Government mulls new taxes, slashing development budget

ISLAMABAD: As tax collection nosedives, the government is considering options to levy new taxes, cut development budget and seek a relaxation in deficit target amid pressure from International Monetary Fund (IMF) to take action to cover the revenue shortfall.

The demand the IMF was making so far behind closed doors was made public for the first time when the international lender, in its official handout, asked the government to be ready to take corrective measures.

“Fiscal consolidation is broadly on track, but the authorities must be prepared to take further action to address possible revenue shortfalls,” said a note issued by the IMF from Washington on Wednesday after its executive board meeting.

The IMF had determined Rs2.810 trillion tax collection target – a goalpost that the Federal Board of Revenue (FBR) never accepted despite publicly owning it. “It was never our target,” said a member of the FBR on condition of anonymity.

The Rs2.810 trillion target is the core pillar of this fiscal year’s IMF determined budget deficit target of 4.7% of Gross Domestic Product or Rs1.363 trillion.

Before the IMF communiqué, the FBR was reluctant to accept its failure and insisted that the Fund was happy with its performance. In the first five months of the current fiscal year, the FBR had collected Rs903 billion in taxes, achieving just 12% growth rate, which was half than the needed pace.

In November alone, the FBR collected Rs178 billion in taxes, posting a negligible growth rate of just 4.2%. Till December 18, it collected Rs1.02 trillion in taxes, which was only 36% of the annual target. The revenue collection body is required to collect Rs1.246 trillion till December 31, which it might miss by at least Rs75 billion.

The FBR is of the view that falling oil prices in the international market also dented its revenues. However, the impact is not as much as the FBR is claiming. Finance Minister Ishaq Dar has already stated that the impact of reduction in oil prices would be Rs60 billion on an annualised basis. Although the FBR has told the IMF that it would not be able to collect more than Rs2.610 trillion, internally the FBR is now betting at Rs2.550 trillion without taking any additional measures, said the sources. The government’s inability to collect Gas Infrastructure Development Cess (GIDC) is another area of concern for the IMF and the Fund is anticipating over Rs100 billion shortfall on this account.

Options

The finance minister has already conducted a meeting and discussed various options, sources said. They added final decision will be taken after reviewing the full results of July-December period. The final option will be tabled in front of the IMF in the next review meeting, expected to take place at the end of January. The IMF has already asked FBR Chairman Tariq Bajwa to come with a contingency plan in the next meeting.

The sources said the easiest available option for the government is to cut this year’s development budget. For this year, the National Assembly approved Rs525 billion federal development allocations.

The sources said the other option is levying more taxes. The FBR wants the government to take new tax measures but given the prevailing political instability, the government may look for other options, official sources said.  The official sources said the government also internally discussed the option of seeking waiver from the IMF to relax the 4.7% budget deficit target.

Published in The Express Tribune, December 19^th, 2014.

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May also seek relaxation as IMF directs action to cover revenue shortfall