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ISLAMABAD: In a major development, the government introduced on Tuesday a Rs120 billion ‘mini-budget’ through presidential ordinances, envisaging Rs53 billion of additional taxes on income, imports, agriculture and domestic sales of export-oriented items, after having failed to introduce reformed general sales tax through parliament. Immediately after the ordinances were issued, the major opposition Pakistan Muslim League-N rejected them and described the move as a violation of the Constitution.
The government also announced a set of expenditure control measures, including cuts in development programme, ban on fresh recruitments and purchase of durable goods and 50 per cent reduction in non-salary expenditures to save about Rs67 billion.
The combined financial impact of tax measures and expenditure cuts has been estimated at Rs120 billion.
The new tax measures were introduced with immediate effect for the remaining period of the current fiscal year (till June 30) through separate presidential ordinances to meet some of the conditionalities of the International Monetary Fund (IMF) to restrict current year’s fiscal deficit below 5.5 per cent of GDP.
The revenue collection target has been reduced to Rs1,600 billion from the budgetary target of Rs1,667 billion.
The government had assured the IMF last week to take major policy measures within a few days to remain engaged for a wider financial support from other lending agencies like the World Bank and Asian Development Bank.
Under the ordinances, the government will collect Rs20 billion additional revenue through 15 per cent surcharge on income tax, Rs25 billion through withdrawal of sales tax exemptions and zero ratings, Rs6 billion through 2.5 per cent special excise duty on imports and Rs2 billion through increase in applicable tax on sugar.
To achieve the objective, President Asif Ali Zardari issued an ordinance to amend Income Tax Ordinance of 2001 to impose 15 per cent surcharge on income tax to generate Rs20 billion in three months.
This would mean that existing income tax payers would have to pay an additional tax of 15 per cent.
For example, if a taxpayer is currently paying an annual tax of Rs100,000 billion, he will have to pay Rs115,000.
Another ordinance further amends the Sales Tax Act 1990, and withdraws general sales tax (GST) exemptions on fertilisers, pesticides and tractors.
The facility of zero rating on plant machinery and equipment, including parts has also been withdrawn. That would mean 17 per cent GST on the agricultural inputs and engineering items.
Similarly, zero rating on export-oriented sectors has also been withdrawn which would mean levy of 17 per cent GST on the sales of plant, machinery and equipment and domestic sales of export-oriented items like textiles, leather, carpets, sports and surgical goods.
The withdrawal of GST exemptions and zero ratings would generate an additional revenue of Rs25 billion.
Another presidential ordinance increased special excise duty by 150 per cent to 2.5 per cent on items already subjected to one per cent duty to generate Rs6 billion additional revenue in three months.
Among many other items, this will increase the duties on all beverages, cigarettes and cement.
Another Rs2 billion would be generated during the remaining three and a half months of the current year by removing the taxable value of sugar at Rs28.80 per kg.
The ex-factory price of sugar will be considered as prescribed price for the levy of eight per cent GST on its sales.
PML-N’s spokesman Ahsan Iqbal immediately criticised the taxation measures and said that new taxes could be imposed only by the National Assembly but the government had established a new precedent of violating the Constitution by imposing a ‘mini-budget’ through ordinances.
The government has been moving back and forth on introduction of new tax measures through parliamentary approval, issuance of statutory regulatory orders and achievement of political consensus on reforms measures but always backtracked owing to stiff resistance from opposition parties and coalition partners.
Finally, it had to take the unilateral route of presidential ordinances to meet international commitments for tax reforms under IMF pressure.
In a separate announcement, the ministry of finance said the expenditures controls and revenue measures have been introduced to secure public finances as part of its commitment to stabilise the economy and pursue its reforms agenda despite the shocks of unprecedented floods and rising oil prices.
It said the expenditures on POL entitlements, purchase of stationery and travelling allowances have been cut by half and a complete ban has been imposed on fresh recruitments and purchase of durable goods.
Likewise, it said it had already completed an exercise to ensure surrender of budgetary allocations beyond last year’s level, besides rationalising public sector development programme without affecting social sectors, projects of strategic importance and less developed areas.
The finance ministry said the government’s initiatives for economic stabilisation had already started showing results.
It said the anticipated eight per cent budget deficit had been reigned in and would now be under 5.5 per cent of GDP, the recourse to State Bank of Pakistan borrowings has been aggressively managed to bring it down to Rs68 billion on Feb 28 against a high of Rs321 billion in first half of the current year.
The finance ministry said that inflation rates had started declining during the past two months to 12.9 per cent in February against 15.7 per cent in December, while external sector had shown extraordinary performance.
It said exports had increased by 26 per cent in eight months and were expected to cross $25 billion at the end of the year and remittances were expected to surpass the $11 billion mark.
