Governments impose special taxes to meet critical requirements of industries that they cannot finance out of the existing resources. The Gas Infrastructure Development Cess (GIDC) was imposed to establish additional infrastructure for gas supplies to industries.

By the end of July this year, Rs700 billion accumulated under the head of GIDC, which is enough to finance the planned infrastructure. But out of this amount. only Rs295bn has actually been transferred to the government. The remaining Rs405bn is yet to be paid by the industries.

The Supreme Court of Pakistan, in its Aug 13 judgment, directed the government to recover the outstanding amount of Rs405bn from the industries concerned in 24 equal instalments. But it also cautioned the government that the levying of GIDC would be considered practically dead if the “work on the laying of three gas pipeline projects was not commenced immediately”.

Now the government is trying to ensure that the industries start paying the instalments. But the industries, according to Planning and Development Minister Asad Umar, are seeking further relaxation in time.

The government cannot grant any such relaxation because it is in the domain of the apex court and also because it is in a hurry to complete the gas pipeline projects as per the deadline. The irony is the industries — from electricity companies to fertiliser and textile mills — have already received GIDC from their consumers by factoring it in the prices of their products.

The imposition of a special tax on electricity companies and fertiliser units is bound to be inflationary

From the government’s viewpoint, they should simply start paying what they still owe to it in instalments. But the industries have their own reasons that mostly revolve around their claimed poor financials as they seek further relaxation in the time period for clearing the outstanding amount.

The smooth recovery of Rs405bn in 24 equal instalments starting from Aug 1 is important for the government as it will make up the possible shortfalls in revenue collection. For the 2020-21 budget, the government had initially estimated tax income of just Rs15bn from GIDC, keeping in view the past trend. In 2019-20, it had received an estimated Rs11bn. The Supreme Court ruling, however, means that tax recoveries under GIDC may ideally yield Rs185.62bn (sum total of 11 monthly instalments of Rs16.87bn as the industries are required to start monthly payments from August, the second month of 2020-21).

The swelling of the budgeted income of just Rs15bn to Rs185.62bn would reflect in the head of “other taxes” of the federal government, the third component of its tax revenues — the other two being direct and indirect taxes.

The Federal Board of Revenue (FBR) has been tasked to collect Rs4.96 trillion in direct and indirect taxes in the current fiscal year. But that is possible only if the economic recovery, after the last fiscal year’s 0.4pc contraction in GDP, remains fast-paced and smooth. During the first quarter, the FBR has reported the collection of Rs999bn tax revenue against the quarterly target of Rs969bn, which is a healthy development.

Before the settlement of the GIDC recovery issue by the apex court, the government had projected Rs501.3bn from “other taxes”. But even if the industries are not able to pay all 11 monthly instalments of GIDC during this fiscal year, revenue collection under “other taxes” will surely exceed the initially estimated Rs501.3bn by a big margin. That, together with the fact that traditionally the federal government ends up collecting higher than initially projected amounts under the head of “other taxes”, brightens the scope for a substantially large addition in this fiscal year’s target of Rs501.3bn. And, that means a big relief for the government facing the challenge of meeting the targets for direct and indirect taxes of Rs4.96tr.

Regardless of whether the government finally gets Rs405bn recoverable from all the industries under GIDC within the stipulated time or whether the industries get some relief from the apex court after making a review petition, GIDC of Rs700bn accumulating in the books of industries — but only partially (Rs295bn) transferred to the government — offers a few lessons.

First, it is easy to impose a special tax on industries and presume that it will be transferred to the government coffers. Second, it is easy to promise to the industries to do certain development work and encourage them to pay a special tax for this purpose, but very hard to actually initiate that development work and complete it on time.

Third, when a situation arises wherein industries continue to suffer because of delays in the initiation of the development that was promised before the imposition of a special tax and the government still insists that they pay that tax, the matter would ultimately be settled in the apex court. And as the Supreme Court verdict in the GIDC case established, the court ruling would bind each party to do what they are naturally obliged to do.

So instead of finding an easy solution to the revenue crunch by way of imposing a special tax, governments should rather prefer expanding the tax base and checking tax evasion. More importantly, the imposition of a special tax on industries like electricity companies and fertiliser makers is bound to be inflationary — as the pass-through impact of GIDC has established beyond doubt.

Published in Dawn, The Business and Finance Weekly, October 5th, 2020


Living in Karachi
19 Jan 2021

Living in Karachi

The poor often end up paying more than middle-income segments.


Updated 19 Jan 2021

LNG contracts

It is important for industry to reconnect with the national grid and for gas to be allocated for more efficient uses.
19 Jan 2021

Murdered judges

THE continuous violence in Afghanistan has raised serious questions about the sustainability of the peace process, ...
19 Jan 2021

K2 feat

A TEAM of 10 Nepalese mountaineers made history over the weekend as they scaled the world’s second highest peak K2...
Updated 18 Jan 2021

More ignominy for PIA

Decades of mismanagement, nepotism and political opportunism were bound to take their toll.
18 Jan 2021

Agriculture woes

AGRICULTURE is the lifeline of Pakistan’s economy. It is a source of livelihood for two-thirds of the country’s...
18 Jan 2021

Internet access

AS the Covid-19 pandemic rages on, and shows few signs of dissipating, one of the many lessons policymakers should ...