budget.

An important meeting of the CDA Board was held under the chairmanship of Noor Mengal at the CDA Headquarters.

In the meeting, the CDA board approved the world’s largest bird aviary, which will be built in F-9 Park in Islamabad. Birds from all over the world will be bred in the aviary covering 10 acres of land.

The main objective of this bird aviary is to establish an aviary that will serve as a sanctuary for various species of birds that will contribute to the conservation of biodiversity and provide entertainment and information to park visitors.

The Aviary will be built through an open auction on the basis of DBOT model (Design, Build, Operate, and Transfer).

Copyright Business Recorder, 2023

In the Finance Act 2023 many amendments have been proposed. This article is restricted to two important measures which in the opinion of the author represent misunderstanding of primary accounting and common law principles.

They will add to nothing but litigation costs for the taxpayers as these measures are bound to be challenged before the superior courts. These measures are: changes in the rate of super tax from 4 % to 10% for Tax Year 2023 and determination of value to be taxed in case of issue of bonus shares.

Super tax

Super tax under Section 4C was levied in by the Finance Act, 2022, which is effective from July 1, 2022. This tax was payable for the Tax Year 2022 which is a period from July 1, 2021 to June 30, 2022. As a result of an appeal by the taxpayers, Sindh High Court held that such tax will not be payable for the Tax Year 2022 but it shall be payable for the tax year 2023. However, a Single Bench of Lahore High Court in the petition (#58683) of 2022 has held that super tax levied by the Finance Act, 2022 is also applicable for the Tax Year 2022. The appeal against the order of Sindh High Court is already before the Supreme Court of Pakistan and its hearings are to be held after the summer vacation.

Based on the discussion held before the Supreme Court that are produced in the interim order, confusion persists on the matter. The part of the order is reproduced asunder:

Learned counsels for the petitioner have pointed out that the Tax Year 2022 for which the impugned Super Tax under Section 4C of the Income Tax Ordinance, 2001 (“Ordinance”) has been imposed starts from 01.07.2021 until 30.06.2022. In the present case, the respondents being high earning taxpayers with incomes greater or equal to Rs.300 million claim that they do not fall within the purview of Super Tax for two reasons.

Firstly, because their accounting year ended on 31.12.2021 prior to the close of Tax Year 2022 on 30.06.2022. Therefore, the impugned Super Tax was being demanded by the petitioner with retrospective effect.

We are not persuaded by the arguments at this stage because according to the learned counsel for the petitioner, the accounting year of the respondents ends during the course of Tax Year 2022 to which the provisions of Section 4C are lawfully applicable.

This observations of the Supreme Court reflect the confusion in the minds of their Lordships. It has also been reported that during the hearing there existed serious confusion on this matter.

It is hoped that the confusion (underlined sentence in the order of the Supreme Court) will be removed in due course. There is effectively no confusion on this matter and the subject of determining a tax charge for a tax year is not being explained appropriately. This aspect has been explained in the following paragraphs:

Under the Income Tax Act 1922 and also in the earlier Income Tax Laws of the Anglo-Saxon countries, which still prevail in UK Corporation Tax, the rates of tax were not laid down in the law. The current position of the UK Corporation Tax is as under:

Corporation tax rates

(1) Corporation tax is charged at the rate set by Parliament for the financial year as the main rate.

Subsection (1) is subject to—

(a) section 18A (which provides for tax to be charged at the standard small profits rate instead of the main rate in certain cases), and

(b) any other provision of the Corporation Tax Acts which provides for corporation tax to be charged at a different rate.

Under this system ‘Tax Rates’ for each financial year are legislated by the Parliament invariably after the close of the financial year. This system was also the practice in Pakistan before the promulgation of Income Tax Ordinance, 1979 and in the official copy of the Income Tax Act, 1922 one can find the year-wise Finance Acts.

In the Income Tax Ordinance 1979 a different practice has been adopted. This practice prescribes tax rates in the ordinance which convey the legal intention that the rate prescribed in the Ordinance is applicable for all years to come and any change applicable will be with prospective effect. It goes to the extent that even the reduced or increased rates for future years are prescribed.

This primary principle of retrospective and prospective intention of law has neither been raised nor presented before the two superior courts. It is expected that the same will be raised before the Supreme Court. The question here is not about the right of the legislature to prescribe any rate with retrospective effect; it is about the intention of the law and structure of the tax statute.

In this regard the second argument which has not been properly appreciated by Lahore High Court is with regard to the case where the income year has already closed on December 31, 2021 with respect to the Tax Year 2022 charge. In its order Lahore High Court has wrongly relied on the matter that for these persons the Tax Year relevant for the year ended December 31, 2022 is Tax Year 2022; therefore, any tax charge for that year will be applicable. They have considered that use of a ‘special’ year is a concession.

This presumption is wrong. A ‘special year is not a concession. It is an economic need. Even if it is considered that there should be equity in taxation, taxpayers having a ‘special year’ cannot be discriminated against those having June 30 as a year-end. If the law is applied as Lahore High Court has held then people having a ‘special year’ will be taxed for super tax for their income for the January 1 to June 30, 2021 period, whereas the same period will not be taxed for the persons having June 30, 2022.

Equitability can only prevail when in case of such changes the increased rates should be applicable for the split period income. The argument by lawyers in Lahore High Court that for those that have a December 31, 2021 this represents a past and closed transaction is completely valid.

(To be continued)

Copyright Business Recorder, 2023

KARACHI: The government has increased the rate of advance income tax for commercial importers from 5.5% to 6%. According to recent amendments made to the Income Tax Ordinance, 2001, this change was introduced through sub-clause 27(13) of Clause 7 of the Finance Act, 2023, amending Serial No. 3 of Table to Part-II of the ordinance.

In order to ensure a smooth transition and effective implementation of the revised rate, all Collectors have been directed to issue strict instructions to the concerned officers. This directive aims to guarantee the collection of the revised levy starting from 1st July, 2023, considering previous experiences with similar issues.

Furthermore, the Collector of Customs Appraisement (East) has been requested to take up the matter with the board.

New advance tax imposed on construction, residential businesses

The objective is to incorporate and link this rate increase to the commercial importers of respective items in the WeBOC system, as advised by the Directorate of Reforms & Automation. This action follows the reply provided by the Directorate in response to the Collectorate’s earlier CRF (Customs Reform File) regarding the same matter.

The adjustment in the advance income tax rate for commercial importers is a significant development that will have an impact on businesses involved in importing goods. The increased rate aims to contribute to the government’s revenue generation efforts and align with the broader fiscal goals set forth in the Finance Act, 2023.

Copyright Business Recorder, 2023

ISLAMABAD: The Federal Board of Revenue (FBR) from July 1, 2023, implemented upward revised rates of withholding taxes on buying and selling of immovable properties under the Finance Act 2023.

In this connection, the FBR’s field formations have enforced the revised rates across the country.

The rates of withholding tax under sections 236C (Advance Tax on sale or transfer of immovable Property) and 236 K (advance tax on purchase or transfer of immovable property) have been increased.

Immovable properties: Tax authorities issuing ‘super tax’ notices

The rate of withholding tax for filers of income tax returns has been increased from 2 percent to 3 percent under section 236 C (Advance Tax on sale or transfer of immovable Property).

The rate of withholding tax for non-filers of income tax returns has been raised from 4 percent to 6 percent under section 236 C (advance tax on sale or transfer of immovable Property).

The rate of withholding tax for filers has been increased from 2 percent to 3 percent under section 236 K (advance tax on purchase or transfer of immovable property).

Details revealed that the rate of withholding tax for non-filers has been further raised from 7 percent to 10.5 percent under section 236 K (advance tax on purchase or transfer of immovable property). Under the Finance Act 2023, by virtue of amendment made through the Finance Act 2023 changes have been made in the rates of advance income tax collected under section 236C and 236K of the Income Tax Ordinance 2001.

As per FBR’s field instructions, under section 236(c) of the rate of advance tax would be 3 percent for filers and 6 percent for non-filers.

The new rates under section 236K, the advance tax at the rate of 3 percent would be collected from filers and 10.5 percent from non-filers.

The FBR’s field formations have also asked its relevant zones to apply the new rates from July 1, 2023.

Copyright Business Recorder, 2023

ISLAMABAD: The federal government has notified up to 35 percent Ad-hoc Relief Allowance 2023 to all the federal government employees.

According to Finance Division, the president has sanctioned with effect from July 1, 2023 and till further orders, an Ad-hoc Relief Allowance-2023 to all the federal government Employees i.e. Armed Forces Personnel, Civil Armed Forces and Civil Employees of the federal government as well as the civilians paid from Defence Estimates including contingent paid staff and contract employees employed against civil posts in Basic Pay Scales on standard terms and conditions of contract appointment.

The grade 1 to 16 employees will get 35 percent Ad-hoc Relief Allowance of basic pay as on 30-06-2023 whereas BPS-17 to 22 will get 30 percent of Basic Pay as on 30-06-2023.

Govt employees demand ‘relief’ through FY24 budget

The amount of Ad-hoc Relief Allowance will be subject to income tax; admissible during leave and entire period of LPR except during extra ordinary leave; treated as part of emoluments for the purpose of calculation of pension/gratuity and recovery of house rent; admissible to the employees during the tenure of their posting/deputation abroad; and will be admissible to the employees on their repatriation from posting/deputation abroad at the rate and amount which would have been admissible to them had they not been posted abroad.

Copyright Business Recorder, 2023

EDITORIAL: Consumer Price Index (CPI) for June dropped by 8.6 percentage points compared to the month before – from 38 percent in May to 29.4 percent in June - with those privy to routine data manipulation by administrations in general and the finance minister in particular crying foul while his supporters are claiming that he delivered where it mattered most – to the common man.

The question is which side of the spectrum, from those enamoured of his policies and those that are not which include a rising number of PML-N long-term loyalists, is presenting an accurate picture?

Three disturbing observations are in order. First and foremost, the decline is sourced almost entire to food and non-alcoholic beverages with a weightage of 40.87 percent with indices of non-perishable items (weightage 35.08 percent) declining from 278.9 in May to 274.16 in June and perishable items (weightage 5.79 percent) from 227.6 to 219.49.

Within the non-perishable items the decline has been in three of the commodities that were heavily subsidised by the government: (i) wheat flour index plummeted from 354.87 in May to 325.87 in June, cooking oil from 373.99 in May to 360.75 in June and masoor from 193.9 in May to 190.59 in June and moong from 175.04 in May to 168.24 in June.

Two other items that were subsidised did not register a decline notably rice rose from 303.57 in May to 316.38 in June and sugar rose from 194 in May to 199.12 in June. It is critical to note here that subsidies doubled from what was budgeted in the outgoing year – from 664 billion rupees to 1.103 trillion rupees in the revised estimates with obvious negative repercussions on the budget deficit and consequently on inflation.

Vegetables and fresh fruits indices declined in June compared to the month before, an outcome of supply.

Secondly, housing, water, electricity and gas with a weightage of 27 percent shows an index decline from 173.07 in May to 172.95 in June though none of the component items noted shows a decline. In addition, house rent has a weightage of 19.25 percent, which has shown little upward movement during the past year which may be more reflective of understating of rental income by landlords rather than of the actual rent raise.

Transport registered a minor rise attributed to motor fuel; however, with the massive raise in the budgeted reliance on petroleum levy, 869 billion rupees, this is unlikely next month.

Thirdly, CPI (national) July-May 2022-23, as per the Pakistan Bureau of Statistics, was 29.16 percent while the figure for July-June is 29.18 percent so the annual average did not significantly improve. And this is backed by CPI rural July-May of 26.8 percent and July-June of 26.85 while rural was 32.65 and 32.63, respectively.

The finance minister stated on a private channel that core inflation, non-food and non-energy, should be the preferred indicator rather than the CPI.

While this may be true when considering fixation of the policy rate by the monetary policy committee of the State Bank of Pakistan but when considering the impact of inflation on household budgets this assertion by the minister may baffle economists, given that two major critical imported items majorly contribute to a householder’s monthly kitchen budget – petroleum and products (transport of goods and services and electricity) as well as cooking oil – coupled with the minister’s persistent inane support for controlling the rupee-dollar parity (cited repeatedly by the IMF as one of the main impediments to a staff level agreement) to prefer core inflation may reflect better on the government’s performance but wins it no kudos from the voters.

Sensitive Price Index July-May registered 32.8 percent while the July-June figure is cited as 33 percent. This reveals the failure of the relevant officials to rationalise and synchronise data, thereby raising serious concerns over data credibility. One can only hope that any future attempt to understate a figure for political reasons must at least be done intelligently enough not to raise doubts about the data.

Copyright Business Recorder, 2023

ISLAMABAD: The estimates of key economic indicators are prone to certain risks and vulnerabilities that could cause deviations from the projections, as these risks can undermine the achievement of the targets set under the Medium-Term Debt Management Strategy (MTDS), says the Finance Division.

