Most likely, a presidential order will introduce a mini-budget
To earn an additional Rs60b, the government plans to impose a flood charge on imports.
ISLAMABAD: Although the government postponed a decision on Thursday to impose a windfall income tax on commercial banks as retaliation for currency manipulation, it may publish a Presidential Ordinance to impose a flood levy on imports in order to raise an additional Rs60 billion in taxes. According to sources in the Ministry of Finance, it has been determined in principle to apply 1% to 3% import tariffs in order to generate an additional Rs60 billion in income.
The money would remain outside the federal divisible pool and would not be dispersed in accordance with the National Finance Commission Award if these obligations were imposed as a levy, nevertheless. The charge would not be included in the Federal Board of Revenue’s collection because it is not a tax. The first draught of the Presidential Ordinance has reportedly been created and is awaiting approval from the federal cabinet and the inauguration of the president, according to the sources. The ordinance can start to be followed on Sunday.
They said that it might take extra time if the government decides to include the windfall income tax on commercial banks in the ordinance. If the government takes sufficient steps to close the revenue gap, the ordinance’s adoption may also help the government’s case in the eyes of the International Monetary Fund. According to the sources, a 1% to 3% flood fee on imports could be implemented to bring in Rs60 billion.
The 1% rate may be applied to imported items that are currency exempt, with the exception of those that are excluded under the Vienna Convention or the 5th Schedule of the Customs Act. The 2% surcharge may be applied to products that do not qualify as luxury goods.
The luxury items may attract a 3% levy, they added. The initial plan was to impose up to 3% additional customs duties to compensate for the Rs100 billion shortfalls in custom duties’ annual collection target. The government has set a customs duty collection target at Rs1.150 trillion, which may be missed by over Rs100 billion in the current fiscal year.
From July through mid-December, imports amounted to $29 billion. But nearly $12 billion or 41% of imports were duty free. So far, the imports have contracted by 22%, which are hitting the revenue receipts. During the first four months of the current fiscal year, the share of import taxes fell to 45% from roughly 52% in the previous fiscal year.
The government has calculated that the slowdown in economic activity will have a negative impact of Rs380 billion on its yearly target of Rs7.470 trillion. The FBR’s ability to collect income has also begun to suffer as a result of the legal battles.
Due to these delicate issues, the FBR was unable to make a decision about the commercial banks’ windfall income tax on Thursday. Only the commercial banks’ portion of foreign exchange income is planned to be subject to the levy. The State Bank of Pakistan has completed an inquiry against the commercial banks and has established currency manipulation during April-June 2022 quarter, according to the government officials. However, the central bank may not be able to impose hefty penalties and whatever amount it will collect would go to the SBP’s coffers.
The government is planning to recoup the additional gains made by the banks through the windfall tax, according to the sources. The decision could not be taken on Thursday due to absence of credible data about the net additional gains that these banks made on the number of incremental currency transactions. he matter will now be reviewed again and the tax can be included in the ordinance provided the tax authorities have solid base to determine the legality of the windfall profits.
It is estimated that the total income from the foreign exchange earnings by all the commercial banks during the year 2022 could be around Rs100 billion to Rs110 billion.
The FBR has to determine how much of it was because of currency manipulation. The windfall tax rate could be as high as 40% of the foreign exchange earning component of the banks. Without the windfall tax, the banks will be paying 49% income tax in the year 2023, including 10% super tax. If the FBR allows the banks to exclude the expenses from the foreign exchange earnings part, the rate might be less than 40%.
The banking sector witnessed a phenomenal growth despite overall meagre economic growth of 3.5% in 2021. The total deposits of banks increased by 17.7% while the advances grew exceptionally well by 23.4%, due at least in part to the recently introduced measures of taxing unhealthy Advances-to-deposit (ADR) ratios at higher rates.
The overall growth in the banking assets was mainly financed by a 17.7% increase in deposits due to Roshan digital accounts and discontinuation of Rs15,000 and Rs7,500 bearer prize bonds by the government.
The total profit before taxation of the banking industry grew by 12.6% from Rs417 billion in 2020 to Rs470 billion in 2021.
As the FBR prepares to take on the enormous task of collecting Rs965 billion in December, these solutions are being examined. This goal is much greater than the June 2023 goal, which was established under the presumption that the FBR would earn about Rs 260 billion in December from budgetary taxes.
The government has set a tax target of Rs3.65 trillion for the first half (July-December) of FY2022-23. Last week, the Sindh High Court (SHC) repealed a 10% super tax, calling it “discriminatory” and “ultra vires the Constitution.” This action would cost the government Rs247 billion in revenue and has also brought attention to how poorly the tax system functions.
However, the FBR continues to collect the tax from businesses that have not file a legal challenge to the charge.