New taxes, spending cuts to win IMF bailout

ISLAMABAD: The government on Friday announced spending cuts and tax increases totalling Rs2,500 billion as it races to close a budget deficit to 4.9 percent of the GDP in the upcoming fiscal year of 2022-23 to secure a crucial International Monetary Fund (IMF) bailout programme for economic stability.

Click here to read the budget speech.

Finance Minister Miftah Ismail said the government would aim for economic growth of 5 percent in 2022/23 by spending Rs9.5 trillion and half of the outlay is to be financed from local and external sources.

“Austerity is our first priority when it comes to expenditures,” Miftah said in his budget speech in the lower house of parliament on Friday. “Austerity in government expenditures is part and parcel of this budget. We are going to take concrete steps in this regard, we are not offering lip-service.”

A complete ban was imposed on purchase of vehicles for public sector, purchase of furniture except for development projects. Petrol limit for government employees and cabinet members will be curtailed by 40 percent. There will be a ban on foreign visits at government expense except mandatory foreign visits.

The minister proposed 42 percent and an additional 3 percent super tax on banking companies from the current rate of 39 percent. Tax on all persons including companies & AOPs where income exceeds Rs300 million are now subject to 2 percent of additional tax. The capital gain on sale of immovable property has been increased to 15 percent if sold within one year. Withholding tax on filers and non filers on acquisition of property has been increased to 2 percent and 5 percent respectively. Immovable property valued above Rs25 million will now be subject to a deemed tax. The income for such deemed tax will be 5 percent of the fair value of such property. Tax at the rate of 1 percent will be levied on that income.

Click here to read the budget speech.

Advance tax of 1 percent on foreign transaction through debit/credit card is imposed, non-filers will pay a 2 percent tax. Any Pakistani citizen who is not a tax resident of any other country will now be treated as a tax resident of Pakistan.

The minister announced 15 percent increase in government employees’ salary and 5 percent in pension payout. Tax relief for salaried persons has been increased to Rs1.2 million for Rs600,000. Tax on profits from investment in Behbood Savings Certificates, Pensioners Benefit Accounts, and Shuhada Family Welfare Accounts is cut to a maximum rate of 5 percent from 10 percent. If a family’s income is less than Rs40,000 per month, will be given a transfer of Rs2,000. Besides, families using less than 200 units of electricity will be given loans in easy instalments for purchasing a solar panel. Benazir Income Support Program’s allocation has been increased from Rs250 billion during 2021-22 to Rs364 billion in 2022-23. Similarly, subsidies for Utility Stores Corporation have been allocated at Rs12 billion and another Rs5 billion for the Ramzan Package.

The minister said the guiding principles for this year’s taxation policy were to emphasise more on direct taxes, however the government has substantially increased direct and indirect taxes. Next year, the government targets an increase of Rs1.175 trillion in tax revenue.

Click here to read the budget speech.

Minister Miftah criticized the previous PTI-led government and termed it incompetent. "A gigantic challenge before us is to achieve growth without current account deficit,” the minister said.

For FY2022-23, the government targeted to achieve 5 percent GDP growth, with no balance of payment problem. In absolute terms, next year GDP volume would be increased to 87.3 trillion from Rs67 trillion in the outgoing fiscal year. Inflation forecast is set at 11.5 percent through leveraging monetary and fiscal policies. Next year, the government will reduce imports to $70 billion from expected imports of $76 billion during the current fiscal, while exports will be increased to $35 billion from current $31.3 billion.

"After these steps, Current Account Deficit (CAD) would be reduced to minus 2.2 percent of GDP from minus 4.1 percent GDP. It also targeted to receive $33.2 billion remittances next year,” the minister said.

Click here to read the budget speech.

The government boosted development spending in the FY23 budget by over 45 percent to Rs800 billion even as the fiscal deficit, the gap between its revenue and expenditure, is expected to hit 4.9 percent of gross domestic product next year.

For the outgoing fiscal, the government had allocated Rs900 billion but owing to fiscal imbalance and to contain the increasing current account deficit and primary deficit, besides continuing with public relief package, federal PSDP 2021-22 was reduced from Rs900 billion to Rs550 billion during the last two quarters.

The government has estimated gross revenue receipts (tax and non-tax) at Rs9.0 trillion. Of this, the FBR tax revenue target has been fixed at Rs7.0 trillion, which is almost the same figure what the IMF has been demanding. In absolute terms, the FBR tax collection is Rs1.175 trillion more than FY22 revenue target.

Non-tax revenues have been projected at Rs2.0 trillion that include levies & fees, income from property and enterprise, civil administration and other receipts from the petroleum sector.

Interestingly, the direct taxes have been increased by Rs391 billion and next year government would collect Rs2.57 trillion, while indirect taxes have also been increased by a huge Rs784 billion to Rs4.431 trillion for next year, what the independent economists believe will be ultimately taken from the common consumer.

Click here to read the budget speech.

The government will collect Rs750 billion petroleum development levy, Rs40 billion gas development surcharge, Rs70 billion royalties on natural gas, Rs46 billion royalty on crude oil and Rs200 billion Gas Infrastructure Development Cess (GIDC).

Of the gross revenues, the Centre will transfer Rs4.1 trillion to the provinces under the National Finance Commission (NFC), leaving only Rs4.904 trillion net revenues with the government while the total expenditures have been budgeted at Rs9.502 trillion. This led to a gap (budget deficit) of Rs4.598 trillion.

On the expenditure side, the current expenditures will be Rs8.694 trillion. Of this, on debt servicing (interest payment) on local and foreign loans will be Rs3.95 trillion.

Defence expenditure is the second biggest head, for which Rs1.523 trillion have been earmarked against the current year budgeted amount of Rs1.37 trillion depicting an increase of 11.16pc. The current year’s revised defence budget is Rs1.48 trillion. Grants and transfers to provinces will stand at Rs1.242 trillion, spending on pensions will be Rs530 billion.

Click here to read the budget speech.

The government allocated Rs699 billion as subsidies (to Wapda/Pepco, petroleum, KESC, USC, PASSCO, etc) while for current fiscal it was Rs682 billion. Of this, Wapda/Pepco will get Rs275 billion against Rs257 billion during the current year. Around Rs80 billion will go to Karachi Electric Supply Company (KESC) and Rs215 billion will be transferred to Power Holding Private Limited (PHPL) and repayments to Independent Power Producers (IPPs).