Govt considering imposing more taxes on imports

ISLAMABAD:  Govt may slap 17% sales tax on high-grade petrol as it is considering imposing more taxes on imports to cover a projected shortfall of Rs100 billion in customs duty collection.

Tax authorities have recently shared options with the govt to bridge the shortfall by imposing taxes on duty-free imports and raising the additional customs duty to collect roughly Rs60 billion in taxes, according to sources in the Ministry of Finance.

They also include a reduction in the regulatory duty to allow imports aimed at compensating for the revenue loss. However, no decision has been made for imposing a new additional customs duty besides increasing the rates of existing additional customs duty being collected at the import stage, they added.

The additional customs duty is other than the standard customs duty that is imposed to raise more taxes.

Finance Minister Ishaq Dar may soon chair a meeting to review these proposals.

Sources said that the proposal of imposing 17% sales tax on high octane blending component (HOBC) was at an advanced stage, aimed at collecting Rs6 billion in the remaining period of current fiscal year.

The govt is already charging a taxes of Rs50 per litre on imports of HOBC and motor spirit (petrol). The cost of HOBC (97 octane) is higher by Rs45 per litre than the 92-octane petrol.

The International Monetary Fund (IMF) has asked Pakistan to impose 17% sales tax on petroleum products in addition to the Rs50-per-litre levy. Any decision to impose the sales tax on high-quality petrol may be the first step towards that goal.

Recently, the IMF also asked Pakistan to impose new taxes of Rs600 billion to achieve the tax-to-GDP ratio target of 9.5%. Possible shortfall in the coming months may expose the government to more pressure from the IMF.

The Federal Board of Revenue (FBR) could not achieve its October tax collection target of Rs534 billion, falling short by Rs22 billion, primarily because of contraction in imports. The monthly goal was missed despite 15% growth in collection over tax receipts of Rs445 billion in October last year.

However, the Inland Revenue Service (IRS) exceeded its July-October target, partially offsetting the low collection by the Customs Department.

The collection of customs duty, which was the cornerstone of FBR’s performance earlier, remained below target for the fourth consecutive month in October.

Against the four-month target of Rs343 billion, the FBR collected Rs302 billion in customs duty – a gap of Rs41 billion. It was mainly due to the import restrictions as the duty collection on imports dropped by 10% in rupee terms despite appreciation of the greenback.

The government has set customs duty collection target of Rs1.150 trillion, which according to the Customs Department may be missed by Rs100 billion in the current fiscal year. It has come up with multiple options to bridge the gap.

A key proposal is to slap 2% additional customs duty on goods imported at zero duty, including those falling within the free trade agreements. This proposal may generate revenue of around Rs35 billion.

In the first four months of FY23, imports amounted to $21 billion, but nearly $10 billion, or 47%, of imports were duty free. Now, the government is considering targeting these imports for revenue generation.

However, many raw materials for manufacturing export goods are also imported at zero duty. Imports of raw materials through various export facilitation schemes may remain duty free.

Sources said that the FBR had proposed that the existing additional customs duty could be further increased by 1% to 2% to bridge the revenue shortfall. Maximum additional customs duty rate is 7%, which can be raised to 8%. Cumulatively, the government can collect additional revenue of Rs60 billion by increasing the additional customs duty and including the zero-duty items in the tax ambit, according to the sources.

Another option is that the government may reduce the regulatory duty to allow imports, which will compensate for the customs duty loss. However, this proposal may not be viable as the government is following an import compression policy.

Pakistan has managed to cut trade deficit by $4.2 billion, or nearly 27%, in the July-October period of FY23 by blocking imports. The trade deficit shrank to $11.5 billion solely on the back of a steep fall in imports.

This hit the revenue of the FBR, which has been heavily relying on imports for a long time. During the last fiscal year, the share of import taxes was around 52%, which during the first four months of current fiscal year came down to 45%.

Owing to the reduction in imports, the sales tax revenue at the import stage fell by Rs17 billion to Rs557 billion in the July-October period compared to a year ago. But income tax collection at the import stage amounted to Rs98 billion, up by Rs10 billion. Federal excise duty collection at the import stage dropped by Rs5.6 billion to just Rs3.6 billion in four months.