VZCZCXRO0690
RR RUEHLH RUEHPW
DE RUEHIL #1625/01 1990507
ZNR UUUUU ZZH
R 180507Z JUL 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 3855
INFO RUEHBUL/AMEMBASSY KABUL 0639
RUEHLO/AMEMBASSY LONDON 0928
RUEHNE/AMEMBASSY NEW DELHI 5241
RUEHLH/AMCONSUL LAHORE 7601
RUEHPW/AMCONSUL PESHAWAR 6561
RUEHKP/AMCONSUL KARACHI 1994
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC

UNCLAS SECTION 01 OF 02 ISLAMABAD 001625 
 
SENSITIVE 
SIPDIS 
 
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 
 
ISLAMABAD 00001625  002 OF 002 
 
 
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.