TAX NEWS JANUARY 31, 2017

1.      Tax-free days ending for Saudis after oil slump

Tax-free living will soon be a thing of the past for Saudis after cabinet on Monday approved an IMF-backed value-added tax to be imposed across the Gulf following an oil slump. Residents of the energy-rich region had long enjoyed a tax-free and heavily subsidised existence but the collapse in crude prices since 2014 sparked cutbacks and a search for new revenue.

Saudi Arabia is the world''s biggest oil exporter and the largest economy in the Arab region. It froze major building projects, cut cabinet ministers'' salaries and imposed a wage freeze on civil servants to cope with last year''s record budget deficit of $97 billion.

It also made unprecedented cuts to fuel and utilities subsidies. The kingdom is broadening its investment base and boosting other non-oil income as part of economic diversification efforts and aims to balance its budget by 2020. Cabinet "decided to approve the Unified Agreement for Value Added Tax" to be implemented throughout the six-member Gulf Co-operation Council, the official Saudi Press Agency said.

"A Royal Decree has been prepared," it said. A five-percent levy will apply to certain goods following a GCC agreement last June. The move is in line with an International Monetary Fund recommendation for Gulf states to impose revenue-raising measures including excise and value-added taxes to help their adjustment to lower crude prices which have slowed regional growth. The GCC countries have already agreed to implement selective taxes on tobacco, and soft and energy drinks this year.

2.      Tax filers in Pakistan treated as non-filers in AJK, GB’

The Federal Board of Revenue (FBR) has raised an ambiguity that companies/businessmen, who are residing and filing their income tax returns in Pakistan, are treated as non-filers in Azad Jammu Kashmir (AJK) and Gilgit-Baltistan and suppose to pay higher rate of withholding taxes in AJK territory.

Sources told Business Recorder here on Monday that if the name of a taxpayer (filer in Pakistan) is not appearing in the Active Taxpayer List (ATL) of AJK and Gilgit-Baltistan, such taxpayer has been treated as a non-filer in the territories of AJK and liable to enhanced rates of withholding taxes. The FBR will approach the governments of AJK and Gilgit-Baltistan to resolve the issue because the companies operating in AJK and GB are being treated as non-filers despite being filers in Pakistan.

Sources said that in this regard the FBR has submitted a briefing to the Senate Standing Committee on Finance.

According to the FBR, the Income Tax Ordinance, 2001 extends to the whole of Pakistan. The territories comprising Pakistan are specified in Article 1(2) of the Constitution. According to the said article, the areas comprising Pakistan are as follows: The Provinces of Balochistan, Khyber Pakhtunkhwa, Punjab and Sindh; Islamabad Capital Territory; Federally Administered Tribal Area and such states or territories as are or may be included in Pakistan, whether by accession or otherwise.

The territories of Azad Jammu and Kashmir and Gilgit-Baltistan do not constitute a part of Pakistan in terms of Article 1(2) of the Constitution and therefore are not federally administered territories as mentioned in the agenda. The Azad Jammu and Kashmir and Gilgit-Baltistan are independent jurisdictions and, as such, the Income Tax Law in Pakistan does not extend to these areas which are treated as foreign territories as far as application of Pakistan's tax laws is concerned.

In view of the said constitutional position, the AJK Council and the Gilgit-Baltistan Council have adapted the Income Tax law in Pakistan through their legislative assemblies. These Acts are called the Azad Jammu and Kashmir Adaptation of Laws Act, 1959 and the Gilgit-Baltistan Council Income Tax (Adaptation) Act, 2012.

Under these enactments, the Gilgit-Baltistan and AJK councils have adapted Pakistan's Income Tax law ie the Income Tax Ordinance, 2001 and the Finance Acts passed subsequently by the National Assembly of Pakistan for purposes of their own territories. However, the Azad Jammu and Kashmir and Gilgit-Baltistan are foreign territories as far as applicability of the Income Tax Ordinance, 2001 is concerned.

Persons residing in Pakistan who are filing their income tax returns in the country are treated as non-filers in the AJK and Gilgit-Baltistan and vice versa unless such taxpayers are simultaneously filing their returns in AJK / Gilgit-Baltistan and Pakistan as the case may be. In terms of the Income Tax Ordinance, 2001 a "filer" is a person whose name appears on the active taxpayers list issued by the Federal Board of Revenue. However, if the name of the taxpayer is not appearing in the ATL of AJK and Gilgit-Baltistan, such taxpayer is treated as a non-filer in these territories and is subjected to enhanced rates of withholding taxes, the FBR added.

3.      SBP remains unmoved

As anticipated by this newspaper couple of days ago, the policy rate of the State Bank has been kept unchanged for the fourth time at 5.75 percent for the next two months. According to its Monetary Policy Statement (MPS) released on 28th January, 2017, this decision was made after assessment of the relevant developments and detailed deliberations in the meeting of Monetary Policy Committee (MPC). The outlook for inflation was benign. The average inflation was clocked in at 3.9 percent during the first half of the current fiscal due to smooth supplies of perishable items, stable exchange rate and government’s absorption of higher international oil prices. The current trend suggests that average inflation during 2016-17 would be lower than the target of 6 percent. The current account deficit was, nonetheless, substantially higher at dollar 3.6 billion during July-December, 2016 compared to dollar 1.7 billion in the corresponding period of the previous year due to growing CPEC-related imports, decline in exports, absence of CSF and a slowdown in home remittances. This deficit was financed by an increase in bilateral and multilateral funding and a pickup in investment inflows.