The division has uploaded “Medium Term Debt Management Strategy (fiscal year 2023-fiscal year 2026)” on its website, which stated that government intends to reduce budget deficit from 7.9 per cent of GDP in fiscal year 2022 to 3.1 per cent of GDP by fiscal year 2026.

Inflation is projected to decline to around 6.5 per cent per annum by fiscal year 2026 on the back of improved commodity-producing sectors (agriculture and industry), effective monetary policy, and stronger fiscal discipline. With increased investor confidence, stable inflation, fairly valued exchange rate, improved current account balance and better fiscal and monetary management, economic growth is projected to reach 5.5 per cent per annum by fiscal year 2026.

Budget places emphasis on ‘growth-inducing’ sectors: PM Shehbaz

Over the medium term, reduction in inflation rates is expected to result in lower borrowing costs for the government. Accordingly, the interest expenditures as percentage of GDP are expected to reduce over the medium-term which will create fiscal space, it added.

The Division; however, noted that the estimates of key economic indicators are prone to certain risks and vulnerabilities that could cause deviations from the projections. These risks can undermine the achievement of the targets set under the MTDS.

Lower tax revenues lead to greater fiscal deficits that need to be financed through higher borrowings and also reduce fiscal space for expenditure pertaining to the development and social sectors.

The government is targeting higher growth in Federal Board of Revenue (FBR) revenues over the next four years. Any shortfall in the achievement of targets in tax revenue collection will have adverse consequences for the projected fiscal position of the government. Impact arising from climate change events may also adversely affect the macroeconomic framework.

A combination of factors including achieving primary surplus, lowering the overall fiscal deficit, attaining higher GDP growth, and ensuring stability in the exchange rate are fundamental to achieving the goal of debt sustainability.

The government has projected sufficient external financing over the medium term for financing of its budget deficit. Any shortfall in external financing may pose a risk to fiscal health, as well as, the overall macroeconomic stability of the country by putting additional borrowing pressure on domestic markets.

Apart from the crowding-out effect, large domestic borrowing needs make the domestic markets susceptible to macroeconomic shocks. Expectations of continuing inflation and high-interest rates can disrupt the domestic markets with adverse implications for the government’s liquidity management and cost of borrowing.

The government is maintaining a cash buffer to meet unexpected liquidity requirements on account of cash flow mismatches and/ or other contingencies. Proactive cash management is necessary so that government can provide support in managing risks to fiscal stability in case of adverse shock scenarios such as natural calamities, the report noted.

The report noted that the government is also exploring the introduction of inflation-linked bonds. Insurance companies, pension funds and mutual funds prefer to buy these instruments for their liability management. Further, the government may also consider listing and trading of government securities through stock exchange to support investor outreach.

The report further noted that in relation to the currency risk, the maximum benchmark of external debt in total public debt is set to be 40 per cent. In recent years, the increase in this ratio was attributable mainly to exchange rate depreciation rather than excessive external borrowings. Over the medium term, the government will aim to reduce the share of external debt in total public debt.

Copyright Business Recorder, 2023

ISLAMABAD: In a significant development for the country’s economic landscape, National Economic Council (NEC) held a meeting where the development budget of a staggering Rs 2,709 billion was approved.

According to details, PM Shehbaz Sharif chaired the National Economic Council (NEC) meeting where the council members approved a development budget of Rs 2709 billion. However, the federal government will spend Rs 950 billion on development projects in the next financial year.

Furthermore, the provincial government will spend Rs 1559 billion on development projects in the next fiscal year.

Infrastructure, water: Ecnec approves projects worth over Rs280.53bn

Meanwhile, a noteworthy aspect of the approved budget is the inclusion of public-private partnerships, with around Rs 200 billion allocated for such projects. This collaborative approach between the government and private sector entities is expected to expedite development initiatives and leverage expertise and resources to achieve optimal outcomes. In a specific allocation, the cabinet division is set to receive a development budget of Rs 90 billion. This investment will play a crucial role in enhancing the capacity and effectiveness of the division.

Moreover, the federation itself has been granted a development budget of Rs 1150 billion, reflecting the government’s commitment to prioritizing key sectors and addressing critical national needs.

ISLAMABAD: The advance tax at the rate of 3 percent would be collected at the time of registration of electric vehicles (E-vehicles) having value of Rs 5 million or more where engine capacity is not applicable.

The Finance Act 2023 has not specifically mentioned tax rates for the registration of E-vehicles, but according to the tax experts, the tax rate would be 3 percent in case where engine capacity is not applicable and the value of vehicle is rupees five million or more. Therefore, the electric vehicles fall within the category of such vehicles without engine capacity, tax experts added.

According to the Finance Act 2023, the value shall be in case of motor vehicle (2001cc to 2500cc and above 3000cc) – (i) imported in Pakistan, the import value assessed by the Customs authorities as increased by customs duty, federal excise duty and sales tax payable at import stage; (ii) manufactured or assembled locally in Pakistan, the invoice value inclusive of all duties and taxes; or (iii) auctioned, the auction value inclusive of all duties and taxes.

Advance tax on registration of vehicles above 2000cc hiked

Provided further that in cases where engine capacity is not applicable and the value of vehicle is Rs5 million or more, the rate of tax collectible shall be 3% of the import value as increased by customs duty, sales tax and federal excise duty in case of imported vehicles or invoice value in case of locally manufactured or assembled vehicles, Finance Act added.

Under the Finance Act 2023, the government has imposed a fixed tax on imported and locally manufactured vehicles from 2001cc to above 3000cc.

Under the new income tax slabs, the fixed rate of tax would be 6 percent of the value of a vehicle having engine capacity 2001cc to 2500cc.

The fixed rate of tax would be 8 percent of the value of a vehicle with engine capacity of 2501cc to 3000cc.

Under the third revised slab, the fixed rate of tax would be 10 percent of the value of a vehicle having engine capacity above 3000cc.

Copyright Business Recorder, 2023

EDITORIAL: While specific details of precisely what are the prior conditions that the government has agreed to in the 3 billion dollar Stand-By Arrangement with the International Monetary Fund (IMF) are not known as documents of the staff-level agreement would be uploaded as and when the Fund’s executive board formally approves the arrangement, a prerequisite for the tranche release (assuming that the amount will be released in tranches and not in one go) yet there is a widespread consensus based on previous IMF programmes, including the recently lapsed Extended Fund Facility programme with 2.6 billion dollars remaining undisbursed, that prior conditions must include a raise in utility rates and tax collection from sale of petroleum products.

The objective of the raise in utility rates would be not only to reduce the circular debt of over 2.6 trillion rupees that is negatively impacting on the liquidity available to this critical sector but also reduce the existing outstanding stock of the power sector debt in government guarantees estimated at 73 percent (3460 billion rupees end March 2023 as per budget documents).

The raise in tariffs, the Fund press release notes, would be through ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing exercise); however, sadly, while there is a general perception that tariffs will be raised, a usual enough measure taken by Pakistani administrations to secure an IMF programme, yet there is no evidence of structural reforms targeted to reduce 579 billion rupees 2023-24 budgeted subsidy for Wapda/Pepco and 315 billion rupee budgeted subsidy to KE though the amended budget referred to an 85 billion rupee reduction in expenditure without citing any specific item.

The hike in rates would no doubt not only contribute to higher inflationary pressures for households already grappling with 38 percent consumer price index for May 2023 but also raise the cost of production that in turn would up the price of all products manufactured for the domestic market as well as make it a challenge for exporters to compete in the international market.

Petroleum subsidy as per the 9 June budget envisaged at 53.6 billion rupees with the bulk of 30 billion rupees to be channeled to domestic consumers through SNGPL. Ironically though, petroleum levy is budgeted to generate the 869 billion rupees for the federal government as it is not a divisible pool tax therefore considered all the more attractive by the federal government.

This large sum, 60 percent more than the revised estimates of last year, coupled with a massive decline in consumption as households continue to struggle to meet the rise in their cost of living, may have necessitated the Finance Bill to allow a rise in the maximum petroleum levy from 50 rupees to 60 rupees per litre.

The tax on petroleum and products is considered a low- hanging fruit as it is easy to collect with the Federal Board of Revenue playing no role in its collection, though the Board insists it does play a supervisory role, yet this is an indirect tax whose incidence on the poor is greater than on the rich.

Besides a higher levy not only raises transport costs but also ups the cost of farm to market transport of perishables and hence its impact on the cost of living index is significant.

With these two decisions taken to secure the IMF package to avert the possibility of the looming default, the coalition government must surely be aware that inflation will be further fuelled.

And while the IMF press release lays the onus of controlling inflation on the State Bank mainly through adjusting the policy rate, yet it is disturbing that the Fund staff remains unaware of the fact that policy rate adjustment merely ups the government’s debt servicing payments given that it is the largest single borrower especially as the rate rises beyond what is economically feasible for the private sector that in turn raises the deficit, again a highly inflationary policy.

There is, therefore, an emergent need for an empirical study that would convince IMF staff that the linkage between the discount rate and inflation is rather tenuous in Pakistan.

The SBA conditions, therefore, do not provide any comfort level to a pledge that controlling inflation will be a priority.

And while SBA is for nine months only, up to end March next year, yet the fact of the matter is that given the country’s indebtedness and reliance on external sources to fund its budget, 23 billion dollars budgeted for this year, there is little doubt that a longer term IMF programme will have to be secured by the end of the SBA. Needess to say, IMF’s eventual support has come with strings attached.

Copyright Business Recorder, 2023

ISLAMABAD: The Federal Board of Revenue (FBR) will face legal complications to collect new tax on windfall profits gains of big sectors from past and closed transactions due to a big flaw in the Finance Act 2023.

A tax expert raised a legal question how the FBR will collect the said new tax from past and closed transactions? A new provision has empowered the federal government to impose an additional tax on sectors who have any income, profits or gains arisen due to any economic factors that resulted in unexpected income, profits or gains whether or not disclosed in the financial statements.

The federal government by way of notification in the official gazette will determine economic factors including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy or difference in income, profits or gains on account of foreign currency fluctuation.

Businessmen concerned at proposed tax on windfall gains profits

According to the section (“99D. Additional tax on certain income, profits and gains) of the Finance Act 2023, notwithstanding anything contained in this Ordinance or any other law for the time being in force, for any of the last three tax years preceding the tax year 2023 and onwards, in addition to any tax charged or chargeable, paid or payable under any of the provisions of this Ordinance, an additional tax shall be imposed on every person being a company who has any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains. (2) The Federal Government may, by notification in the official Gazette, – (a) specify sector or sectors, for which this section applies; (b) determine windfall income, profits or gains and economic factor or factors including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy or difference in income, profit or gains on account of foreign currency fluctuation; (c) provide the rate not exceeding fifty percent of such income, profits or gains; 16 (d) provide for the scope, time and payment of tax payable under this section in such manner and with such conditions as may be specified in the notification; and (e) exempt any person or classes of persons, any income or classes of income from the application of this section, subject to any conditions as may be specified in the notification. (3) The Federal Government shall place before the National Assembly the notification issued under this section within ninety days of the issuance of such notification or by the 30th day of June of the financial year, whichever is earlier, Finance Act 2023 added.

Copyright Business Recorder, 2023

ISLAMABAD: The government has granted one-year extension in exemption from duties and taxes for the erstwhile tribal areas up to June 30, 2024 under Finance Act 2023.

A senior government official clarified that the exemption has not been withdrawn through any amendment in Finance Bill 2023. This exemption was valid up to June 30, 2023.

Erstwhile tribal areas: One-year extension in exemption of taxes withdrawn

One-year extension was proposed under the Finance Bill 2023. The extension proposed has been confirmed under the Finance Act 2023. Therefore, now the exemption would remain intact till June 30, 2024.

There was confusion when a tax expert interpreted Finance Act 2023 that the said exemption has been withdrawn. However, a senior tax official explained that the exemption has been extended up to June 30, 2024 under the Finance Act 2023.

Copyright Business Recorder, 2023

This is apropos a Business Recorder op-ed ‘Flawed budgetary measures’ carried by the newspaper yesterday. The writers, Huzaima Bukhari, Dr Ikramul Haq & Rauf Shakoori, who are widely known for their expertise in the areas about which they write regularly, have presented a detailed analysis and assessment of the budget for the fiscal year 2023-24 in an impressive manner.

They have argued, among other things, that “A country that was once hailed as an investment alternative to India is now facing the formidable problem of averting a default on its foreign payments.

The inflation rate has soared to nearly 38 percent, while the policy rate to 22 percent after a recent 100 basis points increase. Sadly, financial decisions made by the leaders for political gains cannot be overlooked when attributing responsibility for the current worsening economic situation.

Despite the country’s precarious economic condition, our rulers are still reluctant to acknowledge the need for introspection... .” The writers are absolutely right. In my view, the conduct of almost every politician in the country is characterized by a drive to acquire power.

In other words, power means everything to them. Little do they realize that they are responsible for the current economic impasse in the country. The government has not made any meaningful effort to tame rising inflation. However, it loses no time in hiking interest rates in view of “inflationary expectations”. Someone has got to stand up and say enough is enough.

