Carbon tax on fuel proposed to placate IMF
• Insiders say move will facilitate green bonds, cheaper loans from multilateral institutions
• Withholding tax on bank transactions for non-filers likely to be hiked; carrot-and-stick approach to broaden tax base
• Fiscal adjustment of Rs1.6tr likely through additional revenue measures, privatisation
ISLAMABAD: The government is mulling a move to introduce a carbon tax on petroleum and similar products, amid a push for an integrated general sales tax (GST) from the International Monetary Fund to achieve the true spirit and benefits of the value-added tax (VAT) for documentation and digitisation.
Sources told Dawn that carbon tax was one of the measures being deliberated that could also help garner international financial support for newer aid instruments, including green and e-bonds and cheaper loans and grants from multilateral institutions. The future development programme is already being aligned with climate public investment management benchmarks, the sources added.
The IMF was advocating a revival of standard GST on petroleum products in addition to up to Rs60/litre petroleum levy as one of its broader programme objectives to transform the existing GST scheme with a universal VAT mode of taxation on consumption across the economy with no exception or preferential treatment to any sector.
The authorities, however, suggested the re-introduction of the carbon tax or increasing the threshold for petroleum levy in the coming budget to as much as Rs100/litre for greater revenue generation from petroleum products because its proceeds stay fully in the federal kitty, unlike the GST that overwhelmingly goes to the provinces.
According to sources, the carbon tax was a beneficial initiative for international support and to earn carbon credits and cheaper finances and could then be dedicated to environment-friendly expenditures that replace carbon-emitting practices and contain greenhouse gas emissions. The two non-tax revenues (petroleum levy and carbon tax) would be in place simultaneously in case of a final decision.
The officials argued that federal revenue instruments, like petroleum levy and carbon tax, were easier to collect and address financial constraints than rebalancing the National Finance Commission (NFC) which had a greater provincial tilt in terms of divisible pool resources.
Coupled with the withdrawal of federal financing to provincial development projects under the public sector development programme, the centre would not need to touch politically hot items, like undoing fiscal devolution.
These sources said the government and the IMF have also discussed the increase in size and outreach of various social welfare initiatives under the Benazir Income Support Programme (BISP) and the linkage of monthly stipends with inflation to counter adverse impacts of record inflation. Both sides agree on the need for better targeting and phasing out of beneficiaries through income-generating schemes.
Taxation measures
According to officials, the revenue effort would focus on digitisation and documentation through carrot-and-stick tactics. While retailers would be encouraged to register under the Tajir Dost Scheme voluntarily, they would soon be punished through fines and other punishments by adding new legal instruments to the income tax laws in the upcoming finance bill.
Likewise, non-filers would be subject to higher withholding tax on bank transactions. At present, they pay 0.6pc of WHT above Rs50,000 transactions which could be increased to 1pc in the coming budget.
The sources said a series of measures were also introduced in the finance bill last year, but later withdrawn on the intervention of parliamentarians for being “too harsh” and having the potential of being misused by tax officials. Those measures were being reconsidered for the next year. The next and 24th IMF bailout is expected to aim for expanding the tax-to-GDP ratio by at least 3pc, to around 12pc, at an average rate of 1pc every year.
These sources said the fiscal adjustment of at least 1.5pc of GDP, or about Rs1.6 trillion, would have to be made in the coming budget through additional revenue measures, coupled with expenditure rationalisation and privatisation.
The finance minister has already announced intentions to reform pensions as one of the key expenditure rationalisation measures to be supported by fewer allocations for development spending.
The focus on the revenue side would be on expanding the tax net by transforming the general sales tax into real VAT, notwithstanding its inflationary impact, coupled with the expansion of the tax base to retail and wholesale traders, agriculture, reduction in income tax slabs, and their uniform applicability to all incomes, irrespective of the source to diversify the revenue sources.
The government has already given an undertaking to the fund to continue gas and electricity tariff adjustments ‘in a timely manner’ starting with the new fiscal year and simultaneously make efforts for energy cost reductions and induction of the private sector to address circular debt.
It has also promised to continue the tight monetary policy and switch to a market-based exchange rate, besides strengthening social security and SOEs, even though the IMF expects major risks to the reform programme owing to political unrest and geopolitical situation.
Published in Dawn, May 17th, 2024