SBP is quite optimistic about a higher GDP growth. The MPS states that “benefiting from the historic low interest rates, private businesses are actively borrowing from the banking sector for upgrading and expanding their businesses processes.” This has been helped by retirement of government borrowings to scheduled banks and increase in bank deposits. Private sector borrowed Rs 375 billion in the first half of FY17 as compared to Rs 283 billion in the same period of last year and a substantial part of these borrowings was for fixed investment. This healthy credit expansion, higher production of Kharif crops, improvement in energy supplies and upbeat business sentiments “signal recuperating real economic activities”. LSM grew by 3.2 percent during the first five months of the current fiscal and further expansion was expected on account of growing infrastructure spending and recent support of export-oriented sectors.

Although the business community and the government would have liked another cut in the policy rate for obvious reasons, sticking to the existing policy rate, in our view, was a better option in the given circumstances. The reasons for the support of such a stance are not difficult to understand. The level of inflation remains subdued so far but is higher than the past year and is likely to come under further pressure in the near future. The current trends in the foreign exchange market suggest that stability in the inter-bank rate of the rupee was not guaranteed and higher international oil prices have to be passed on to the domestic consumers sooner rather than later. If this burden was not shifted to the domestic market, the fiscal implications of such a distorted policy could be serious. Also, demand pressures in the economy could increase as private sector credit has tended to grow while government borrowings from the banking system, including from the SBP have not been adequately contained. The situation on the external front is simply alarming. The current account (C/A) deficit which is the main indicator of the external sector situation of a country has doubled to dollar 3.6 billion during the current fiscal. All the important components of the C/A balance are showing deteriorating trends. Home remittances and exports are down, CSF inflows would be no more available and no programme with the IMF is likely to be negotiated anytime soon. More worrying aspect is that the chances of improvement in the external sector are also very slim. Protectionist policies in the developed economies are gathering momentum while domestic productivity is still hampered by a host of factors like confrontation at the borders, political tensions within the country, corruption and poor infrastructure. The depreciation of the rupee which could encourage exports and contain imports is also not on the cards due to the insistence of the government to maintain the existing parity of the rupee. Overall balance of payments has not yet deteriorated and foreign exchange reserves have not been depleted due to foreign funding and pickup in investment inflows but these receipts are not likely to continue to give adequate comfort to the external sector.

A grim situation in the external sector and some rise in the rate of inflation might have persuaded the MPC of the SBP to increase the policy rate somewhat but such a change in stance seems to have been avoided for the time being due to its negative impact on economic activities in the real sectors. As the wording of the MPS shows, SBP is highly pleased with the expansion in private sector credit, particularly for fixed investment, retirement of government borrowings to the scheduled banks, rise in commercial banks’ deposits, higher demand for consumer financing and growth in the LSM sector. Any increase in the policy rate might have wiped off some of the gains on these indicators. However, the MPC will be constrained to consider an increase in the policy rate if the present trend in the C/A balance continues and the inflationary pressures re-emerge. After all, it is the basic responsibility of a central bank to maintain price stability which is also a prerequisite to sustainable growth. Finally, it was somewhat disconcerting to see the Finance Minister hinting at the possibility of unchanged monetary policy stance in a meeting a few days prior to the announcement of MPS. This kind of attitude strengthens the present perception that SBP is not an autonomous institution in letter and spirit as provided under the laws of the land. Last but not least, Pakistan desperately needs an industrial policy. LSM growth is woefully dismal if one takes into account country’s population growth rate. It needs to be around 7 percent to employ the teeming millions entering the employment age. The situation, therefore, brooks no complacency. Period.

4.      Govt charging no GIDC on imported gas, NA told

The government is charging no Gas Infrastructure Development Cess (GIDC) on imported gas (re-gasified liquefied natural gas) as compared to the domestic gas to make it viable in the country.

Minister for Petroleum and Natural Resources Shahid Khaqan Abbasi informed this to National Assembly on Monday during the question-hour.

“There is a huge gap in supply and demand of the natural gas, therefore, taxes on the RLNG are less as compared to domestically produced gas to make it viable in the market,” he said.

The minister said if the taxes are imposed on the imported gas, it would not remain viable as an alternate source of energy in the country.

According to the details, the government is charging Rs300 per MMBTU GIDC on fertilizer feed stock, Rs150 per MMBTU on fertilizer fuel stock, Rs263.56 per MMBTU on CNG in region-I, Rs200 per MMBTU on CNG in region-II, Rs200 per MMBTU on captive power and Rs100 per MMBTU on WAPA/KESE/CENCOs, independent power plants (IPPs) and general industry each in domestically produced gas while this tax is zero on the imported gas.

He informed the House that 600 billion cubic feet imported gas is being used in the country and this has helped run the industry including fertilizer plants and others.

The imported gas is available for consumption of everybody, he said, adding the quantum of the taxes varies for different categories of consumers depending on the consumption by each sector and applicable gas sale prices.

To another question, the minister informed the House that LNG has been imported since March 2015 and so far 58 LNG cargoes have been imported in the country.

Both the gas utilities, i.e. SNGPL and SSGC have reported that no loadshedding is being observed in the country, he said, adding that load management/curtailment is being done in low priority sectors to provide uninterrupted gas supply to top priority domestic and commercial consumers.

This has become possible due to injection of 40 MMCFD gas from Mardan Khel, injection of re-gasified LNG (RLNG) into the system, he said, adding that both the gas utilities are taking re-enforcement schemes to boost up undersize network along with replacement of leaky and old networks.

Members of PTI and JUI-F member Naeema Kishwar earlier protested against the government and minister for petroleum and natural resources for allowing Adviser to Prime Minister Amir Muqam to inaugurate new gas connections in different parts of Khyber Pakhtunkhwa.

The minister said that moratorium on new gas connections in the country is intact but some new schemes are allowed after approval of the cabinet.

He said the federal government is releasing funds for some new gas supply schemes and “the rule is simple whoever will give funds for the schemes, will inaugurate them.”