Arif Baig (Karachi)

Copyright Business Recorder, 2023

Pakistan’s prevailing outlook paints a grim picture of a state in deep trouble. In view of perpetual political instability coupled with the economic meltdown, the country has been grappling with daunting challenges on all fronts, internal and external.

The main root cause of the present day’s mess is the non-observance of the principle of trichotomy of powers enshrined in the supreme law of the land—the 1973 Constitution of the Islamic Republic of Pakistan. The blame for this has earlier been mainly attributed to extra-constitutional measures and continuous institutional interferences in executive matters. However, of late, the state’s judicial branch has played a part as well in hampering the governance system, leading to political instability and economic chaos.

A country that was once hailed as an investment alternative to India is now facing the formidable problem of averting a default on its foreign payments. The inflation rate has soared to nearly 38 percent, while the policy rate to 22 percent after a recent 100 basis points increase. Sadly, financial decisions made by the leaders for political gains cannot be overlooked when attributing responsibility for the current worsening economic situation. Despite the country’s precarious economic condition, our rulers are still reluctant to acknowledge the need for introspection. A palpable division within institutions and power struggles among them are posing serious threats to our sovereignty. The mindset exhibited by those who matter in the land has not only undermined democratic principles but has also severely eroded institutional credibility.

The pursuit of endless power games has resulted in ignoring crucial matters, exemplified by nearly 55,000 pending cases in the Supreme Court of Pakistan alone. Additionally, the state of law and order is highly worrisome. Violent protests in the wake of Imran Khan’s arrest on May 9, 2023, have sparked a fresh national discourse. Despite decades of implementation of the Army Act of 1952 and the sentencing of many civilians under its jurisdiction, it is now being contested. Sympathizers of the May 9 incident, including some others, have contested its non-application and the matter is sub judice before the apex court.

Amidst these testing circumstances, ordinary citizens are bearing the economic brunt. The coalition government of Pakistan Democratic Alliance (PDM), much like its predecessor, has failed to provide any respite to distressed families. The reform agenda for addressing fiscal deficit is still awaiting implementation. Presentation of a budget of Rs 14.46 trillion on June 9, 2023, touted as a tax-free budget, underwent significant alterations [now revised to Rs 14.46 trillion] before receiving approval from the National Assembly on June 25, 2023, to meet the conditions (dictates) of the International Monetary Fund (IMF).

The tax revenue target initially set by the government for the Federal Board of Revenue (FBR) was Rs 9,200 billion [now revised to Rs. 9415 billion]. Although it seems pragmatic, but keeping in view the economic conditions of the country when major establishments are struggling to carry on their operations due to high cost of doing business and numerous small and medium enterprises (SMEs) have already gone out of business, it may not be achieved.

In this situation, rather than reforming the capacity of revenue generation and improving enforcement capability, the government has preferred to burden the already struggling middle-income families and push many below the poverty line. Finance Act, 2023 making amendments in the Petroleum Products (Petroleum Levy) Ordinance, 1961 has raised the levy up to Rs 60 per liter. An additional levy of Rs 10 would be inflationary nullifying the increase in salary of government employees, besides creating a burden on the middle class. It is also unconstitutional as the petroleum levy being a non-tax item could not be made part of the Money Bill.

Though the government claimed cutting expenditures up to Rs. 85 billion, yet amendments in the Members of Parliament (Salaries and Allowances) Act, 1974 (XXVII of 1974) present a different picture. The law is amended to secure use of vehicles of 1600cc by chairpersons of standing committees of the National Assembly and the Senate, though for camouflaging the words between 1200cc to 1600cc mentioned. “They are already using 1300cc cars”. Again, it is violative of the Constitution as such items could not be made part of the Money Bill. Further amendment extends the facility of staff-driven cars to the heads of standing committees for their journey outside of Islamabad dispensing with the condition to hire private drivers for such yatras (visits). The treasury will be burdened for the remuneration of drivers. The same section earlier required that chairpersons would be responsible for restitution of any damage caused to the official vehicle in the event of any accident during a journey outside Islamabad now it is from taxpayers’ pocket.

While amending the Customs Act 1969, the government offered 0% duty on imports or exports made by, or for, the qualified investment in respect of a project as specified at Serial No.1 of the First Schedule to the Foreign Investment (Promotion and Protection) Act, 2022. Subsequently, relief has been given in customs duty on household goods of employees of Reko Diq Mining Company (Private) Limited. However, this benefit will be claimed by only those who are either citizens of a country other than Pakistan or who for the tax year immediately prior to the import of goods, were non-resident in Pakistan for the purpose of Income Tax Ordinance, 2001.

However, the most regressive revenue measure is in the case of middle-income salaried persons. The Finance Act 2023 has increased the tax burden on the salaried class, with monthly incomes between Rs 200,000 to Rs 300,000. The highest slab for the salaried person (having salary income more than 75% of total taxable income) is 35% which is higher than 29% of the normal corporate tax rate. A salaried individual will now pay a higher rate of tax than companies and large corporations.

According to new tax rates with effect from July 1, 2023, for salaried individuals, earning over Rs 2,400,000 but not exceeding Rs 3,600,000, tax will be Rs 165,000 plus 22.5% of the amount exceeding Rs 2,400,000. Where taxable salary exceeds Rs 3,600,000 but does not surpass Rs 6,000,000, the tax will be Rs 435,000 plus 27.5% of the amount exceeding Rs 3,600,000. For a salary of more than Rs 6,000,000, the tax will be Rs 1,095,000 plus 35% on the amount exceeding Rs 6,000,000. However, no change is made in the taxation of income of salaried individuals falling in the lower slabs which is between Rs 600,001 to Rs 2,400,000.

While imposing heavy taxation on employees, the government did not bother to withdraw exemptions available to the rich and mighty salaried persons in higher judiciary and higher echelons of the civil-military bureaucracy. Additionally, the informal economy is the biggest challenge in revenue collection where salaried persons avoid any taxation.

Various credible reports indicate that the size of Pakistan’s informal economy is close to 37% of GDP. The informal sector also offers significant employment opportunities to the workforce in both rural and urban areas, especially in markets, restaurants, etc. The government has failed to introduce a comprehensive plan for documenting the economy and financial inclusion to bring all into the tax net, even those non-filers who pay exorbitant withholding taxes. FBR lacks the will to bring non-filers into the tax ambit. Introducing a higher rate for withholding tax is not a solution as most of them conduct cash-only businesses that hardly involve banking transactions. The government seems oblivious to the fact that due to its passive approach in hunting down these non-filers and traders, the dream of financial freedom from global lenders will never be realized.

Additionally, the government should revisit its approach of running loss-bearing commercially operated state-owned enterprises (SOEs) on subsidies. A good portion of revenue is being wasted in terms of subsidies which, in the current budget, is around Rs 1054 billion, including for these SOEs.

Budget for the fiscal year 2023-24 dedicates lion’s share of funds [Rs 7303 billion against net income of Rs 6879 billion] toward servicing debts, resulting in constrained resources for other essential expenses and operational costs. For tackling this challenge, the optimal strategy involves streamlining administrative processes, right-sizing the gigantic government machinery, cutting administrative expenses by 50%, formalizing the economy, and implementing a robust framework that guarantees accurate payment of both direct and indirect taxes by all stakeholders. Additionally, Pakistan should enhance its monitoring capabilities to combat trade-based money laundering and ensure precise collection and reporting of taxes. Neglecting these measures would hinder the realization of improved social indicators and development goals.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and 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: The procedure of capital gain on disposal of securities will remain applicable on transactions of shares of listed companies as recorded in the system of the National Clearing Company of Pakistan Limited (NCCPL).

The FBR has issued SRO 776(I)/2023 to amend the Income Tax Rules, 2002.

The FBR has also amended Income Tax Ordinance 2001 through Finance Act 2023 in this regard.

Under the amended rules, the FBR has clarified that the provisions of section 37A shall remain applicable on transactions of shares of listed companies as recorded in the system of NCCPL and reported in accordance with Eighth Schedule of the Income Tax Ordinance 2001.

Listed cos’ shares transactions as recorded in NCCPL system: Procedure of capital gain on disposal of securities to stay applicable: FBR

Under the new rules, section 37A (Capital gain on disposal of securities) shall not apply to the disposal of shares of listed companies otherwise than through registered stock exchange and which are not settled through NCCPL. For the purposes of second proviso to sub-section (1) of section 37A, “shares of a listed company” shall not include units of a mutual fund or collective investment scheme or a REIT scheme or derivative products and provisions of section 37A shall remain applicable on disposal of such units, schemes or products.

The State Bank of Pakistan shall not allow transfer or registration of repatriable shares unless prescribed certificate from the Commissioner, to the effect that the tax liability under sub-sections (6) to (10) of section 37 is discharged, is provided by the person selling the shares, the revised rules added.

A tax expert explained that the capital gains on disposal of listed securities are governed by a special system which is effectively applicable only for the transaction routed through NCCPL which is also the tax collection agent. These provisions are governed by Section 37A read with Section 100B of the Income Tax Ordinance 2001.

Through Finance Act 2023, now it has been provided that only those transactions will qualify under this section (37A) which are effectively settled through NCCPL. If they do not fall under that classification then provisions of Section 37 which provides for a different rate of tax shall apply.

Another very important change has also been made in the schedule relating to tax on capital gain on listed shares. This is effectively the correction of a mistake in the law as stood before the Finance Bill 2023.

The mistake has, however, been partly removed. As stood before the proposed amendment any capital gain on disposal of listed securities is subject to zero percent tax rate if the holding period is more than five years. Nevertheless, this provision is applicable only for shares acquired on or after July 1, 2022. For any shares acquired before July 1, 2022 the rate of tax was prescribed at 12.5%. In our view this is a wrong and discriminatory law.

These changes propose a rectificatory amendment in this provision. Now it is proposed that the rate of tax will be zero if the shares were acquired before June 30, 2013.

For the period of acquisition between July 1, 2013 and June 30, 2022 the rate of tax of 12.5% has been retained. This does not make sense. There has to be a reason why the period from July 1, 2013 to June 30, 2022 is discriminated against for the purposes of levy of tax, tax expert added.

Copyright Business Recorder, 2023

Further tax is required to be charged on supply of taxable goods to person who has not obtained registration or not an active taxpayer, subject to certain exclusions.

=======================================================================================================
Description                                                                                     Heading
=======================================================================================================
Contraceptive and accessories thereof                                                         3926.9020
                                                                                              4014.1000
Bovine semen                                                                                  0511.1000
=======================================================================================================
Saplings                                                                                     Respective
                                                                                                Heading
=======================================================================================================
Combined Harvester -Thresher                                                                  8433.5100
Dryer for agricultural products                                                               8419.3400
No-till-direct seeder, planters, trans-planters and other planters                            8432.3100
                                                                                              8432.3900
Import of goods as mentioned under S. No. 159 of Part III of Fifth  Schedule      7471.3010, 8471.3020,
the Customs Act, 1969 (IV of 1969) chargeable to customs duty at the rate of      8471.3090, 8471.4110,
percent, subject to the conditions, restrictions and limitations mentioned        8471.6010, 8471.6020,
therein, by the software exporters registered with the Pakistan Software Expo     8471.6090, 8471.7040,
Board.                                                                            8471.9020, 8471.7020,
                                                                                   8471.5000, 8517.6270
=======================================================================================================

The FA has increased rate of further tax from 3% to 4%.

PREPARATION SUITABLE FOR INFANTS – ZERO RATING

Amendments enacted by Finance Act, 2023 vis-à-vis those proposed in Finance Bill 2023–I

At present, supply of ‘preparation suitable for infants’, put up for retail sale not exceeding Rs 500 per 200 grams as well as raw materials, packing materials, components etc. used in manufacturing thereof are subject to sales tax at the rate of 0%.

FA has enhanced the threshold of ‘Rs 500 per 200 grams’ to ‘Rs 600 per 200 grams’.

EXEMPTIONS

==============================================================
Description                         HS Code           Proposed
                                                          duty
==============================================================
Imported and locally              Respective           Rs 2000
manufactured energy                 heading            per fan
inefficient fans which
do not comply with
the MEPS, notified
by PSQCA
Imported and locally               8539.2200               20%
manufactured                       8539.2990        ad valorem
incandescent bulbs
==============================================================

Through the FB, import or supplies of following goods were proposed to be exempted from levy of sales tax:

The exemptions proposed have not been adopted in the FA. As a result, the above goods shall remain taxable at applicable rates.

DIAMMONIUM PHOSPHATE (DAP)

Import or supplies of DAP are exempt from sales tax. FA has withdrawn the exemption and made it taxable at reduced rate of 5% with no refund of excessive input tax.

