Defers approval of Karachi package again and request for import of more wheat.
ISLAMABAD:The cabinet’s economic decision-making body on Wednesday approved the levy of an additional withholding tax of up to Rs200,000 on sale of newly bought cars within three months of purchase aimed at discouraging unchecked premium being paid to get timely delivery.
The Economic Coordination Committee (ECC) of the cabinet also adopted, in principle, a subsidies rationalisation plan that sought to abolish untargeted and unrecognised subsidies and ensure at least Rs488 billion in annual savings. ECC Chairman Abdul Hafeez Shaikh gave directive for bringing specific proposals before the committee for abolishing and rationalising the subsidies.
The ECC, for the second time, deferred approval of the Rs739 billion worth of Karachi Transformation Plan and also put off decision on a request for import of an additional 380,000 tons of wheat till its next meeting. “The Karachi Transformation Plan was postponed to the next ECC meeting,” according to the Ministry of Finance.
Car tax
On a summary moved by the Ministry of Industries, the ECC approved the imposition of Rs50,000 to Rs200,000 additional withholding tax on new cars at the time of their first registration in the name of second buyer. It approved the levy of Rs50,000 tax on 1,000cc cars, Rs100,000 tax on 1,000cc to 2,000cc cars and Rs200,000 tax on vehicles of more than 2,000cc.
Dealers of car manufacturers-cum-assemblers were largely involved in the illegal practice of charging premium. The tax has been slapped to discourage the demand for premium that a buyer currently pays in the range of Rs50,000 to Rs600,000 over and above the invoice price just to get delivery of vehicle on time.
The tax has initially been approved for imposition till June next year and will be implemented through an amendment to the Income Tax Ordinance, subject to clearance by the federal cabinet.
The additional withholding tax has been levied on persons who buy locally manufactured cars from automakers and subsequently sell them within three months of delivery.
The ECC approved the abolition of 4% withholding tax on manufacturers and retailers of locally manufactured phones and cleared, in principle, another proposal for removing 17% sales tax on locally manufactured phones of over $200 value, subject to clearance by the International Monetary Fund (IMF). The ECC approved the Mobile Device Manufacturing and Electric Vehicle Policy (two to three-wheelers) and HCVs.
Subsidies
In July this year, Prime Minister Imran Khan had set up a subsidies cell under Dr Waqar Masood Khan to examine all types of hidden and explicit subsidies with a view to assessing their desirability and recommending rationalisation.
“The assessment carried out by the subsidies cell has indicated that there are subsidies amounting to Rs2 trillion annually, which constitute 4.5% of GDP and 58% of current budget.” The stock of unrecognised subsidies was Rs5.2 trillion as of June 2020, which was equal to 24% of domestic debt and “poses actual and potential loss to the exchequer for lack of adequate returns or possible losses to be booked in not too distant future,” according to the working.
The ECC chairman appreciated the detailed plan for rationalisation of subsidies, its various components and directed that a comprehensive summary should be presented with concrete proposals suggesting a way forward to the ECC, a statement issued by the Ministry of Finance stated.
The subsidies cell has determined the annual benefit of adopting the action plan at Rs488 billion while the impact of certain policy actions will be determined at a later stage.
According to the action plan, the subsidy on electricity is to be given to low-income consumers through the Ehsaas programme, initially in the jurisdiction of IESCO. Potential savings have not been worked out yet. The cell has also proposed that industrial subsidies should be targeted and the industrial support package of Rs3 per unit should be eliminated “to reduce burden of cross-subsidies on industries”. This will result in annual savings of Rs75 billion.
It has also proposed that from the next fiscal year, industrial electricity subsidies should only be given to the export sector.
According to the plan, provinces should share 50% burden of the subsidies from next fiscal year that will result in savings of Rs45 billion. There is also a proposal to undertake a survey of beneficiaries and to register eligible tube well owners. No financial impact of the proposal has been worked out.
According to a critical proposal, the government should adopt a national average electricity tariff by consolidating accounts of distribution companies. The subsidies cell has also proposed the settling of power sector circular debt parked in Power Holding Private Limited (PHPL) and preparation of a settlement plan for the unpaid circular debt by identifying overdue amounts by the end of this month.
Relending policy
The ECC approved a new relending policy presented by the Economic Affairs Division. Now, instead of charging 9-12% interest rate on foreign loans being extended to provinces, federal government departments, the government will charge actual rates in addition to 0.25% disbursement charges.
The average cost of external borrowing by the federal government for the past five years was 3.6% annually. During the same period, the rupee depreciated 9.1% per annum.
Wheat import
The ECC deferred a summary that sought import of an additional 380,000 tons of wheat for Azad Jammu and Kashmir (AJK) and Utility Stores Corporation (USC). The chairman directed to provide first load of additional quantities to both AJK and USC on priority as an interim arrangement to ensure smooth supply of wheat across the country, said the finance ministry.
The commerce ministry has opposed the proposal of importing additional wheat. It stated that the shipment schedule prepared for the public sector procured quantities of 2.16 million tons was already very tight and did not allow the accommodation of additional demand by March-April 2021.
The commerce ministry stated that the total import of wheat through public and private sectors had already reached around 3.4 million tons and vessels were lined up till March next year.
