SUPREME COURT AND GOP CLASH OVER FUEL TAX; GOP WINS FOR NOW

UNCLAS SECTION 01 OF 02 ISLAMABAD 001625



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E.O. 12958: N/A

TAGS: ECON, ENRG, EFIN, PGOV, PREL, PK

SUBJ: SUPREME COURT AND GOP CLASH OVER FUEL TAX; GOP WINS FOR NOW



REF: A. ISLAMABAD 1355

B. ISLAMABAD 1520



1. (SBU) (SBU) Summary: The Supreme Court on July 7 suspended the

GOP's newly-adopted fuel surcharge or "carbon tax" only to have

President Zardari impose an almost identical version of the tax by

Presidential ordinance on July 9. The "carbon tax" had gone into

effect July 1 as a part of the annual budget passed unanimously by

the National Assembly in place of the petroleum development levy, a

tax that generated some $1.5 billion for GOP coffers but which the

Court had ordered abolished in May (Ref A). Although wrangling over

the legality of Zardari's move continues, the Court adjourned for

one month with the tax still in place. Protesters in a number of

cities have rallied against President Zardari's imposition of the

tax. End Summary.

2. (U) The Supreme Court had ruled in May that the petroleum

development levy (PDL) was unfair, because despite the decline in

world oil prices, the GOP was maintaining elevated fuel charges to

garner revenue, rather than passing on the lower fuel prices to

consumers (Ref A). Sharp declines in fuel prices in the second half

of the 2008-09 fiscal year, combined with the GOP's elevated prices,

brought windfall revenue of over $1.5 billion to the GOP's coffers.

After the Supreme Court ordered the GOP to abolish the PDL, the GOP

replaced it with a fuel surcharge in the FY 2009-2010 budget.

Finance Advisor Shaukat Tarin maintained that enacting the new tax

as a part of the budget approved by the National Assembly would

deflect further legal challenges. Originally introduced (and still

popularly known) as a "carbon tax," the tax was renamed a "fuel

surcharge" when National Assembly members took note that it

contained no incentives for consumers to "go green" and actually

taxed environmentally-friendly compressed natural gas (CNG). CNG

was dropped from the tax and the budget (with the amended tax) was

passed unanimously by the National Assembly (Ref B).



3. (SBU) Soon after the budget came into effect July 1, suits were

again lodged in the Supreme Court contesting the legitimacy of the

fuel surcharge. On July 7, a three-member bench of the Supreme

Court led by Chief Justice Iftikhar Muhammad Chaudhry ordered the

temporary suspension of the fuel surcharge pending presentation of

further evidence of its necessity and precise nature. The

government complied with the Court ruling and announced lower fuel

prices later that day. The Court acted in response to several

suits, one of which was brought by attorney Akhram Sheikh on behalf

Pakistan Muslim League-N (PML-N) secretary general Iqbal Zafar

Jhagra. Sheikh told PolOff July 7 that he challenged the ordinance

on the grounds that it falls disproportionately on the poor and

denies them a constitutionally guaranteed "fundamental right" of

social justice. Sheikh asserted that, Tarin's assurances

notwithstanding, any measure no matter how it is adopted, can be

challenged in the court.



4. (SBU) On July 9, however, President Zardari re-imposed a version

of the tax by ordinance (similar to an Executive Order in the U.S.)

which it named a "petroleum levy." Prices at the pump were duly

restored to their previous higher levels. Attorney General Sardar

Latif Khosa notified the Court the same day that the GOP was

withdrawing the fuel surcharge and had issued the ordinance instead

to "send a positive signal to the International Monetary Fund (IMF)"

(Note: GOP and IMF representatives were holding the week of July 3

the third review of Pakistan's progress in meeting criteria under

its Stand-By Arrangement (SBA) for the delivery of the next tranche

of funds. Eliminating the fuel tax altogether would have added

almost another percentage point to the deficit and might have

prevented a successful conclusion to Pakistan's IMF review. End

Note). Presidential spokesman Farhatullah Babar asserted that the

GOP had shown "respect for the independence of the judiciary by

upholding its verdicts" when it withdrew the previous tax and issued

the re-named petroleum levy by ordinance.



6. (SBU) New legal challenges were brought almost immediately.

Media reported that PML-N and others filed new suits challenging the

ordinance on July 10 on the grounds that it disproportionally

targeted the poor and that the President does not have the power to

impose taxes. The suits asked that the tax again be suspended until

the Court has heard arguments. The Court denied initial petitions

to suspend the ordinance and announced it will reconvene in one

month to hear further arguments, leaving the tax in place.



7. (U) Public response to the President's re-imposition of the tax

has been negative. Protesters representing transport associations



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in Peshawar burned an effigy of Zardari and chanted slogans against

the government on July 10. Truckers in Swabi and Lahore staged

peaceful demonstrations and warned that protests would continue

until the ordinance is removed. Protestors in Peshawar and Karachi

voiced their opposition not only to the resumption of higher fuel

prices, but also to GOP action that they termed contrary to the

Supreme Court decision. At a protest in Karachi organized by the

Old City Traders Alliance, protesters blamed the IMF for the tax,

accusing the IMF of intruding on Pakistan's sovereignty.



8. (SBU) Comment: Because the Supreme Court is the court of first

instance "with respect to the enforcement of fundamental rights, if

the case involves a question of public importance," jurists were

able to make a case directly to the highest court that the fuel

surcharge (and the petroleum development levy before it) infringed

upon citizens' fundamental right to social justice - despite the

surcharge having been approved by the legislature. However, there

is still hot debate as to whether the Court overreached in taking on

the case, as well as widespread condemnation of President Zardari's

response. The renewed legal challenges as to the right of the

executive to levy taxes leave the future of the ordinance ultimately

uncertain, although it remains in place currently. Chairman of the

National Assembly Standing Committee on Commerce Khurram Dastgir

told ECON that the GOP could - and rightly should have - brought the

issue back to the legislature for urgent action once the Court

suspended the fuel surcharge. Clearly aware of the IMF review

underway simultaneously in Istanbul (readout septel),the GOP chose

to act so as to avoid possibly derailing the next tranche of funds

with a budget-busting deficit while it made its case in court.