EDITORIAL: Dr Muhammad Ashfaq, Chairman Federal Board of Revenue (FBR), while briefing the Senate Standing Committee on Finance stated that all-out efforts are under way to fix distortions in the tax system to ensure that the ongoing six billion dollar International Monetary Fund (IMF) programme is the last such programme.
He added that the Fund had urged for ending tax distortions to the tune of 700 billion rupees but agreed to a more phased approach with 343 billion rupees in the first phase. This objective must be fully supported as distortions account for not only lower revenue collections than would otherwise have been possible but also account for higher prices on the finished product.
Dr Ashfaq further contended that the objective of the 343 billion rupee money bill currently under discussion in the relevant committees of the Senate and the National Assembly was to end distortions, as out of this total, 160 billion rupees is earmarked for the pharmaceutical sector and 110 billion rupees for plant and machinery that will be adjustable and therefore refunded.
For the pharma sector, Dr Ashfaq clarified that the relevant law has been amended to zero-rate the finished output (medicines) by treating it at par with the export sector even though import of raw materials would be charged a 17 percent tax which, in turn, would be refunded after adjustment.
In other words, the impact on the prices of medicines that have witnessed on average a rise of over 300 percent during the last three years would be zero. Previous to the money bill currently under discussion pharma raw materials were not taxed and only the packing material was taxed; however, Dr Ashfaq revealed that from henceforth even the tax on packing material would be refundable.
For the time being, at least, tax exemptions have been retained on basic food items and preferential treatment to the agriculture sector has been preserved. Reduced rates of tax shall continue to be applied to fertilizers and tractors; and pesticides shall remain exempt from sales tax. The remaining exemptions, according to a statement by Dr Ashfaq, shall be dealt with in the Budget for fiscal 2022-23.
The obvious question that arises is why the pharmaceutical sector is being required to pay the standard rate of sales tax if the entire tax amount is to be refunded? The purpose of documentation and removal of distortions could also have been served with application of a nominal rate of sales tax (except on packing material) and it would not have burdened this sector with the need for substantially additional working capital and incur the cost of that capital. Perhaps there is a suspicion that this sector may not be declaring its entire production and therefore if the refund amount is substantial then it has to declare the entire output or forego the refund of tax paid on raw material purchase.
It is important to note that the FBR has acknowledged that around 92 billion rupees out of the total 343 billion rupee money bill will have inflationary implications. In this context, this newspaper would urge the FBR to revisit its policy on poultry (a source of relatively cheap protein to forestall stunting in children) and the IT sector (with rising exports that cabinet has emphasized as a fast rising non-traditional export).
Committee members also rightly expressed their concerns at imposing the standard 17 percent sales tax on solar panels and on donations to educational institutions. Dr Ashfaq’s claim that ending distortions would pre-empt the need for going on another IMF programme is premature to say the least because: (i) ending distortions in the sales tax regime — a tax whose incidence on the poor is greater than on the rich, in a country where poverty levels are as high as 46 percent (as per the target number in the envisaged Ehsaas ration programme), is a distortion in itself; and (ii) unless the government stops pumping hundreds of billions of rupees into the economy (current expenditure outlay has been raised from 4.2 trillion rupees in 2017-18 to 7.5 trillion rupees in the current year’s budget with hundreds of billions of rupees of cheap credit being disbursed to the disadvantaged), with more than 50 percent of the country’s foreign exchange reserves borrowed at a rate well above the global average disturbingly Pakistan would retain its image of being a perennial Fund borrower.
Copyright Business Recorder, 2022