Rs36bn additional tax imposed on cigarettes and tobacco

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ISLAMABAD: The government on Thursday announced fresh revenue measures of more than Rs50 billion and lifted a ban on all non-essential, or luxury, imports to meet yet another lateral demand of the International Monetary Fund (IMF) before it clears Pakistan’s bailout package later this month.

Addressing a press conference in the federal capital on Thursday, Finance Minister Miftah Ismail said Rs36bn worth of additional tax had been imposed on cigarettes and tobacco and about Rs14bn would come from changes in the retailers’ tax regime.

He said some of the other proposed tax relief measures for real estate, capital markets, banks and so on had been postponed for now.

The minister said Pakistan had completed all conditions and prior actions required by the IMF under the 7th and 8th reviews for the disbursement of $1.18bn and complied with an additional funding arrangement of $4bn from Qatar, Saudi Arabia and the United Arab Emirates and re-rolling of payable debt by China.

“However, the Fund wanted clarity on certain issues,” the minister said and explained that the import ban was imposed on May 19 for two months to control the outflow of scarce foreign exchange. However, the import ban issue could have been raised by the World Trade Organisation (WTO) with which the IMF worked very closely, he said, adding that this was why the Fund wanted the ban removed.

Mr Ismail said the prime minister was not in the mood to let luxury imports flow in while the government’s priority was to provide for food items and arranged imports of one million tonnes of wheat, 200,000 tonnes of urea, cotton, edible oil and pulses, which helped control prices.

Therefore, with limited dollars, Pakistan’s choice was easy to feed its 230 million citizens instead of luxury imports like Mercedes, iPhones and home appliances.

“But since this is a demand of the international community, we are lifting the ban on imports and replacing it with prohibitive regulatory duties of 400pc to 600pc so that fewer dollars be spent on luxury imports,” he said, adding that the government would impose thrice the existing regulatory duties —maximum permissible under WTO rules — on completely built units (CBUs), or finished goods.

“With my limited resources, I will prioritise flour, wheat, cotton and edible oil instead of iPhones and cars. We will remove the bans but impose prohibitive duties in the form of regulatory duties, customs duties and sales tax, so their import does not materialise,” he said.

He said the import ban was lifted to comply with IMF conditions and other international agreements while limiting imports.

The minister conceded that despite the ban, one could still find salmon and sushi in Karachi and Islamabad restaurants — which obviously could not be four months old and meant these consignments were still coming, perhaps through the green channel that the government would soon regularise with duties. The minister said these duties were not aimed at raising revenues but discouraging foreign exchange outflow.

Responding to a question, he said there would be no restrictions on industrialists importing machinery for manufacturing products for exports, or on spare parts in small quantities, but there would still be restrictions on the machinery imported to manufacture products for the local market.

On a question about imports by the manufacturers or assemblers of automobiles, cell phones and home appliances, Mr Ismail said the ministries of industries, commerce and the State Bank of Pakistan would, for some time, allow them to import half of what they used to do earlier.

“Let me get my head above the water” before getting back to normal but “we would have to remain within our means and allow imports that could be covered with remittances and exports and no more”, he said.

He said the government had also complied with power tariff adjustments and would ensure that all subsidies are funded in the budget and would also remain committed to generating Rs153bn primary fiscal surplus (the difference between revenues and expenditures excluding debt servicing).

Regarding tax measures, Mr Ismail said he had made a mistake while projecting Rs42bn in revenue through a tax on retailers as it became applicable also to very small traders consuming up to 50 units of electricity and with monthly bills of Rs1,000-2,000 and then the Federal Board of Revenue somehow slipped up and imposed Rs6,000 monthly tax instead of Rs3,000.

As a result, he said, this had to be withdrawn from the beginning, i.e. from July 1. Now, we would be able to recover Rs27bn instead of Rs42bn — a gap of Rs15bn.

Mr Ismail said the government had removed sales tax on power subsidy paid out of budget, which the FBR used to charge on the final electricity cost of about Rs22-24 per unit while the government was providing it to export sectors at Rs9 per unit. He said there was no point in charging tax on subsidies and paying it out of budget.

Now, the FBR will charge sales tax on the actual cost of units billed to a consumer and this will also be covered in the upcoming ordinance. The same principle will now also apply to gas pricing.

The minister said the issue of sales tax on agricultural machinery and implements would also be addressed.

The finance minister said the government would now promulgate an ordinance over the next few days to charge variable taxes to traders, starting with 5pc sales tax and 7.5pc income tax will remain in place for three months for all traders, i.e. until Sept 30.

After three months and with effect from Oct 1, this 5pc sales tax and 7.5pc tax would be on consumption of up to 50 units, after which these taxes would gradually increase for higher consumption to 7.5pc, 10pc, 12.5pc and after 1,000 units to 12.5pc and 20pc sales tax and income tax, respectively.This Rs15bn gap was being more than filled with the imposition of Rs36bn additional tax on the tobacco industry, the minister said. The current tax of Rs1,850 per 1,000 cigarettes on tier-2 packs will be increased to Rs2,050, and Rs5,900 per 1,000 cigarettes on tier-1 packs will be raised to Rs6,500. The Rs10 per kg cess tax on tobacco is also being increased to Rs380 per kg.

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