Karachi, December 31, 2021 (PPI-OT): Mini-budget FY22: Harmonizing taxes to contain twin deficits

Mini Budget FY22 with a total outlay of Rs343bn (0.6% of GDP) is finally here to pave way for resumption of IMF program, one of the two pre-conditions, that will enable Pakistan in three most important things: 1) adequately fund external side, 2) contain the increasing imports and 3) bridge the fiscal gaps. Passage of the bill by the National Assembly will also address concerns over political noise and dissent within coalition partners.

Some of the changes proposed in Finance (Supplementary) Bill 2021 are mildly inflationary. The bill seeks to withdraw various tax exemptions on sectors ranging from power, pharma, automobiles, and FMCG while it also brings the zero-rated items on import front to normal tax regime.

There is more to it than exemptions and zero-rating removals as the government moves to implement most of these changes at import stage which is adjustable from collections at consumer-end warrants more documentation of the economy.

Mini-budget of Rs343bn tabled

After a lot of hiccups, the government has tabled Finance (supplementary) Bill 2021 which proposes tax collection enhancement of Rs343bn (0.6% of GDP). This was one of the two pre-conditions from the IMF in order to resume the EFF Program. We believe that this will not only help Pakistan in overcoming the fiscal gap but also be able to reduce the rising imports. Pakistan will now be able to start CY22 having settled the course of external funding that is needed to finance the ballooning Current Account Deficit after IMF’s Board approves the Sixth Review. An easy passage of this supplementary bill will portray a stronger political capital of the incumbent government while also addressing the nascent concerns over political noise as well as the dissent within coalition partners.

Measures are mildly inflationary

The government has proposed implementation of 17% GST on 140 items which are essentially consumable and industrial goods. The proposal on a widespread increase in GST on sugar, poultry feed, oilseeds for poultry, imported vegetables, and other essential goods are directly going to impact inflation, albeit in a mild manner. On the other hand, the government has assured that these measures may not likely impact the masses but only the elite segment of population. This will likely enable the incumbent government to retain their political capital to a large extent.

The new tax measures on both consumable and industrial goods will also enable the government to help in reducing import bill, as some of the sales tax collection has been implemented on Sixth Schedule under which machinery imports were zero-rated, which also includes imported machines for mobile-phone manufacturing. This will impede imports growth ahead and should be taken as a welcoming sign to battle the widening current account deficit.

Amongst plant and machinery imports, our back of the envelope calculations suggest Rs659bn (US$3.7bn) worth of such imports will be taxed for the next 6 months which is nearly 30% of annual machinery import bill for the current fiscal year.

Documentation of economy will improve

The changes proposed also extend to retailers besides the consumable goods which effectively puts more documentation. Also, the power to exclude any taxable supply or import under Third Schedule has now been transferred from Government to FBR. Moreover, a massive portion of pharmaceutical sector stands undocumented. As per FBR, only 453 out of 800 pharmaceutical manufacturers are registered with Drug Regulatory Authority of Pakistan (DRAP). The input tax will also enable in cornering the counterfeit segment of pharmaceuticals in Pakistan. Also, GST at input stage for bakeries, restaurants, sweet stores, flight food, products of poultry meat, vegetable oil, cereals, red chillies, etc, though adjustable, points towards more documentation of economy whose secondary impact will be to enable authorities in enhancing revenue collection in the long-run.