The government has finalised the mini-budget to the tune of Rs360 billion that would slap 17% sales tax on about 140 essential consumable and industrial goods, in addition to increasing the income tax rates on phone calls by 50%.
The plan was shared with Adviser to the PM on Finance Shaukat Tarin on Thursday which, once approved by parliament, would make everything expensive.
The prices of goods, including milk, cereals, bakery items, meat, chicken, gold, bicycles, cars including electric cars, mobile phones will rise, unleashing another wave of inflation in the country.
In a bid to partially offset the impact of the mini-budget, a subsidy plan of Rs41 billion has also been prepared. However, it is unlikely to mitigate its full impact.
Inflation jumped to 11.5% last month and the State Bank of Pakistan has also upward adjusted its inflation projection to the range of 9 to 11% for the current fiscal year.
The government is also in process of withdrawing electricity subsidies.
Prime Minister Imran Khan believes that Pakistan is the cheapest country in the world — a remark that is contrary to the ground reality.
The inflation rate is the highest in the country among all the South Asian nations, according to a World Bank report.
It was the first comprehensive briefing that Tarin received on the mini-budget that has been agreed between Pakistan and the International Monetary Fund (IMF) as part of pre-conditions for the revival of the stalled $6 billion bailout programme.
Federal Board of Revenue (FBR) Chairman Dr Mohammad Ashfaq gave the briefing to Tarin.
The government has decided to increase income tax on cellular services from 10% to 15% to generate revenue worth Rs5 billion, sources told The Express Tribune.
This is a partial reversal of the reduction in the tax on phone calls in the budget.
The government has also decided to slap income tax on foreign produced TV dramas and serials as well as advertisements starring actors from other countries. The decision has been made under pressure from the local drama producers.
The government has also proposed that the dividend received by non-Real Estate Investment Trusts (REIT) investor from a special purpose vehicle should be taxed at the rate of 35%.
Tarin had said that the IMF had demanded imposing Rs700 billion in new taxes but he had convinced the global lender to levy only Rs350 billion on account of withdrawal of sales tax exemptions.
The sources said the government had decided to slap 17% GST on at least 140 types of consumable goods and industrial machinery to raise Rs353 billion worth of taxes.
A major chunk of the revenue — around Rs300 billion — will be generated by slapping 17% tax at the import stage on nearly 80 items. The majority of these items are essential goods and do not fall in the category of luxury goods.
About six dozen items will be charged at 17% sales tax rate at their import stage.
Some of consumer-sensitive goods that will also attract sales tax at import are raw materials for the manufacturing of medicines, cereals, live animals, birds and eggs, meat, fish, fresh vegetables, fish feed and animal feed and journals and periodicals.
The imposition of 17% GST on raw materials of the medicines might create hue and cry in in the society.
The representatives of the pharmaceutical sector also met with the finance adviser on Thursday in a bid to convince him not to impose tax on their raw materials.
However, the FBR sources said that a major chunk of the pharmaceutical sector was undocumented. Their documentation would help in lowering the prices, including through the adjustment of input tax at the final stage.
The estimated size of the pharmaceutical sector is nearly Rs700 billion and Rs530 billion is the undocumented supply chain that is causing huge tax evasion, they added.
They said there were over 800 pharmaceutical manufacturers registered with the Drug Regulatory Authority of Pakistan (DRAP) but only 453 manufacturers were registered with the FBR.
The government is now proposing zero sales tax for the pharmaceutical sector for the documentation of the supply chain.
However, this will result in the creation of huge refunds due to 17% GST charged at the import stage on the raw materials of the medicines.
The imported plant and machinery will also be subject to 17% sales tax rates including those purchased for setting up power generation and transmission projects.
Similarly, the machinery for renewable energy including solar, wind and nuclear power generation will also attract 17% sales tax.
The world is moving towards alternate source of electricity generation but the government’s policies are contrary to the global direction.
The machinery for mining and extraction of minerals as well as CKD kits for single cylinder engines will be subjected to 17% GST.
To generate another Rs9 billion, the government has decided to slap 17% sales tax on the local supplies of one dozen items. They include Items sold in bakeries and sweet shops, food stuff served in flight kitchens, sausages and products of poultry meat, locally produced crude vegetable oil, sprinkler, drip and spray pumps.
About four dozen items that are currently subject to lower than 17% GST will also attract the standard percentage to generate Rs31 billion.
They include dairy items sold in branded packaging as well as items sold in restaurants and sweet shops. The locally manufactured cars of above 850cc will again be subject to 17% GST.
The hybrid electric vehicles above 1800cc are also proposed to be taxed at 17%.
Surprisingly, imported electric vehicles in CBU condition have been targeted for increasing revenue. This is in contrast to the rest of world, where the use of electric vehicles is being encouraged.
The import of scrap, silver, gold in unworked condition, jewellery and various types of plant and machinery will also be subjected to 17% GST.
About half a dozen goods that are currently taxable at zero rate would be subject to 17% GST in a bid to raise Rs10 billion.
They include the import of large ships for repair and maintenance, imported bicycles and imported infant formula milk.
Mobile phones that are currently subject to Rs1,740 to Rs,9270 per set fixed sales tax will be charged at 17% standard rate aimed at generating Rs7 billion, the sources said.
This will increase the tax burden of a high-end phone set from Rs9,270 to roughly Rs42,000 — a surge of Rs32,730 or 353%, the sources added.
The items that will still be protected from the imposition of 17% GST only at the local stage include fruits, vegetables, pulses, wheat and rice, poultry, fish and meat consumed by the common man.
Milk and fat-filled milk, wheat bran and beet sugar, educational books & stationery items, pesticides, imported parts for computers and laptops, imported CKD kits for electric vehicles, imported plant and machinery for installation in SEZs have also been exempted.
Some of these items will be subject to sales tax but the government will give Rs41 billion subsidies on them.
Read Also: No new taxes in mini-budget, says Tarin
It is discussing to grant a subsidy of over Rs15 billion on infant milk; Rs3 billion on cotton seed; Rs3.5 billion on seeds and fruits; Rs4 billion on animal feed; and Rs2 billion on poultry feed.
A subsidy of Rs1.5 billion is proposed for goods supplied to the government hospitals, Rs5 billion on grains excluding wheat, rice and flour and Rs5 billion on oil cake and solid residue.
However, the disbursement of subsidies has always remained non-transparent and discretionary with no firm commitments for their continuation in the future.
The sources said after the endorsement of the finance adviser, the mini-budget will now be presented before the federal cabinet for approval before its submission in parliament.
The government has committed to introduce over Rs525 billion taxation measures in addition to slashing Rs200 billion development funds as well as Rs20 billion for non-uplift projects as part of the IMF condition to create primary budget surplus in this fiscal year.