The government may be compelled to withdraw concessionary sales tax for five leading export-oriented sectors, first extended in 2016-17 and continuing to this day, as well as fiscal incentives to industry extended in the Second Amendment Finance Bill 2019.
This was revealed by well-placed sources within the Federal Board of Revenue on condition of anonymity who participated in the meetings with the International Monetary Fund (IMF) staff mission, adding that the final decision rests with the executive.
Sources confirmed to Business Recorder that concessions, exemptions and tax reductions are in excess of Rs 680 billion for the current year – including Rs 100 billion concessions/exemptions announced in the April 2018-19 budget document (announced by the PML-N government) and Rs 40 billion in the Second Supplementary Finance Act 2019.
FBR sources further revealed that a proposal is under consideration to increase the standard rate of sales tax from 17 to 18 percent – projected to generate an additional Rs 30-40 billion in 2019-20.
Sources further stated that the FBR is suggesting to the government to abolish Fifth Schedule (conditional exemption of customs duty) of the Customs Act 1990; and items under this schedule may be brought into the First Schedule of the Customs Act in budget 2019-20. Around 400 tariff lines are availing exemption without any condition under Fifth Schedule of the Customs Act 1990 which may be subjected to higher rates of duties.
Under the second supplementary finance bill 2019, government exempted customs duty on import of plant and machinery by green field industrial undertakings and units in special economic zones; and waived off customs duty and advance income tax on import of firefighting equipment for setting up industrial entities in the Special Economic Zones. However these are unlikely to be amended as incentives to Greenfield industrial undertakings are fully supported by multilaterals including IMF and firefighting equipment is a necessary precaution.
The second finance bill 2019 also reduced/abolished customs duty on the import of 45 industrial raw materials and inputs including zero percent duty on the import of latex, adhesive tape, evaporators and machinery for preparing, tanning or working hides, skins or leather and machinery for making/repairing footwear. These may have to be reviewed in the forthcoming budget.
Pakistan authorities and the IMF have agreed on a primary deficit of 0.6 percent of the GDP for 2019-20 – a reduction of 1.3 percent from the existing primary deficit which would have to supported, as stated in the IMF press release “by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments and improve tax administration.” In the event that the government is unable to reduce expenditure the onus of raising revenue would be all the greater.