PHARMA SECTOR

==========================================================================
Description                                   Existing      Proposed in FB
                                                 (%)       but not adopted
                                                                       (%)
==========================================================================
PET scrap, if imported for the manufacture
of polyester filament yarn                       20                     11
Import of specified raw materials/inputs by
 manufacturers of Capacitors                     16                      5
Printed Composite Packaging of Aluminum
Foil backed with Paper and Plastic               10                      5
==========================================================================

Through FB, while specifying reduced rate of sales tax at 1% on ‘drug’, registered under Drugs Act, 1976, and ‘medicaments’ classifiable under Chapter 30 of the First Schedule to the Customs Act, 1969, it was proposed that input tax on such supplies would not be available in case of importer and manufacturer only. Now, through the FA, it has been provided that input tax adjustment would not be available to any person in the supply chain of such drugs/ medicaments.

================================================================================================
PCT Code      Description                                                Rate of Regulatory Duty
================================================================================================
2849.1000     Calcium (Carbides)                                                              5%
3824.9980     Chloroparaffins liquid                                   10% till Dec 31, 2023 and
                                                        5% from January 1, 2024 to June 30, 2024
7002.3200     Tubes of other glass having a linear                                           10%
              coefficient ofexpansion not
              exceeding 5x10-6 per Kelvin within a
               temperature of 0 C to 300 C
================================================================================================

Further, through the FB, reduced rate of sales tax at 1% was restricted on raw materials/ingredients, including excipients, which are liable to customs duty not exceeding 11% ad valorem. The said restriction was made effective from July 1, 2022. As a result, the standard rate of sales tax had become applicable on aforesaid goods subject to customs duty above 11% retrospectively.

The FA has removed the retrospective application of aforesaid amendment. Further, bar on adjustment of input tax relating to these supplies, earlier specified by reference to importer and manufacturer only, has been made applicable in case of all the persons in the supply chain.

FEDERAL EXCISE DUTY

DUTIES OF EXCISE TO BE LEVIED

=======================================================================================================
PCT code     Description                                                        Existing       Proposed
                                                                                    %         in FB but
                                                                                            not adopted
                                                                                                    (%)
=======================================================================================================
2710.1995    Liquid paraffin                                                       3                  0
3206.4100    Ultramarine and preparations basedthereon                             16                11
3823.7000    Industrial fatty alcohols                                             16                11
3920.4910    Polyvinyl Chloride (PVC) Rigid film                                   20                16
3920.9900    Plates, sheets, films, foils and strips of plastics                   20                16
4805.2500    Testliner (recycled liner board) weighing more than 150 g/m²          20                16
             Other uncoated paper or paperboard weighing 150 g/m² having di-
4805.9190    electric strength less than 0.5 Kv per milimeter                      20                16
4806.2000    Greaseproof papers                                                    20                16
             Centrifuges, including centrifugal dryers filtering or purifying
8421.9990    machinery and apparatus for liquid or gases                           20                16
             Parts for use with the machines of headings 8501.5340, 8501.5390,
8503.0020     8502.1110, 8502.1390 & 8502.2000                                     11                 3
=======================================================================================================

Through the FB, a new clause (e) was proposed to be added to sub-section (1) of section 3 to read as under:

“(e) any item specified in the First Schedule”

It was statedly not a revenue measure but introduced as a streamlining measure, to further elaborate the chargeability of FED on goods and services. The FA has finally corrected clause (e) as under;

“(e) any item not covered in clause (a) to (d) above and specified in the First Schedule”

The amendment seems to cover imposition of FED on items which are neither goods (imported or manufactured) nor services, specified in the First Schedule.

FIRST SCHEDULE DUTIABLE GOODS

=================================================================================
Description                                      Existing                Proposed
                                                  Rate of                 Rate of
                                                   duty                      duty
=================================================================================
Tobacco mixture in an electrically heated        Rs 5,200        Rs 16,500 per kg
tobacco product by whatever name called,          per kg
intended for consumption by using a
tobacco heating system without
combustion
Sugary Fruit juices, syrups and squashes,        10% of                    20% of
waters whether or not containing added         retail price          retail price
sugar or artificial sweeteners excluding
mineral and aerated waters
=================================================================================

(a) The FA has increased FED on following goods which were not proposed in the FB:

(b) The FA has imposed FED on Fertilizers at the rate of 5% ad valorem.

(c) The levy of FED on following dutiable goods has been made effective from January 1, 2024:

CUSTOMS DUTY

FIRST SCHEDULE TO THE CUSTOMS ACT

Reduction in customs duty on import of following goods proposed through the FB has not been adopted in the FA:

In addition to above, changes have been made in various PCT heading as well as description to rationalize the duty structure.

FIFTH SCHEDULE TO THE CUSTOMS ACT (CONCESSION / EXEMPTION)

Exemption from Customs Duty on import of following goods proposed through the FB has not been accepted in the FA.

(i) Certain machinery, equipment, and inputs for manufacturing of solar panels, inverters and batteries by local assembler / manufacturer of renewable energy sector.

(ii) Seeds for sowing.

(iii) Raw materials imported by manufacturers of diapers & sanitary napkins;

(iv) Organic composite solvents and thinners for manufacture of Butyl Acetate and Dibutyl Orthophthalates.

(v) Roasted peanuts for manufacturing of Ready to Use Supplementary Foods (RUSF) & Ready to Use Therapeutic Foods (RUTF).

(vi) Specified raw materials/inputs by manufacturers of Adhesive Tapes, Moulds and Dies, Mining machinery, Machine Tools and Rice mill machinery.

(vii) Baby shrimp/prawns/juvenile for breeding in commercial fish farms and hatcheries.

(viii) Active Pharmaceutical Ingredients (APIs) Dextrose Anhydrous Injectable Grade (Pyrogen Free) USP

(ix) Gefitnib, Caspian (Caspofungin 50 mg and 70 mg injection) and Bovine Lipid Extract Surfactant

(x) Flavouring powders for food preparation.

Reduction in Customs Duty on import of following goods proposed through the FB has not been adopted in the FA:

The FA has not adopted reduction in the assessed value of the IT related equipment proposed through the FB for the purpose of levying customs duty, in case of imports by the software exporters registered with Pakistan Software Export Board.

Regulatory Duty (RD)

RD has been imposed on the following goods through the FA:

ISLAMABAD CAPITAL TERRITORY (SALES TAX ON SERVICES) ORDINANCE, 2001 (‘ICTO’)

The following amendments in the ICTO proposed through the FB have not been adopted in the FA:

(i) Reduction in sales tax rate applicable on IT services and IT enabled services to 5%; and

(ii) Exemption from sales tax registration granted to Freelance exporter.

FOREIGN INVESTMENT (PROMOTION AND PROTECTION) ACT, 2022

In December 2022, ‘Foreign Investment (Promotion and Protection) Act, 2022 [‘FIPPA’] was passed with a view to attract, encourage, and protect, large scale investments in Pakistan.

FB proposed amendments in the following fiscal laws to address procedural issues arising out of implementation of the exemptions and tax concessions provided in the FIPPA:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Federal Excise Act, 2005

The amendments relating to the Customs Act not proposed through the FB has now been made through the FA.

PETROLEUM PRODUCTS (PETROLEUM LEVY) ORDINANCE, 1961

Through the FA, the maximum petroleum levy rate as specified in the Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 has been increased from Rs. 50 to Rs. 60 for High Speed Diesel Oil and Motor Gasoline.

(Concluded)

Copyright Business Recorder, 2023

KARACHI: Chairman of National Business Group Pakistan, President Pakistan Businessmen and Intellectuals Forum, Mian Zahid Hussain said IMF has no justification to stop lending after the revised budget and the imposition of new taxes of Rs215 billion.

If the IMF does not give the loan, the fear of bankruptcy of the country will increase because other institutions and banks will give loans to Pakistan only after the IMF loan, he said.

Mian Zahid Hussain said that basic changes have been made in the budget as per the demands of the IMF and the government expects a positive decision from the international organization in a few days.

Talking to the business community, the veteran business leader said that in these circumstances, negative rhetoric from the central leaders of a failed political party condemnable. The business leader said that the IMF programme is ending in three days, but if this organization wants, it can extend that date because the government has increased taxes by Rs215 billion and reduced the expenses by Rs85 billion.

Apart from this, the proposed amnesty of the amount of $100,000 received from overseas Pakistanis has been withdrawn, the ban on imports has been lifted and the funding of Benazir Income Support Programme has been increased by Rs16 billion.

Mian Zahid Hussain further said that the government has announced to increase the petroleum levy from Rs50 to Rs60 it may not be implemented immediately, while the effects of lifting the ban on imports will be visible after a few days because our system is full of loopholes and the process is slow, while holidays are also coming.

At present the cargos of $4 billion lying at the ports, while the central bank has only $3.54 billion. To combat this situation, the government is trying to get immediate loans from various sources including the Islamic Development Bank, because the IMF loan may be delayed, or we may have to wait for a new programme if the current programme expires.

Copyright Business Recorder, 2023

FAISALABAD: Most of the problems confronted by the agriculture and allied engineering sector are genuine but at this stage the presentation would be illogical as the government has already approved the federal budget.

However, the FCCI would try to invite provincial Agriculture minister to resolve all issues and compensate them at the provincial level, said Dr Khurram Tariq, President Faisalabad Chamber of Commerce & Industry (FCCI).

He stated this while talking to a delegation of the agriculture and allied engineering sector. Amjad Ali Amjad was heading this delegation. President FCCI said that budget exercise starts every year in the months of March and April but proposals relating to this sector were not received in time by the FCCI however next year we would focus on it and try to present viable recommendations for the next year’s budget.

He said that in the amended budget taxes to the tune of Rs 215 billion have been added however we would try to negotiate with the provincial minister to facilitate them under the food security program. He said that although the problems are genuine, we must be convincingly vocal to force policy makers to accept our proposals.

He endorsed the contention of Amjad Ali Amjad that small growers are unregistered and could not be brought into the tax net. Hence, manufacturers of agricultural appliances have to bear the amount of sale and further tax from their own profit which has made their businesses vulnerable. Dr Khurram Tariq asked them to submit their proposals in writing along with a circular exempting the agriculture sector from tax during the previous year. He said that the government has subsidized the import of agricultural appliances.

“This facility is available on tractors but it is surprising that it has not been waived off on its related attachments,” he said and added that the agriculture sector must be given more incentive to ensure food security.

He said that we would request the provincial minister to resolve issues with the federal government in addition to compensating small growers at the provincial level. He was of the view that reduced cost of agriculture appliances would encourage mechanised farming and thus play a key role in enhancing per acre yield.

He said that he had already taken up this issue at the federal level but he was told that the government has injected Rs 2800 billion in the rural economy and hence farmers are very happy. President suggested that the agriculture and allied engineering sector must explore the opportunities to export their appliances to Africa and the Philippine. He also offered to arrange an awareness session for the agriculture and allied engineering sector.

Copyright Business Recorder, 2023

ISLAMABAD: The Federal Board of Revenue (FBR) has implemented customs budgetary measures including raise in regulatory duties and Additional Customs Duty (ADC) on imported items from July 1, 2023.

In this connection, the FBR issued “customs budget notifications” (2023-24), here on Tuesday.

However, many import tariff relief measures and abolition and reduction in import duties announced in the budget (2023-24) are not part of the notification issued by the FBR.

In budget (2023-24), the FBR has abolished regulatory duties on a wide range of items including synthetic filament yarn of polyester and second hand clothing. The FBR’s budget implementation notifications do not reflect a reduction on RDs/additional customs duties from July 1, 2023.

Customs: FBR seeks customs budget proposals from business & trade

According to an SRO 775(1)/2023 issued on Tuesday, five percent RD has been imposed on the import of calcium (Carbides).

The RD at the rate of 10 percent would be applicable on the import of Chloroparaffins liquid till December 2023 and five percent RD from January 1, 2024, to June 30, 2024.

The 10 percent RD has been subjected to the tubes of other glass having a 10“; linear coefficient of expansion not exceeding 5 x 10-6 per Kelvin within a temperature of 0°C to 300°C.

The RD at the rate of 15 per cent would be applicable on the import of glass of heading 70.03, 15 70.04 or 70.05, bent, edge worked, engraved, drilled, enamelled or otherwise worked, but not framed or fitted with other materials (except 7006.0020).

The 30 per cent RD would be applicable on the import of glass sheet worked.

The RD at the rate of 15 per cent would be applicable on the import of glassware of a kind used for 20 table, kitchen, toilet, office, indoor decoration or similar purposes (other than that of heading 70.10 or 70.18) (except PCT codes 7013.4900, 7013.9100, 7013.9900).

The 20 per cent RD would be applicable on the import of Tungsten filament incandescent bulb and parts of tungsten filament incandescent bulb. The FBR has also revised additional customs duties on the import of different items. Through an SRO771(1)/2023, the FBR has amended S.RO 693(1)/2006 relating to the ADC.

The FBR has revised ACDs on the import of different components of the vehicles under the SRO771(1)/2023. The ACDs would be applicable on the import of weather strips for doors, glass and luggage compartments for vehicles, water hoses for engine cooling system and heater, air cleaner hoses and Brake oil reservoir hose for vehicles of heading 87.03 and other types of vehicles specified in the notification.

