Hard decisions likely to conclude IMF deal

June 22, 2022 (MLN): The much-awaited deal with IMF seems to be witnessing a major breakthrough as Pakistan and the fund have reached an understanding on changes in tax measures proposed in Federal Budget FY23 and the staff-level agreement will be attained soon as the amended budget is passed by Parliament.

The key changes that came into sight so far have been additional tax measures of Rs422bn to increase the tax collection target to Rs7.4 trillion. These measures include raising the petroleum development levy, poverty alleviation tax, an upward adjustment in customs duty collection, and alteration in personal income tax slabs to name a few.

Following IMF’s displeasure with the initial budget announcement, the government is expected to make the following major changes to the taxation measures highlighted earlier for budget FY23.

With oil prices falling in the international market, the government has reportedly revised down Petroleum Development Levy (PDL) target to Rs550bn from Rs750bn announced in the Federal Budget FY23 which was unlikely to achieve at the present time.

“The strategy of resuming PDL is said to be at a gradual pace, rather than a sharp increase of Rs30/ litre from 1st July.” analyst at JS Global said in a note, adding that some news flows suggest a levy of Rs5/ litre, which would increase up to Rs50/ litre over time.

On the banking front, media reports suggest that the corporate tax of the banking sector is likely to be revised down to 42%, from 45% announced earlier in the budget.

“Any incentive of this quantum would not be enough to offset the potential higher poverty alleviation tax, however, would provide some support as compared to other sectors, he said.

With the tax collection target revised upward, the government agreed to impose a 1% poverty tax on firms earning Rs150mn, 2% on those earning more than Rs200m, 3% on over Rs250m and 4% on Rs300m and above. Previously, the poverty alleviation tax was announced at 2% on individuals and corporates earning Rs300mn/annum and above.

Another key change is GIDC collection target which was set at Rs200bn has been proposed to be abolished while the custom duty collection target has been revised upward to Rs1005bn from Rs953bn earlier.

The market participants believe that these amendments are positive from the economic perspective as they will not only help unlock a disbursement of $900mn from IMF but also will be followed by China's debt rollover of $2.5bn and Saudi fund rollover of $2bn immediately, pumping SBP foreign exchange reserves by almost $5.5bn in the next 1-1.5 months.

To recall, SBP reserves have reached a more than 2-year-low of $8.9bn, with an import cover of fewer than 5 weeks.

However, from equity perspective, the amendments are believed to be negative for the stock market in the wake of soaring inflation, higher tax incidence, and possibility of further monetary tightening.

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