KARACHI: The Supreme Court’s order to suspend the imposition of carbon tax on petroleum products may delay the third tranche of International Monetary Fund’s loan and seriously affect the government’s efforts to generate additional revenue, analysts said here on Tuesday.

An economic team from Pakistan is in Turkey to discuss with the IMF the decisions taken by the government in the budget for 2009-10 and persuade the donor to release the already delayed $875 million tranche of a $7.6 billion loan agreed in November 2008.

The decision to levy the surcharge was widely criticised by the general public, transporters, industrialists and traders.

It was feared that the tax would spark a fresh wave of inflation and particularly hit food prices which had witnessed an average 22 per cent inflation during 2008-9.

While traders and industrialist welcomed the Supreme Court order, analysts and researchers showed little enthusiasm.

They said the government had many options to raise revenue by taxing other sectors of the economy, but it would be difficult to persuade the IMF to release the tranche. 

It is believed that the government was pressurised by the IMF to impose carbon tax to reduce fiscal deficit with higher revenue generation.

'The Supreme Court’s order to suspend carbon tax will affect the government’s revenues that are already depressed because of an economic slowdown,' said analyst Mohammad Sohail of Top line Securities.
 
'The government needs to meet the IMF deficit target and it may reduce development expenditures to bridge the gap,' he said.

Other analysts said the government had several options to meet the revenue shortfall, and increasing General Sales Tax could be one of them.

'Sales tax on petroleum products can be increased to 20 per cent form 16 per cent, which will generate enough revenue,' said analyst Abid Saleem.

He said the government might also increase corporate tax. However, such decisions have a political cost and may affect the government’s popularity. 

'The government has allocated about Rs650 billion for development plans. Reducing development expenses will hamper overall economic growth, creating more unemployment and poverty,' he said.

Last year, the government slashed development expenditures to reduce fiscal deficit. The decision hit the overall economic growth which was recorded at just two per cent.

If the Supreme Court abolishes the tax in its judgment, the government will have limited options to tax other sectors of the economy.

'Most economic sectors witnessed a slowdown during the past year and expectations for the current year are also not encouraging. It appears that the government will be left with no option but to risk its popularity by taxing other sectors,' an analyst said.