The ACDs would be applicable on the import of windscreen, rear and window glasses for vehicles of sub -heading 8704.2190 and 8704.3190; glasses for doors, glass plain, glass window (sliding), glass for rear door, glass for rear quarter window and glass for windscreen for vehicles of heading 87.03 and lamp assembly for illuminating license plate for vehicles of heading 87.03 and vehicles of sub-headings 8704.2190, 8704.3130 and 8704.3190 and rear combination lamp/back up lamp/rear turning indicator/plough lamps/reverse light/parking light for motor cars etc.

Copyright Business Recorder, 2023

ISLAMABAD: The exemption from payment of “Tax on Deemed Income basis” on immovable properties would only be applicable on persons appearing in the Active Taxpayers’ List under the Finance Act 2023.

Explaining an important amendment in Finance Bill 2023, a leading tax expert said that the tax which was levied in Finance Act, 2022 is on the value of immovable capital assets especially plot and houses. This is a sort of pseudo wealth tax on the immovable property at a deemed valuation. This tax has been challenged before the superior courts and the ultimate decision is pending before the Supreme Court.

Two major changes have been proposed in the amendments proposed. Firstly the exemption from this tax as prescribed under subsection (2) shall be applicable only if the person appears in Active Taxpayers’ List.

New condition imposed on sellers of properties

Second amendment which has been placed under Section 236C of the Ordinance whereby a condition has been prescribed that no transfer of immovable property will be registered unless it is ensured that liability under Section 7E has been discharged. This is a very appropriate prescription.

The second amendment is very important in the sense that a lot of properties are held by the person who do not appear in the active taxpayers list or are eligible to exemptions provided in the law.

The condition that there will be no transfer without discharging this liability is a good step. It is; however, strongly suggested that this provision be used to broaden the tax base and any person who pays tax under this section be necessarily required to file the income tax return.

Procedures are required to be prescribed to ensure discharge of tax liability under Section 7E of the Ordinance. An automated coordination between the property registration and tax authorities can be designed for this purpose, the tax expert added.

Copyright Business Recorder, 2023

ISLAMABAD: Finance minister, Ishaq Dar, on Tuesday told local broadcaster he was confident the International Monetary Fund’s ninth review would be done, which would unlock the disbursal of $1.1 billion from the lender to the cash-strapped South Asian nation.

Meanwhile, Prime Minister Shehbaz Sharif said on Tuesday he hoped a bailout decision from the International Monetary Fund would come in a day or two, capping off protracted negotiations as the country faces an acute balance-of-payments crisis.

Islamabad is racing against time to unlock $1.1 billion under the lender’s ninth review of a $6.5-billion Extended Fund Facility agreed in 2019. The programme expires on June 30.

PM Shehbaz meets IMF MD Georgieva with hope of programme revival

Here are some facts about the importance of unlocking the funds for the cash-strapped South Asian country of 230 million people and the challenges it has faced:

DELAYED TRANCHE

Pakistan has cleared eight of the 11 listed programme reviews, with the ninth review pending since November last year. The delay is already the longest since at least 2008.

The ninth review is to release a tranche of $1.1 billion, leaving about $1.4 billion on the table in unlocked funds. It is unclear if an IMF agreement would release the entire amount.

The ninth review had been stalled due to differences between the fund and Islamabad over policy actions, including external financing needs and a budget that meets programme goals.

HOLE IN FINANCES

The government has earmarked $2.5 billion in external receipts from the IMF in its federal budget for FY24, which means the government is budgeting for the 10th and 11th reviews too, or a new IMF programme after the current one expires.

Pakistan needs upwards of $22 billion to service external debt, make interest payments, and finance its current account for FY24. Reserves, at $3.5 billion, are at a critical level, enough to cover barely one month of controlled imports.

Pakistan’s credit rating has suffered due to macroeconomic uncertainty: Three key rating agencies recently cut Pakistan’s ratings - Standard & Poor’s rating for Pakistan stands at CCC+, Moody’s at Caa3 and Fitch at CCC.

SECONDARY BENEFITS

A successful review would not only release much-needed funds, but also unlock credit from other financiers who are looking for a clean bill of health from the IMF for the ailing $350 billion economy. This includes raising money from the private market.

The country has received financing commitments from friendly countries Saudi Arabia and the United Arab Emirates of $3 billion, while China has granted rollovers on its debt payments due.

National elections are due by November this year and the government has said the decision to enter a new IMF programme will be a decision for the incoming administration.

TOUGH CONDITIONS

The initial draft of the budget presented in parliament earlier this month failed to meet IMF expectations but was hurriedly revised to introduce new taxes and expenditure cuts. -The country’s central bank also hiked the key rate by 100 basis points in an emergency meeting on Monday barely two weeks after keeping the rate unchanged in a scheduled meeting.

Hopes of a last-minute bailout rose following meetings between Sharif and IMF Managing Director Kristalina Georgieva in Paris this month, followed by marathon meetings between IMF staff and finance ministry officials.

The Federal Government presented Finance Bill, 2023(‘FB’) in the National Assembly on June 9, 2023. After the debate in the Senate and National Assembly, the Government has passed Finance Act, 2023(‘FA’) with certain modifications/amendments made in the FB.

The amendments made in the fiscal laws by the FA are made effective from July 1, 2023 unless otherwise specified.

This Memorandum summarises major amendments made in the FB whilst passing the FA.

==========================================================
S.        Engine            Existing          Revised Tax/
No.      Capacity             Tax              Rate of Tax
==========================================================
1       Upto 850cc          Rs 10,000            Rs 10,000
2     851cc to 1000cc       Rs 20,000            Rs 20,000
3    1001cc to 1300cc       Rs 25,000            Rs 25,000
4    1301cc to 1600cc       Rs 50,000            Rs 50,000
5    1601cc to 1800cc       Rs 150,000          Rs 150,000
6    1801cc to 2000cc       Rs 200,000          Rs 200,000
7    2001cc to 2500cc       Rs 300,000     6% of the Value
8     2501ccto 3000cc       Rs 400,000     8% of the Value
9      Above 300occ         Rs 500,000    10% of the Value
==========================================================

INCOME TAX

ADDITIONAL TAX ON WINDFALL INCOME

Through the FB, a new provision was proposed to empower the Federal Government to impose additional tax on persons or classes of persons who have any income, profits or gains arisen due to any economic factors that resulted in windfall income, profits or gains.

The proposal has been retained by FA with following amendments:

=======================================================================
Description                   Current                           Amended
=======================================================================
                              -number of days-
=======================================================================
Constitution of committee     45 days of receipt        days of receipt
                              of applica15               of application
Decision in dispute           120 days                45 days, extended
                                                             by 15 days
=======================================================================

i) The applicability of the said tax has now been restricted to companies only operating in specified sectors;

ii) The retrospective application of the said tax has been reduced from five (5) years to three (3) years preceding the tax year from tax year 2023 and onwards; and

iii) Federal Government notification for determination of windfall income and the economic factors resulting in an income subject to tax under this section is now required to be placed before the Parliament within ninety (90) days of notification or June 30 of the financial year, whichever is earlier.

The legal challenges to the implementation of these provisions are still not addressed which may arise on certain constitutional grounds and principles laid down by the Superior Courts particularly with regard to past and closed transactions.

TAX ON DEEMED INCOME UNDER SECTION 7E

Through the Finance Act, 2022, a resident individual owning immovable properties in Pakistan is subjected to tax on deemed income from such properties for tax year 2022 and onwards. Such deemed income is effectively taxed at 1% of the FBR values of immovable properties. The said tax is not applicable on certain immovable properties which inter alia include the following:

==========================================================================================================
Sr No.   Taxable income                           Existing Rates                                 New Rates
==========================================================================================================
1.       Where the taxable income does not        Rs. 0                                              Rs. 0
         exceed Rs 600,000
2.       Where the taxable income exceeds Rs      2.5% of the amount                    2.5% of the amount
         600,000 but does not exceed Rs           exceeding Rs 600,000                exceeding Rs 600,000
         1,200,000
3.       Where the taxable income exceeds Rs      Rs 15,000 + 12.5% of the        Rs 15,000 + 12.5% of the
         1,200,000 but does not exceed Rs         amount                                            amount
         2,400,000                                exceeding Rs 1,200,000            exceeding Rs 1,200,000
4.       Where the taxable income exceeds Rs      Rs 165,000 + 20% of the        Rs 165,000 + 22.5% of the
         2,400,000 but does not exceed Rs         amount                                            amount
         3,600,000                                exceeding Rs 2,400,000            exceeding Rs 2,400,000
5.       Where the taxable income exceeds Rs      Rs 405,000 + 25% of            Rs 435,000 + 27.5% of the
         3,600,000 but does not exceed Rs          the  amount                                      amount
         6,000,000                                exceeding Rs 3,600,000            exceeding Rs 3,600,000
6.       Where the taxable income exceeds Rs      Rs 1,005,000 + 32.5% of
          6,000,000 but does not exceed Rs         the amount
         12,000,000                               exceeding Rs 6,000,000
                                                                                 Rs 1,095,000 + 35% of the
7.       Where the taxable income exceeds Rs      Rs 2,955,000 + 35% of the                         amount
          12,000,000                               amount exceeding Rs              exceeding Rs 6,000,000
                                                   12,000,000
==========================================================================================================

a) one immovable property owned by the resident person;

b) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;

c) immovable property in the first tax year of acquisition where tax under section 236K has been paid;

d) where the fair market value of the properties in aggregate excluding certain specified properties does not exceed Rupees twenty-five million

By way of an amendment through the FA, the abovementioned assets will only be excluded from the purview of tax on deemed income if the name of the person holding such properties is appearing on the Active Taxpayers’ List (ATL). However, if any person is not required to file a return of income and obtain certificate to that effect as provided under the Tenth Schedule then such person would not be liable to pay tax on deemed income under section 7E despite not appearing on the ATL.

If the tax liability under section 7E is not discharged, then the registrar or the person registering the transfer is required not to register the transfer of the subject property.

ADVANCE TAX ON PURCHASE/SALE/ TRANSFER OF IMMOVABLE PROPERTY

The rate of advance tax to be collected from buyer or seller on purchase/sale/transfer of property has also been increased from 2% to 3%. As a result, rate of tax on those not appearing on the ATL will also be increased as under:

=======================================================================
Annual taxable       Tax Year 2023      Tax Year 2024        Excess tax
Income
=======================================================================
600,000                    -                  -                       -
1,200,000               15,000             15,000                     -
2,400,000               165,000            165,000                    -
3,600,000               405,000            435,000               30,000
6,000,000              1,005,000          1,095,000              90,000
12,000,000             2,955,000          3,195,000             240,000
=======================================================================

(i) On purchase of property - from 7% to 10.5%

(ii) On sale of property - from 4% to 6%

CAPITAL MARKET

a) Public Offering

Through the Finance (Supplementary) Act, 2023, capital gains arising on disposal of shares of listed company which is made otherwise than through stock exchange and which are not settled through NCCPL, is taxed under section 37 of the Ordinance. The said amendment had resulted in unwarranted tax implications on public offerings of listed securities.

Through an amendment made by the FA, disposal of shares through initial public offer during the listing process will remain subject to tax under section 37A of the Ordinance provided the details of such disposalare furnished to NCCPL for the computation of Capital Gains and tax thereon.

b) Securities acquired prior to July 1, 2013

At present, capital gains arising on disposal of securities that are acquired before July 1, 2013are subject to tax at the rate of 12.5%.

Through FA, capital gains arising on disposal of such securities will be subject to tax at 0%. The said amendment has resolved the unwarranted anomaly arisen due to an amendment made through the Finance Act, 2022.

PERMANENT ESTABLISHMENT (PE)

The FB proposed certain changes in the definition of PE which has been further amended by the FA to include virtual business presence in Pakistan including any business where transactions are conducted through internet or any other electronic medium, with or without having any physical presence.

Non-residents covered by Double Tax Treaties (DTT) will not be affected by the changes made through FA and consequently their PE status will continue to be determined under the DTT provisions.

ADVANCE TAX ON CONSTRUCTION / DISPOSAL OF BUILDINGS AND PLOTS

An amendment has been made in section 147 through FA, which requires payment of advance tax on project-by-project basis in four equal instalments by persons deriving income from business from the following:

i) construction and disposal of residential, commercial and other buildings

ii) development and sale of residential, commercial and other plots

The said advance tax is required to be discharged by the dates prescribed for corporate and non-corporate persons, as the case may be. The rates prescribed for advance tax are aligned with the tax rates applicable on builders and developers who opted to be taxed under section 100D read with Eleventh Schedule.

Builders or developers in respect of projects registered / covered under the Eleventh Schedule will continue to discharge their tax liability (including advance tax) under the said Schedule. However, for projects which are not registered / covered under the Eleventh Schedule, the advance tax liability under section 147 will be discharged as stated above whilst their taxability will be governed under normal provisions of the law.

