State Bank wants swift broadening of tax base

Governor worried about structural shift of incomes.

KARACHI:

The country’s economy has shown signs of improvement but quick steps are needed to broaden the tax base to benefit from growth in untaxed sectors, such as agriculture, according to State Bank of Pakistan (SBP) Governor Shahid Kardar.

Speaking to Reuters in an interview on Monday, Kardar said he was worried about a “structural shift” of incomes towards the untaxed sectors. “With this shift of incomes away from the taxpaying sectors to non-tax paying sectors, the tax-to-GDP ratio is structurally destined to be hovering around lower levels.”

“The structural shift now needs to be addressed in the next budget. All sectors of the economy need to be taxed beyond a certain level of income irrespective of the source of income,” he said.

Kardar, however, said the government realises the importance of increasing its revenue and cutting expenditure, and was moving in the right direction, albeit slowly. Last month, the government said it would slash its expenses by cutting government travel and petrol allowances and a hiring freeze.

It also announced a 15 per cent one-time flood surcharge on income tax, a 150 per cent increase in special excise duty and removal of sales tax exemptions on fertilisers, pesticides and tractors amongst others. “Some decisions, in terms of taxation measures that have been announced recently, ideally should have come earlier, but nevertheless they have been announced,” said Kardar.

The government needs to build upon the temporary tax measures in the next budget and focus on including all sectors in the tax net, along with rationalising its expenditure as those would be more structural and sustainable measures, said Kardar.

Better growth prospects

Kardar said inflation, the budget deficit and the availability of credit for the private sector remained a concern. However, with the large-scale manufacturing sector picking up, and a favourable external accounts situation, the country might see a better-than-expected economic growth in the current fiscal year.

“At one stage, we had been talking about 2.5 percentage points of GDP in real terms. I suspect it’s likely to be closer to be 2.8 [percentage points] now,” he said. The fiscal deficit, meanwhile, is expected at between 5.3 and 5.5 per cent of GDP, though it could be wider if some of the external flows, including grants, don’t come in quickly enough, he added.

The failure of the government to completely pass on the impact of higher global oil prices will also hurt revenue.

RGST still on

Kardar, who expected yearly inflation to rise to around 15 per cent by June, said he expected the country to remain in an International Monetary Fund (IMF) programme in the foreseeable future to ensure better fiscal management such as increased revenue collection and a cut in expenditure.

He also emphasised that a reformed general sales tax programme (RGST) as agreed with the IMF, had not been shelved. “RGST is not off the table. It is something that is very much on the agenda for the next budget.”

“We are moving in that direction, even though it may not be good enough for the puritans. However, RGST is not off the table when it comes to the budget for next year. It is very much there, and hopefully it will be extended to the services sector as well.”

Published in The Express Tribune, April 5^th,  2011.