Pakistan’s top corporate body has proposed radical action to Prime Minister Shehbaz Sharif to reduce the national finances and current account deficits, including electricity rationing, an increase in individual tax rates, and an amnesty for the wealthy to entice them to deposit their money in the central bank’s coffers.
The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has also advocated for tax-free cryptocurrency encashment in Pakistan and the conversion of foreign currency into Pakistani rupees. It has also suggested that cryptocurrencies held in Pakistan and held as deposits in foreign exchange accounts with the central bank be taxed at a rate of 5%, and that cryptocurrencies held in Pakistan and held as deposits in Roshan Digital Accounts be taxed at a rate of 10% for non-resident Pakistani nationals and dual nationals.
The suggestions, which were sent to Prime Minister Nawaz Sharif last month, aimed at decreasing the budget deficit by Rs1.1 trillion through a combination of spending cuts and tax increases, as well as minimising the current account deficit by limiting or prohibiting some imports entirely. However, some of these ideas, such as the tax amnesty scheme, are contradictory to the principles agreed upon under the International Monetary Fund (IMF) programme, or are politically controversial, such as the rise in individual tax rates and the loss of gasoline subsidies beginning in July.
By the conclusion of this fiscal year, the coalition government led by the PML-N faces major problems, including a potentially record-high budget deficit of Rs5 trillion to Rs5.6 trillion and a current account deficit similar to the pre-IMF plan of $19 billion. The leading business association has advised that the PM request that the country cut its usage of power during peak hours and implement scheduled load-shedding for two to four hours per day to assist alleviate current-account pressures amid the ongoing economic turmoil.
However, lower electricity utilisation may not give relief to customers or the government because it would boost idle capacity payments to power providers. This will also have a negative impact on economic growth prospects. The country recently saw hours of load-shedding as power facilities were unable to operate owing to a fuel shortage. The FPCCI has urged to Prime Minister Sharif that the government start an incentive programme to divert dollars from lockers and personal safes into bank accounts.
According to the plan, the government may exclude such deposits from taxes if they have not previously been disclosed in tax returns and are maintained in local accounts for at least one year. The tax amnesty scheme contradicts the IMF programme, which the government may find difficult to implement as it attempts to resurrect the stalled bailout package.
Rather than regulating imports through regulatory tariffs, the FPCCI supports for a blanket ban on non-essential commodities in light of the present economic crisis. According to a World Bank research, 80 percent of Pakistan’s imports are either raw materials or intermediate items, and their reduction will have an effect on economic growth.
The FPCCI has recommended lowering interest rates from 12.25 percent to 7 percent in order to decrease interest costs and reduce the budget deficit by Rs300 billion. According to the SBP, government borrowing represented around 63.6 percent of total outstanding loans in March 2022. It said that higher policy rates weaken the government’s fiscal capability as the cost of debt rises. The business apex organisation has approved the IMF’s call to raise individual income tax rates.
According to the report, Pakistan’s current personal income tax structure is substantially less progressive. In Pakistan, there are 11 income tax slabs, compared to 5-7 levels in peer nations. “It is proposed that income tax slabs be reduced from 11 to 5-7 in order to promote the progressivity of income tax.” According to IMF projections, this will contribute Rs200 billion in additional income by fiscal year 2024.” The FPCCI has also advocated for the immediate elimination of gasoline and power subsidies, which are fiscally unsustainable. The fake fuel price freeze is postponed until the budget and PSDP funds are available, after which it will be steadily increased each month.