ADVANCE TAX ON MOTOR VEHICLES

Through the FA, the rate of advance tax collected on registration of motor vehicle by motor registration authority or by the manufacturer on sale of motor vehicle has been amended as under:

For the purpose of advance tax, the value of motor vehicle above 2000cc will be as follows:

i) Imported vehicle – value assessed by the customs authorities as increased by the customs duty, federal excise duty and sales tax payable at import stage

ii) Locally manufacture/assembled vehicles – invoice value inclusive of all duties and taxes

iii) Auctioned vehicle – the auction value inclusive of all duties and taxes

There is no change in rate of advance tax collected on transfer of registration of motor vehicle.

ADVANCE TAX ON CASH WITHDRAWAL FROM NON-FILERS

Adjustable advance tax on cash withdrawals of non-filers was reintroduced through the FB at the rate of 0.6% where the sum of the payments for cash withdrawal in a day exceeds Rs 50,000. Since the said tax is applicable on non-filers only, therefore, corrective amendment has been made in the Tenth Schedule to avoid duplicate implications.

THRESHOLD FOR SALARY PAYMENT OTHERWISE THROUGH BANKING CHANNEL

Presently, salary payments exceeding Rs 25,000 per month are not allowed as admissible deduction while computing income from business.

The said limit is now enhanced to Rs 32,000 per month.

ALTERNATIVE DISPUTE RESOLUTION (ADR)

The concept of ADR was introduced in the law to avoid protracted litigation and delay in settlement of cases. This mechanism was introduced in parallel with taxpayer’s right to appeal before appellate forums.

Despite of various amendments made over the years; this forum has not achieved the desired results.

To make this forum effective, following amendments have been made through the FA:

• Under the revised mechanism, the committee shall include a retired judge, not below the rank of a judge of a High Court, who shall also be the Chairperson of the Committee. The retired judge would be nominated by FBR from the panel notified by the Law and Justice Division. The other two members of the Committee shall be the concerned Chief Commissioner Inland Revenue and a person to be nominated by the taxpayer from the panel notified by FBR.

• Presently, the taxpayer needs to withdraw his appeal for seeking relief under the ADR. Under the revamped procedure, the taxpayer, if satisfied with the ADRC decision, is required to withdraw appealand communicate the withdrawal to the Commissioner within 60 days of the ADRC decision.

• Presently, the offer of tax payment made by taxpayer in initial proposal for resolution of dispute, accompanied with the application for ADR, is irrevocable. Through amended provisions, such offer would not be binding.

• Under the amended mechanism, the decision of the Committee shall only be binding upon the Commissioner if the taxpayer has withdrawn the appeal and has communicated the same to the Commissioner within 60 days of service of decision of the Committee. In such circumstances, Commissioner is also required to withdraw his appeal within 30 days of appeal withdrawal notice from the taxpayer.

• Time period for the appointment of Committee as well as time period prescribed for the decision of the dispute has also been reduced in the following manner:

Similar amendments have been made in the Sales Tax Act, 1990 and the Federal Excise Act, 2005. In the Customs Act, 1969, amendments on above lines were made through the Finance Act, 2020 except for appointment of a retired judge as member of the ADRC which has now been made through the FA.

AMENDMENTS PROPOSED THROUGH THE FB BUT NOT ADOPTED IN THE FA:

Following amendments proposed in the FB have not been adopted in the FA:

=============================================================================================================
Sr No.      Taxable income                                           Existing Rate                   New Rate
=============================================================================================================
1.          Where the taxable income does not exceed Rs                   0%                               0%
             600,000
2.          Where the taxable income exceeds Rs 600,000            5% of the amount        7.5% of the amount
            but does not exceed Rs 800,000                           exceeding Rs                exceeding Rs
                                                                        600,000                       600,000
                                                                 exceeding Rs 600,000
3.          Where the taxable income exceeds Rs 800,000           Rs 10,000 + 12.5%        Rs 15,000 + 15% of
             but does not exceed Rs 1,200,000                        of the amount                 the amount
                                                                     exceeding Rs                exceeding Rs
                                                                        800,000                       800,000
4.          Where the taxable income exceeds Rs 1,200,000          Rs 60,000 + 17.5%       Rs 75,000 + 20% of
            but does not exceed Rs 2,400,000                         of the amount                 the amount
                                                                     exceeding Rs                exceeding Rs
                                                                       1,200,000                    1,200,000
5.          Where the taxable income exceeds Rs 2,400,000         Rs 270,000 + 22.5%      Rs 315,000 + 25% of
             but does not exceed Rs 3,000,000                        of the amount                 the amount
                                                                     exceeding Rs                exceeding Rs
                                                                       2,400,000                    2,400,000
6.          Where the taxable income exceeds Rs 3,000,000         Rs 405,000 + 27.5%      Rs 465,000 + 30% of
             but does not exceed Rs 4,000,000                       of the amount                  the amount
                                                                     exceeding Rs                exceeding Rs
                                                                       3,000,000                    3,000,000
7.          Where the taxable income exceeds Rs 4,000,000         Rs 680,000 + 32.5%
             but does not exceed Rs 6,000,000                       of the amount
                                                                     exceeding Rs
                                                                       4,000,000
8.          Where the taxable income exceeds Rs 6,000,000         Rs 1,330,000 + 35%      Rs 765,000 + 35% of
                                                                    of the amount                  the amount
                                                                     exceeding Rs                exceeding Rs
                                                                       6,000,000                    4,000,000
=============================================================================================================

1) Enhancement of monetary limit for immunity on foreign remittances received from abroad through permissible channels from Rs 5 Million to an amount equivalent to USD 100,000 per annum.

2) Reduction of minimum turnover tax from 1.25% to 1% for listed companies.

3) Tax credit for tax years 2024 to 2026 for an individual on construction of a new residential house.

4) Extension in period of exemption on profits and gains on the sale of immoveable property or shares of Special Purpose Vehicle to any REIT scheme from June 30, 2023 to June 30, 2024.

5) Reduction in tax liability on income from new construction projects to a ‘builder’.

6) Reduction in tax liability on income from business of a youth enterprise.

7) Increase in the threshold of Special Tax Regime for SME having turnover up to Rs 800 Million (from Rs 250 Million) and inclusion of persons engaged in the provisions of IT services and IT enabled services under the said Special Tax regime. Conditional tax holiday for SMEs setup exclusively as Agro based industry in a rural area.

8) Reduction in tax liability of a banking company on income arising from additional advances to certain specified sectors.

9) Non-applicability of advance tax on purchase of immovable property by overseas Pakistanis through Roshan Digital Account.

INCOME TAX SCHEDULES

INCREASE IN TAX RATES FOR NON-CORPORATE TAXPAYERS

There was no proposal for increase in the rate of tax for individual and Association of Persons in the FB. Through the FA, the rate of tax for tax year 2024 and onwards has been increased as under:

===================================================
Annual         Tax Year       Tax Year      Excess 
Taxable         2023          2024             tax 
income
===================================================
600,000           -               -               -
800,000         10,000         15,000          5000
1,200,000       60,000         75,000        15,000
2,400,000      270,000         315,000       45,000
3,000,000      405,000         465,000       60,000
4,000,000      680,000         765000        85,000
6,000,000     1,330,000       1,465,000     135,000
===================================================

• Flat increase of 2.5% in the tax rates applicable on salaried individuals earning more than Rs 2.4 Million per annum with highest slab rate of 35% starting from Rs 6 Million per annum (previously Rs 12 Million).

• Flat increase of 2.5% in the tax rates applicable on non-salaried individuals and AOPs earning more than Rs 600,000 per annum with highest slab rate of 35% starting from Rs 4 Million (previously Rs 6 Million).

SALARIED INDIVIDUALS (COMPARISON OF EXISTING AND NEW RATES)

The impact of the above-mentioned changes is illustrated as under:

NON-SALARIED INDIVIDUALS / AOPs (COMPARISON OF EXISTING AND NEW RATES)

The impact of the above-mentioned changes is illustrated as under:

(To be Continue)

Copyright Business Recorder, 2023

ISLAMABAD: The International Monetary Fund (IMF) continues discussions with Pakistani authorities with the aim of quickly reaching an agreement on financial support from the Fund.

This was stated by Nathan Porter, IMF Mission Chief through a statement issued by the Esther Perez Ruiz IMF Resident Representative in Pakistan.

The statement indicated that the Staff level agreement under the Extended Fund Facility (EFF) of the Fund programme is yet to be reached.

Amended finance bill sails through NA: Key steps taken to keep IMF in good humour

The statement noted, “Over the past few days, the Pakistani authorities have taken decisive measures to bring policies more in line with the economic reform program supported by the International Monetary Fund (IMF), including the passage of a budget by the parliament that broadens the tax base while opening up space for higher social and development spending, as well as steps towards improving the functioning of the foreign exchange market and tightening monetary policy to reduce inflationary and balance of payment pressures that affect particularly the more vulnerable.

“The IMF team continues discussions with Pakistani authorities with the aim of quickly reaching an agreement on financial support from the IMF”.

Copyright Business Recorder, 2023

ISLAMABAD: The increase by Rs 10 per litre to Rs 60 per litre as the maximum allowed under petroleum levy (PL) as stipulated in the Finance Bill 2023 may not be imposed in one go from July 1, 2023, as consumers are already burdened by taxes of up to Rs 67.50 per litre, sources in the Petroleum Division told Business Recorder.

The Ministry of Finance officials told Business Recorder that their concern at this time was creating sufficient fiscal space that would satisfy the International Monetary Fund (IMF) into reaching a staff level agreement on the pending ninth review.

The next few days would tell whether the Petroleum Division’s view would gain ascendance over the Finance Ministry’s needs, sources stated, though the consensus was the latter’s decision would prevail.

Rs327bn hike in PL proposed

The ambitious budgeted target under PL has been set at Rs 869 billion for next fiscal year. During the outgoing fiscal year 2022-2023, the government budgeted to collect Rs855 billion through PL, however, this target was revised downward to Rs 542 billion.

Three main reasons are cited for the shortfall in meeting the budgeted target for the outgoing year were: (i) a dramatic decline in consumption, down 23 percent in the first 10 months of the outgoing year to an average of 1.37 billion litres per month for petrol and HSD, due mainly to very high inflation rates and the shrinking value of each rupee earned; (ii) dithering over raising the PL to its maximum, Rs 50 maximum allowed at the time, for political reasons –the maximum on petrol was levied in November and on HSD in April 2023; and (iii) a rise in the international price of oil and products together with an eroding rupee dollar parity.

Saudi Arabia has already announced its decision to cut production by one million barrels per day (bpd) with effect from 1 July 2023, which has sent a signal to the market that oil and products prices will rise further. This would make any decision to up the PL to the new maximum of Rs 60 per litre even more politically challenging

A raise in PL directly impacts on transport prices including transport of perishables from farm to market which would further raise food inflation from the existing high of 50 percent pushing ever more people under the poverty line.

Copyright Business Recorder, 2023

ISLAMABAD: The Finance Act 2023 has withdrawn one-year extension in exemption from duties and taxes for the erstwhile tribal areas up to June 30, 2024.

The exemption has been withdrawn through an amendment in the Finance Bill 2023 made through the amended Finance Bill 2023. This exemption was valid up to June 30, 2023. One-year extension was proposed under the Finance Bill 2023. The extension proposed has been removed under the Finance Act 2023. Now there is no such exemption for the erstwhile tribal areas up to June 30, 2024.

Tax experts told Business Recorder that the exemption of nearly Rs 45 billion has been withdrawn for another fiscal year.

During the period of concession from 2018 to 2023, the facility given to these units crippled the taxpaying units operating in the tax areas of the country. The extension in the exemption period is disastrous for the bona fide taxpaying industries operating in the country.

Under the Finance Bill 2023, an extension in exemption of sales tax to NMDs (FATA/PATA) has been granted for another one year ending on June 30, 2024.

Moreover, another extension in exemption on machinery and equipment imported by erstwhile FATA areas has been allowed till June 30, 2024. At the same time, the extension of income tax exemption has been granted for one year, i.e., up to June 30, 2024 for resident persons of FATA/PATA.

Copyright Business Recorder, 2023

ISLAMABAD: The Federal Board of Revenue (FBR) will charge 15 percent sales tax on Electric Power Transmission Services provided within the territorial jurisdiction of Islamabad Capital Territory (ICT) from July 1, 2023.

According to the Finance Act 2023, the government has made amendments in the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The FBR will charge 15 percent sales tax on services provided or rendered by hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers within the Islamabad Capital Territory (ICT) from July 1, 2023.

Five percent sales tax would be applicable 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. This is applicable on 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.

Fifteen percent sales tax would be applicable where payment received in cash on 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.

Fifteen percent sales tax would be applicable on the IT services and IT-enabled services. Explanation:- The “IT services” include but not limited to software development, software maintenance, system integration, web design, web development, web hosting and network design; and the “IT enabled services” include but not limited to inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, human resources (HR) services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally television programs and insurance claims processing.

Copyright Business Recorder, 2023

The Federal Board of Revenue (FBR) has collected Rs7 trillion in tax revenue till June 26, said Finance Minister Ishaq Dar on Tuesday.

