The government has decided not to impose a flood levy or a tax on deposits.
The International Monetary Fund comes second, and stakeholders oppose the initiatives.
ISLAMABAD: The International Monetary Fund (IMF) and the key stakeholders opposed the proposed flood levy on imports and a one-time tax on general public bank accounts, therefore the government was compelled to abandon them.
The banking sector considered as very regressive the harsh measures that the finance ministry sought to use in an effort to earn additional billions of rupees in revenue on which the federal government would have the exclusive right.
The administration gave in after receiving advice against taking the drastic steps from the IMF, the trade ministry, and the State Bank due to their negative effects on the financial system and economy.
According to well-placed sources, the recommendations were discussed with the IMF during recent negotiations (concerning the conclusion of the ninth review of a $6.5 billion loan programme).
Furthermore, Pakistan’s commitments under the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO) were violated by the intention to apply the flood levy on imports in the range of 1% to 3%. (GATT).
Both of the initial proposals were made by the finance ministry as parts of eight to ten other measures that were being considered to raise Rs 170 billion in taxes over the course of four months, with an annualised impact of approximately Rs 500 billion.
A senior member of the finance ministry stated that both initiatives had now been abandoned.
Ishaq Dar, the finance minister, stated at a news conference on Friday that the government would choose eight to ten goods from a list to consider for taxation.
The 0.6% withholding tax on cash withdrawals made by non-filers and the 1% rise in the general sales tax rate to 18% were on the list. In just four months, the 1% increase in GST would generate Rs70 billion.
The government is probably going to go forward with its plan to restore the 0.6% tax even though the State Bank is against taxing cash withdrawals. This action might boost the flow of money once more.
Measures like taxes on cash deposits or withdrawals are regressive in nature and go against the idea of just and equitable income-based taxation. The Pakistan Muslim League-Nawaz government and the Federal Board of Revenue, however, have historically been perceived as favouring such measures.
The suggestion by the finance ministry to charge bank deposits once was uncommon and might have forced people to retain their money outside of the banking system. Increased currency circulation may also result from the 0.6% withholding tax suggestion that is still being considered on deposits.
According to SBP statistics, the total deposits in the banking sector as of the end of December 2022 were close to Rs22.5 trillion. These include the Rs 10.5 trillion in personal deposits held by employees, entrepreneurs, and other people.
The sources claimed that “the administration planned to target only a class of persons holding greater savings.” This shows that the finance ministry’s main objective is to raise taxes, even though doing so will have significant effects on many different economic sectors.
The IMF has emphasised “permanent” revenue strategies that may instantly improve tax collection and survive judicial scrutiny in its post-visit statement.
According to the sources, the government also discussed with the IMF its plan to impose a 1% to 3% flood charge on imports in order to generate an additional Rs60-70 billion in taxes. The IMF, however, disapproved of it.
The first plan called for 1% to 3% higher customs taxes, but the finance ministry changed it to a levy in order to keep the money out of the provinces’ hands.
The Federal Divisible Pool, which is being divided between the provinces and the Center, includes “import duties.” Nevertheless, a “levy” is a federal tax that is not distributed to the provinces.
According to the sources, the IMF met in-depth with the WTO, Ministry of Commerce, and Ministry of Finance representatives. The flood levy would be against the World Trade Organization commitments, it was widely agreed at that meeting.
The IMF was informed by a customs official that a “levy” was not a duty. In a similar vein, domestic goods cannot be unfairly discriminated against by not paying the same tax as imported items.
The General Agreement on Trade and Tariffs states that products from any contracting party’s territory that are imported into the territory of any other contracting party shall not be subject to internal taxes or other internal charges of any kind that are greater than those that are applied, directly or indirectly, to comparable domestic products.
