• Clearance for bringing jewellers into compulsory GST compliance regime
• Ministry of Economic Affairs says sales tax on foreign aid driving donors away

ISLAMABAD: As the government received some written objections from the International Monetary Fund (IMF) to the federal budget, the Ministry of Economic Affairs (MEA) on Tuesday protested in parliament over subjecting concessional international loans, grants and consultancies to general sales tax, as donors are shying away.

At a meeting of the Senate Standing Committee on Finance, the Federal Board of Revenue (FBR) also secured clearance for bringing all the 29,000 jewellers into the compulsory general sales tax compliance through integrated points of sale (POS) and powers for disconnecting electricity and gas to over 2.3 million large (tier-1) traders in case they fail to register for GST or link up with POS.

The meeting — presided over by PPP Senator Saleem H. Mandviwalla — was told that there were 29,000 jewellers in the country but only 22 were registered and integrated with the POS system, which was discriminatory. The tax authorities said all the jewellers fell in the category of tier-1 traders because of the precious and expensive products they were dealing in, even in small shops, and all would have to come into the sales tax net.

Also, about 2.3 million retailers or traders identified under the tier-1 category are unregistered at present. They would be subjected to Rs3,000 monthly tax based on up to Rs30,000 monthly electricity bill, increasing up to Rs10,000 per month tax as the bill goes up.

The FBR’s board is also empowered under the new budget to increase the tax rate to Rs50,000 per month through electricity bills. It can also order the disconnection of electricity and gas in case these large retailers fail to be registered or integrated with FBR’s computerised system.

The FBR team, led by its chairman Asim Ahmad, also conceded before the committee that the draft finance bill placed before parliament for discussion was quite different from the one approved by the federal cabinet, as certain changes had to be made after the draft finance bill had gone to press and submitted to parliament. However, they undertook to come up with an updated draft during the course of the committee’s discussions.

Officials on the sidelines of the Sena­­te committee said the IMF had raised written objections over certain budgetary measures, particularly those pertaining to personal income tax, which increased the taxable income limit to Rs1.2 million per year and red­uced income tax rates on high-end earners.

These officials said the government was engaged in various workings and wanted the lowest income slabs to be protected as much as possible from tax burden and hinted at increasing tax rates on those earing above Rs5-6 million in annual income.

However, they warned that the revenue impact of such a move might not suffice because of fewer people in those categories compared to a large base under the 1.2m income category. Some other perks and earnings of other sectors could be considered to make up for the gap.

The previous government committed to income tax reforms to generate about Rs125bn in additional revenue but the measures taken in the budget 2022-23 reduced even existing income tax yield by about Rs45bn.

The MEA complained that some international donors were shying away from providing aid while others had threatened to cut taxation claims from aid money or double up their home-country tax on their loans, as tax autho­rities were raising tax claims against foreign aid and related consultancy ser­­vices despite MEAs requests not to do so.

The senators were surprised that government ministries were bringing policy issues to parliament instead of settling them at government level.

The MEA said the FBR did not address their concerns even after detailed discussions over the repercussions. As a result, the Japanese International Cooperation Agency (Jica) has already stopped its funding to Pakistan. “In a debt-trapped economy like Pakistan, this will cause serious repercussions and this must be addressed by the Ministry of Finance and FBR,” the MEA said in writing.

It said the European Union had pointed out that GIZ — the main German development agency — had a blanket tax exemption under an old bilateral agreement and the same facility should also be available to all EU grant projects.

The FBR exempted GIZ from tax in 2017, and the provincial governments of Khyber Pakhtunkhwa and Baloch­istan followed suit in 2017 and 2022.

It said the United Kingdom also requested that official development assistance grant financing should be exempt from all taxes and duties in all forms, including any returns generated.

The United States also demanded that no tax be deducted on grants, otherwise, the same would be deducted from grant money. It also “cautioned that if these invoices are not accepted, USAID will de-obligate $1.7 million (100pc of tax deducted) and it will go back to the US treasury”.

It also warned that the two countries had also agreed that taxes and duties must not be applied to any USAID projects and warned that $3.4 million was anticipated to be deducted in the upcoming year that will be (200pc of taxes deducted).

Similar issues were emerging regar­ding interest-free loans and grants from Denmark, KfW of Germany, the Japan Bank for International Coope­ra­tion, and the French Development Agency.

Some of these loans either had zero interest or minor interest of 0.25pc to 0.75pc over a repayment period of 25 to 45 years compared to 1.25pc to 6pc of multilateral lenders like the World Bank, Asian the Development Bank and the Islamic Development Bank.

The MEA said the interest-free loans offered by any development partner should also be exempt from taxes and related foreign consultancies, and procurement of goods and services should also be exempted.

Published in Dawn, June 15th, 2022

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Iran’s counterstrike
Updated 15 Apr, 2024

Iran’s counterstrike

Israel, by attacking Iran’s diplomatic facilities and violating Syrian airspace, is largely responsible for this dangerous situation.
Opposition alliance
15 Apr, 2024

Opposition alliance

AFTER the customary Ramazan interlude, political activity has resumed as usual. A ‘grand’ opposition alliance ...
On the margins
15 Apr, 2024

On the margins

IT appears that we are bent upon taking the majoritarian path. Thus, the promise of respect and equality for the...
Noshki killings
Updated 14 Apr, 2024

Noshki killings

It must be asked why Baloch separatists continue to target civilians as well as security men despite large deployment.
Upholding the law
14 Apr, 2024

Upholding the law

THE recent discord in Bahawalnagar offers a chance to reflect on the sanctity of the law and its enforcement across...
Tragic travels
14 Apr, 2024

Tragic travels

FOR those embarking on road and boat journeys, the probability of fatal accidents has seen a steady rise. The recent...