“For the first time in the history of Pakistan, FBR has collected Rs7,000 billion in tax revenue till June 26,” Dar said in a tweet post.

“It will increase further till June 30,” he added.

The development comes just days before the end of the ongoing fiscal year i.e. 30 June 2023.

Last month, FBR provisionally collected Rs559 billion in May 2023 against the monthly target of Rs 621 billion, reflecting a shortfall of Rs 62 billion in May 2023.

The FBR set a tax collection target of Rs7.6 trillion for 2022-23.

Higher tax collection has been one of the major demands of the International Monetary Fund (IMF) to revive the stalled bailout programme.

On Sunday, the government passed the Finance Bill, 2023-24, which included several fiscal tightening measures as it moved to appease the lender .

The revised budget aims for an additional Rs215 billion in tax revenue alongside a cutback of Rs85 billion in public spending for the upcoming fiscal year.

However, this does not affect the federal development budget or the salaries and pensions of government employees.

With the changes in the finance bill, 2023-24, the revenue target of Federal Board of Revenue (FBR) for fiscal FY2023-24 went up from Rs9.2 trillion to Rs9.415 trillion.

That the incumbent government has done anything and everything to keep the International Monetary Fund (IMF) in good humour is a fact. In this regard, it is important to note that June 30 2023 is the date when the $6.5 billion Extended Fund Facility (EFF) agreed in 2019 is set to expire.

Revisiting the budget for fiscal year 2023-24 by the government and raising the policy rate by 100 basis points to 22 percent by State Bank of Pakistan are the key steps that must convince the lender of the last resort to release the stalled tranche. The budget changes include Rs 215 billion additional taxation measures and withdrawal of import restrictions.

In my view, it is about time the IMF revisited its approach to Pakistan in view of the fact that the incumbent government has met all of Fund’s conditionalities. The edgy procrastination on the part of IMF has been inflicting immense harm on the country’s economy, which is already in tatters. Unfortunately, it increasingly appears that the Fund is no longer a solution; it’s, in fact, a part of problem.

The IMF is known as the lender of last resort to countries in financial trouble. The IMF is, therefore, requested to live up to its reputation in accordance with the mechanism that John Maynard Keynes had outlined in the early 1930s.

Shahid Ikram (Karachi)

Copyright Business Recorder, 2023

The consistent series of the GDP with one year, 2015-16, has been estimated and released by the PBS from 1999-2000 onwards. This now enables determination and comparison of the key fiscal ratios of Pakistan from 2001-02 to 2022-23. For example, the trend in the tax revenues-to-GDP ratio can now be identified.

The approach adopted is to determine the magnitude of a fiscal ratio during the tenure of a particular government, that is, in the first year and in the terminal year. Therefore, the chosen years are 2001-02, 2007-08, 2012-13, 2017-18, 2021-22 and 2022-23. Adequate information on public finances was not available prior to 2001-02. The fiscal ratios are derived with respect to the GDP.

The first key indicator is the trend in total tax revenues as percentage of GDP, including both federal and provincial taxes. Over the last two decades this ratio has fluctuated between 8 percent and 12 percent of the GDP. It was close to 8 percent of the GDP in 2001-02 and this year it is likely to be 9.3 percent of the GDP.

The trend is inverted U-shaped. The tax-to-GDP ratio rose steadily after 2001-02 and reached the peak of 11.4 percent of the GDP in 2017-18. Between 2012-13 and 2017-18 there was a big increase in the ratio of 2.6 percent of the GDP.

Thereafter, the tax-to-GDP ratio shows a clear declining trend and now stands at 9.3 percent of the GDP, with a fall of 2.1 percent of the GDP after 2017-18. In the absence of a withdrawal of the sales tax on petroleum products, it would have been close to 10 percent of the GDP, still significantly below the peak level attained in 2017-18.

There is need to recognize that one of the fundamental structural problems with the public finances of Pakistan is the low and declining tax-to-GDP ratio. It is low in comparison to other South Asian countries. India has an overall tax-to-GDP ratio of 17 percent, while it is close to 18 percent of the GDP in Nepal.

There is fortunately one positive development in the tax system of Pakistan. The share of the income tax has increased from 29% in total tax revenues to 36 percent in 2022-23. However, many of the withholding taxes in the income tax system are of an indirect nature.

Turning now to the changes in the level and composition of federal expenditures, there are some clearly visible trends. Total federal spending has ranged from 11 percent to 15 percent of the GDP. It was at the lowest level of 11.5 percent of the GDP in 2001-02 and reached the peak of 14.5 percent in 2007-08. It stands at 13.3 percent of the GDP in 2022-23.

There have been big long-term changes in the composition of federal expenditure. Current expenditure has been rising steadily as a percentage of the GDP. It has increased from 9.3 percent of the GDP in 2001-02 to 12.7 percent of the GDP in 2021-22. There is a small decline of 0.3 percent of the GDP in 2022-23.

The evidence points to the fact that the rising level of current expenditure has ‘squeezed out’ development spending so as to prevent big increases in the budget deficit. As such, the development expenditure by the federal government has contracted sharply from a peak of 3.3 percent of the GDP in 2007-08 and 2012-13 to less than 1 percent of the GDP in 2002-23. This is undoubtedly a very negative long-term development in public finances.

The lack of adequate development spending by the federal government is a big constraint to economic growth. Vitally needed infrastructure related to expansion of water resources, highways and power transmission and distribution are being greatly delayed in implementation.

Within federal current expenditure, there have also been major changes in composition. The largest head is debt servicing, and its share has increased from 44 percent in 2001-02 to 52 percent in 2022-23. The level has gone up during this period from 4.1 percent of the GDP to 6.5 percent of the GDP. This reflects not only the rising level of government debt but also the quantum jump in interest rates this year.

The other rising component of current expenditure is the outlay on subsidies and grants. Combined they had a share of 15 percent in 2001-02, which rose to a peak of 34 percent last year. This is attributable to the problems of cost recovery, especially in the power sector and the collection of loss-making SOEs. However, there is one positive development in the form of significantly larger outlays for social protection, especially for the Benazir Income Support Programme.

A perhaps surprising finding is the fall in defence spending as a percentage of GDP. It has declined from 2.5 percent of the GDP in 2001-02 to 2.2 percnet of the GDP in 2012-13. There was a peak at 2.6 percent of the GDP in 2017-18. Thereafter, it has fallen to 1.9 percent of the GDP in 2022-23. Even if military pensions are included in defence expenditure, it is still below 2.5 percent of the GDP. The level of military spending in India is somewhat higher at 2.7 percent of the GDP.

The next set of trends relates to the relative levels of spending by the federal and the provincial governments respectively. Following the liberal 7th NFC Award in favor of substantially larger transfers to the provincial governments, their share in public spending, both current and development, has increased. It was 25 percent in 2021-22, which rose to a peak of 39 percent in 2017-18. The share has declined to 31 percent in 2022-23, due to the extremely large jump in debt servicing by the federal government.

Within the total development spending in the country, the share of provincial governments has consistently been increasing. As highlighted above, there has been a squeezing out of development spending at the federal level because of the big increase in the burden of debt servicing. Consequently, while the share of provincial governments in total development spending was only 16 percent in 2001-02 it has now increased to 60 percent. This has augured well for education and health spending.

Finally, there is need to focus on the bottom line, that is, the size of the budget deficit and primary surplus/deficit as a percentage of the GDP. The consolidated budget deficit of the federal and provincial governments has been showing a sharply worsening trend. It was 4 percent of the GDP in 2001-02 and rose to 7.3 percent of the GDP in 2012-13. There was a significant fall to 5.8 percent of the GDP in 2017-18. Thereafter, it reached a peak of 7.9 percent of the GDP in 2021-22. There was a minor containment to 7.6 percent of the GDP in 2002-23.

A similar trend is visible in the primary surplus/deficit as percentage of the GDP. There was a small surplus in 2001-02. Thereafter, the budget books generally closed with primary deficits. It hit an all-time peak with a deficit of 3.4 percent of the GDP in 2012-13, followed by a big deficit of 3.1 percent of the GDP in 2021-22. This has come down to a deficit of 1.1 percent of the GDP in 2022-23.

Overall, the overriding conclusion is that the trends over the last two decades in key fiscal ratios have generally been negative. The tax-to-GDP ratio has fallen consistently, current expenditure, especially on debt servicing, has been rising while development spending, particularly by the federal government, has been falling as a percentage of the GDP, thereby limiting the growth rate of the economy.

Also, there has been a rising trend in the size of the budget deficit with respect to the GDP and primary deficits have been generated in most years. There is no doubt that major structural reforms are required in different areas of public finances in the country if the GDP growth rate is to be enhanced and inflation kept under control.

Copyright Business Recorder, 2023

LONDON: Pakistan’s sovereign dollar-denominated bonds jumped on Monday after its parliament approved a revised budget in a last ditch bid to clinch a deal with the International Monetary Fund (IMF).

Shorter-dated securities saw the biggest gains with the 2024 bond adding more than 3 cents before retracing some of the gains, Tradeweb data showed. However, they are still at deeply distressed levels of just under 53 cents.

There are four days to go before a $6.5 billion Extended Fund Facility (EFF), agreed in 2019, expires on June 30. The IMF has to review whether to release a $1.1 billion tranche pending to Pakistan that has been stalled since November.

National Assembly approves IMF-aligned budget FY24

Saturday’s budget review came a day after Prime Minister Shehbaz Sharif met IMF Managing Director Kristalina Georgieva on the sidelines of the Global Financing Summit in Paris.

The IMF made clear that it was unhappy with the budget Pakistan presented earlier in the month, saying it failed to broaden the tax base in a progressive way and undercut resources needed for vulnerable people.

The funding is key to Pakistan as it faces an acute balance of payment crisis, which analysts say could spiral into a debt default if the IMF funds do not come through.

The central bank barely has enough foreign exchange reserves to cover one month of even controlled imports, its currency has lost more than 25% against the US dollar since the beginning of the year and the economic meltdown is driving more of its citizens to try risky migration routes to Europe.

KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) in its emergency meeting held on Monday decided to increase the benchmark policy rate by 100 basis points (bps) to historical high of 22 percent on deteriorated inflation outlook followed by imposition of new taxes in the budget.

Cumulatively, the MPC has raised the policy rate by 825 percent during this fiscal year (FY23) to control the rising inflation. In the previous meeting held on June 12, the committee kept the policy rate unchanged at 21 percent amid subdued domestic demand and downward inflation trajectory expectation.

In the previous meeting, MPC was expecting that moderating global commodity prices and high base effect would help bring inflation down from June 2023 onwards. In this context, the MPC was of the view that maintaining the current policy stance is necessary to bring inflation down to the medium-term target range of 5-7 percent by the end of FY25.

SBP keeps key interest rate unchanged at 21%

However, the recent developments on the economic front has forced the committee to review its decision on policy rate and after two weeks of scheduled meeting, the committee in its emergent meeting decided to further tighten the monetary policy stance to curb the inflation.

After the previous meeting, the MPC viewed the monetary policy stance as appropriate to achieve the objective of price stability “barring any unexpected domestic and external shocks.” The MPC further noted that this outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”

According to a statement issued after the meeting, the Committee, however, has noted two important domestic developments since the last meeting that have slightly deteriorated inflation outlook and which could potentially increase pressure on the already stressed external account.

First, there are certain upward revisions in taxes, duties and PDL rate in FY24 budget as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritization of imports. While the MPC views these measures as necessary in the context of completion of the ongoing IMF program, they have increased the upside risks to the inflation outlook. The Committee views that additional tax measures are likely to contribute to inflation both directly and indirectly, while the relaxation in imports may exert pressures in the foreign exchange market. The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices.

With this background, the MPC convened an emergency meeting on Monday to respond to these developments. The MPC decided to raise the policy rate by 100 bps to 22 percent, effective 27th June 2023.

The MPC views this action as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis. This would help further anchor inflation expectations, which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5-7 percent by the end of FY25, barring any unforeseen developments.

The MPC views that current decision of rate increase along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty.

The Committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term. Analysts said that the current increase in policy rate one of the IMF condition for the release of EFF tranche of $1 billion to build the sliding foreign exchange reserves of the country.

Copyright Business Recorder, 2023

ISLAMABAD: Finance Act 2023 has imposed a new advance tax on the construction, development and disposal of commercial and residential businesses.

Under the Finance Act 2023, the new advance tax will be collected on a Project to Project basis.

Through the Finance Bill 2023 a concession was proposed to persons of Pakistan origin from the collection of advance tax on purchase of immovable property. This concession is proposed to be removed. This is not a correct step as such persons are generally not taxable in Pakistan and tax paid is not adjustable against income in Pakistan.

The perpetual tax amnesty available under section 111(4) of the Income Tax Ordinance which was limited to a sum of Rs 5 million for remittance from outside Pakistan in a tax year was proposed to be increased to USD 100,000 has been removed. The amnesty is now available at the old limit of Rs 5 million, according to the Finance Act 2023.

Copyright Business Recorder, 2023

ISLAMABAD: Finance Act 2023 has withdrawn one-year extension in exemption from duties and taxes for the erstwhile tribal areas up to June 30, 2024.

The exemption has been withdrawn through an amendment in the Finance Bill 2023 made through the amended Finance Bill 2023. This exemption was valid upto June 30, 2023. The extension proposed has been removed under the Finance Act 2023. Now there is no such exemption for the erstwhile tribal areas up to June 30, 2024.

Tax experts told Business Recorder that the exemption of nearly Rs 45 billion has been withdrawn for another fiscal year.

During the period of concession from 2018 to 2023, the facility given to these units crippled the taxpaying units operating in the tax areas of the country. The extension in the exemption period is disastrous for the bonafide taxpaying industries operating in the country.

Under the Finance Bill 2023, an extension in exemption of sales tax to NMDs (FATA/ PATA) has been granted for another one year ending on June 30, 2024.

Moreover, another extension in exemption on machinery and equipment imported by erstwhile FATA areas has been allowed till June 30, 2024. At the same time, the extension of income tax exemption has been granted for one year, i.e., up to June 30, 2024 for resident persons of FATA/ PATA.

After issuance of the final Finance Act 2023, the one-year extension in tax exemptions would not be available to the industrial units of iron/ steel, plastics, ghee, textile and other sectors/ industries located in the erstwhile Federally Administered Tribal Areas/ Provincially Administered Tribal Areas.

Copyright Business Recorder, 2023

General These notes provide comments on the changes proposed in the Finance Bill 2023 by the Finance Minister. This amends the Finance Bill earlier presented in the Assembly. The Finance Bill 2023, after incorporating these amendments, becomes the Finance Act 2023.

The notes in the following paragraphs are restricted to comments on the amendments in the Income Tax Ordinance, 2001.

We will be issuing comprehensive comments on the overall Finance Act 2023 very shortly after the publication of the gazette.

Windfall Income Tax

In the Finance Bill 2023 an additional tax was proposed for income or profit on account of unexpected income.

This new section 99D has been redrafted and a better version has been introduced in the changes proposed. Now this tax will be charged on ‘Windfall income or profit’ which is a generally acceptable term in the international tax spheres.

The word “windfall” originally referred to fruit blown down from a tree by the wind, which could be easily collected from the ground. Its use evolved to describe any kind of economic godsend or good fortune, and the term “windfall profit” is often used in a manner that implies undeserved good fortune.

What is a windfall tax?

A tax on excessive profits. A windfall tax is an additional tax applied to big companies registering sudden and significant increases in their profits due to external circumstances or events such as a war or a pandemic.

It is only applied to companies with excessive profits, above a normal level. This is calculated by comparing profits in a previous period or based on an estimation of real costs.

History & examples:

Windfall taxes are not new. In the World War I and World War II, for example, windfall taxes brought in significant revenue to help governments rebuild and stop wartime profiteering. In 1981, the UK Conservative Party under Margaret Thatcher imposed an extraordinary levy on the windfall profits of banks that were making large margins on their loans due to very high-interest rates. The pandemic and now the inflation crisis have revived the idea of taxing excess profit.

Economists like Nobel laureate Joseph Stiglitz and international organisations like the United Nations have called for a windfall tax. Across the world, governments are taking steps to implement windfall taxes in some sectors.

In the UK, Prime Minister Rishi Sunak introduced the 25% Energy Profits Levy in May 2022 when he was chancellor. In the 2022 Autumn Statement, the current Chancellor, Jeremy Hunt, said the levy would increase to 35% from January 2023, and run until March 2028. India has also levied Windfall profit tax on energy businesses; however, the same have been levied through indirect taxes.

Retrospective effect

It is considered that a Windfall profit tax is always retrospective. This means that it is the tax on profits which have been earned. This retrospectivity has a meaning. It is for the event that has already taken place during the year. If that event does not continue in the future period then though in the law the windfall tax is not applicable.

Nevertheless, in Pakistan, this law has been incorrectly understood. Under the amended position a Windfall profit tax (called additional tax) up to 50% of Windfall profit can be levied with respect to any three (3) year preceding Tax Year 2023. In the original bill this term was five (5) years. In our view, this additional tax can only be levied for Tax Year 2023 and for any future year if the conditions for windfall persist. There is no legal validity for a Windfall Tax on any year prior to Tax Year 2023. The profits earned before the introduction of the Finance Act, 2023 cannot be subjected to Windfall Tax. It is therefore desired that the internationally accepted practice, which requires a certain procedure, be adopted.

Legal Validity

A new clause has been inserted in the proposed section which provides that notification for the levy of Windfall Tax shall be presented to the National Assembly. This presumes that parliamentary sanction will be sought for the charge of this tax. This provision has been inserted to safeguard the challenge to this tax on the basis that the same is not included in the charging provisions.

Notwithstanding this aspect, the legal validity of this tax is not correct for any charge of Windfall Tax on any income prior to Tax Year 2023.

Increase in the tax rates for non-company cases

General rate of taxes for non-company cases, both salaried and others, has been increased and schedules for that purpose have been amended.

Review of the aforesaid amendment reveals that there is no increase in the maximum tax rate of 35% both for salaried and non-salaried cases.

However, an increase of 2.5% has been made with respect to taxable income gradually exceeding Rs 600,000 but not exceeding Rs 3,000,000 in non-salary cases and Rs 2,400,000 to Rs 12,000,000 for salary class.

There may be rationale for the manner adopted however there was no need for this change.

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Impact of Revised Tax Slabs on Salary Taxation
Finance Act 2023-24
===================================================================================
Monthly      Annual        Tax FY 2023    Tax FY 2024     Difference        Monthly
Income       Income                                                     Incremental
                                                                                Tax
===================================================================================
50.000       600.000       -              -               -                       -
100.000      1,200,000     15.000         15.000          -                       -
150,000      1,800,000     90,000         90.000          -                       -
200,000      2,400,000     165.000        165,000         -                       -
225.000      2.700.000     225.000        232.500         7.500                 625
250.000      3.000.000     285.000        300.000         15.000              1.250
300.000      3.600.000     405.000        435.000         30.000              2.500
325,000      3.900,000     480,000        517,500         37,500              3,125
400.000      4.800.000     705,000        765.000         60.000              5,000
500,000      6,000.000     1.005.000      1.095.000       90,000              7.500
525.000      6.300.000     1.102.500      1.200.000       97.500              S.125
600,000      7.200.000     1.395.000      1.515.000       120.000            10.000
700,000      8,400,000     1,785,000      1,935.000       150,000            12,500
800.000      9.600.000     2.175.000      2.355.000       180.000            15.000
1.000.000    12.000.000    2.955.000      3.195.000       240.000            20.000
1.100.000    13.200.000    3,375,000      3,615.000       240,000            20,000
1.200.000    14.400.000    3.795,000      4,035.000       240.000            20,000
===================================================================================

Tax on Deemed Income

This tax which was levied in the Finance Act, 2022 is on the value of immovable capital assets especially plot and houses. This is a sort of pseudo wealth tax on the immovable property at a deemed valuation. This tax has been challenged before higher courts and the ultimate decision is pending before the Supreme Court.

Two major changes have been proposed in the amendments proposed. Firstly, the exemption from this tax as prescribed under subsection (2) shall be applicable only if the person appears in Active Taxpayers’ List.

Second amendment, which has been placed under Section 236C of the Ordinance whereby a condition has been prescribed that no transfer of immovable property, will be registered unless it is ensured that liability under Section 7E has been discharged. This is a very appropriate prescription.

The second amendment is very important in the sense that a lot of properties are held by the persons who do not appear in the active taxpayers list or are eligible to exemptions provided in the law.

The condition that there will be no transfer without discharging this liability is a good step. It is however strongly suggested that this provision be used to broaden the tax base and any person who pays tax under this section be necessarily required to file the income tax return.

Procedures are required to be prescribed to ensure discharge of tax liability under Section 7E of the Ordinance. An automated coordination between the property registration and tax authorities can be designed for this purpose.

Capital on Disposal of Listed Securities

Capital gains on disposal of listed securities are governed by a special system, which is effectively applicable only for the transaction routed through NCCPL, which is also the tax collection agent. These provisions are governed by Section 37A read with Section 100B.

Now it has been provided that only those transactions will qualify under this section (37A), which are effectively settled through NCCPL. If they do not fall under that classification then provisions of Section 37, which provides for a different rate of tax, shall apply.

Another very important change has also been made in the schedule relating to tax on capital gain on listed shares. This is effectively the correction of a mistake in the law as stood before the Finance Bill 2023. The mistake has, however, been partly removed.

As stood before the proposed amendment any capital gain on disposal of listed securities is subject to zero percent tax rate if the holding period is more than five years. Nevertheless, this provision is applicable only for shares acquired on or after July 1, 2022. For any shares acquired before July 1, 2022 the rate of tax was prescribed at 12.5%. In our view, this is a wrong and discriminatory law.

These changes propose a rectifactory amendment in this provision. Now it is proposed that the rate of tax will be zero if the shares are acquired before June 30, 2013.

For the period of acquisition between July 1, 2013 and June 30, 2022 the rate of tax of 12.5% has been retained. This does not make sense. There has to be a reason why the period from July 1, 2013 to June 30, 2022 is discriminated against for the purposes of levy of tax.

Tax Amnesty

The perpetual tax amnesty available under Section 111(4) of the Ordinance, which was limited to a sum of Rs 5 million for remittance from outside Pakistan in a tax year, was proposed to be increased to USD 100,000 has been removed. The amnesty is now available at the old limit of Rs 5 million.

Alternate Dispute Resolution

Reasonable amendments have been introduced in Section 134 of the Ordinance relating to Alternate Dispute Resolution Mechanism (ADR). Whole section has been redrafted.

Since the inception of ADR regime there has been an issue relating to ADR with respect to the condition of withdrawal of taxpayers’ appeal before the appellate forum whilst invoking ADR forum.

This time a new procedure has been prescribed. The condition of withdrawal of appeal by the taxpayer has been removed; however, the ADR order, which will be available before the withdrawal of appeal by the taxpayer, will be applicable or enforceable only when the taxpayer withdraws the appeal.

This is an appropriate step as in almost every case the taxpayers were hesitant to resort to the ADR mechanism if the right of appeal is withdrawn.

It appears that the procedure adopted is too lucrative as all the taxpayers will be inclined to adopt ADR for the reason that they will have two avenues to redress their grievance.

In this situation, it appears that there should be clarity as to the subject whether all the taxpayers who desire for an ADR mechanism will be eligible to refer the matter to ADR. This concern arises on account of the fact that the word used in the section is ‘may’ for the Board to form an ADR. This raises the question whether or not all persons in dispute for amounts above the threshold are entitled to ADR. The words should have been ‘the board shall’.

The membership of ADR has also been changed. Now it will be a three-member committee consisting of a retired High Judge or equivalent, the concerned Chief Commissioner and a member selected by the taxpayer from the approved penal.

It has been prescribed that only the matter where the tax liability is above Rs 100 million will be taken to ADR.

All matters whether they relate to questions of law or facts can be taken to ADR. The law, as prescribed, states that once ADR is formed the demand under the order in appeal will be stayed.

Advance Tax on Construction Business

A new advance tax has been introduced on construction, development and disposal of commercial and residential business. This advance tax will be collected on a Project-to-Project basis.

Advance Tax on Purchase of Immovable Property

Through the Finance Bill a concession was proposed to persons of Pakistani origin from the collection of advance tax on purchase of immovable property. This concession is proposed to be removed. This is not a correct step as such persons are generally not taxable in Pakistan and tax paid is not adjustable against income in Pakistan.

Permanent Establishment

This definition is relevant for non-resident persons taxable in Pakistan. In the proposed bill an incorrect deletion of the word ‘fixed’ was proposed. This has been removed.

Furthermore, a new kind of permanent establishment has been introduced, which relates to ‘virtual business’. For that purpose a definition has been inserted. The definition inserted is technically correct; however, the same has to be in line with the OECD mechanism as most of the tax treaties have adopted that definition with respect to virtual business.

It is further stated that this all encompassing definition may be subject to abuse by the taxation officers. Pakistan, which is in dire need of foreign exchange/investment, should allow virtual businesses to progress without any upfront confrontation with the regulators.

In the definition the words ‘an entity’ after the word ‘personnel’ as introduced in the Finance Bill have been retained. This is not the correct application of law. Permanent Establishment (PE) is always determined for a legal entity. One entity cannot be the PE of another entity.

It appears that this amendment has been intentionally made to overcome the cases where there are instances of an entity’s personnel for another project. It appears to be the intention of this amendment. This is an erroneous perception. The learned Justice Syed Mansoor Ali Shah has settled this matter in the Supreme Court in the case of Snamprogetti.

Exemption for tax on income: Tribal Areas

This exemption was valid up to June 30, 2023. The extension proposed has been removed. Now there is no such exemption.

Copyright Business Recorder, 2023