Pakistan, IMF at odds over Rs5.4tr tax collection target

Global lender wants FBR target increased to 13% of GDP in next fiscal year

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have been unable to sort out differences over the fiscal policy because of the latter's demand that the federal tax collection be increased to nearly 13% of the size of the country's economy within a year.

Sources in the Ministry of Finance told The Express Tribune that if the government accepted the IMF demand, a tax collection target of around Rs5.4 trillion would have to be set for the fiscal year 2019-20.

Under the present circumstances and an extremely poor performance in the outgoing fiscal year, the Federal Board of Revenue (FBR) would be unable to collect more than Rs4.9 trillion in the next fiscal year starting from July.

The disagreement over the FBR's collection target is also undermining a deal on the budget deficit target for the next fiscal year.

Based on very high tax collection assumptions, the IMF is inclined to give a tight budget deficit target.

For the fiscal year 2018-19, the Pakistan Tehreek-e-Insaf (PTI) government had set a Rs4.4 trillion tax collection target for the FBR. However, looking at the board's performance in the first nine months, it is unlikely to collect over Rs4 trillion, sources in the FBR told The Express Tribune.

The FBR fell short of the target by nearly Rs318 billion and could rake in only Rs2.68 trillion.

The Rs4 trillion tax collection target is equal to 10.6% of the GDP and to increase it to 13%, the FBR would have to generate an additional amount of Rs1.45 trillion. This would require a 36% growth rate, which is impossible to achieve, the FBR sources added.

The FBR has so far posted an average growth of 2% in revenue from July to March.

After taking into account the positive impact of the nominal GDP rate of nearly 12% (inflation plus the real GDP), the FBR would still need to take unprecedented measures to meet the IMF demand.

To achieve a target collection target of Rs5 trillion, the government would have to impose additional taxes of around Rs500 billion for the fiscal year 2019-20.

The sources said the new situation in the wake of massive revenue shortfall would be explained to the IMF during a staff-level visit expected in the third week of this month.

The IMF may eventually agree to a target of around Rs5 trillion, which will be equal to 12% of the next year's GDP size.

Finance Minister Asad Umar said on Friday that the deal with the IMF was "almost done" and an agreement could be reached during his visit to Washington starting from Tuesday.

The government had hoped that the increase in inflation and exchange rate adjustments would have a positive impact on tax collection. However, it failed to achieve the desired results by the end of the ninth month of this fiscal year.

During November's failed round of talks, the government had expected that the FBR would improve its collection this fiscal year and that would help in taking less additional revenue measures in 2019-20.

The sources said Pakistan was keen to increase the FBR's tax-to-GDP ratio by 1.1% of the GDP in the next fiscal year, followed by 0.9% of the GDP in the fiscal year 2020-21. During the last fiscal year, the FBR's tax-to-GDP ratio stood at 11.2%.

The next fiscal year would not be easy for the government as well as for the people. The government plans a crackdown against tax evasion, particularly in the real estate sector, under invoicing of imports and offshore taxation.

The general sales tax (GST) effective rate is around 7.25% against the standard rate of 17% because of various tax exemptions and special tax regimes. An integrated value-added tax system could improve the effective rate but that would also require a massive withdrawal of exemptions.

The finance minister would unveil the government's five-year macroeconomic plan on Monday, but without releasing specific targets. Umar said last week that the macroeconomic targets could only be shared once an agreement is reached with the IMF.

The government's five-year plan may touch some politically sensitive areas like tax collection from the agriculture sector and GST on provincial services.

To improve the meagre Rs2 billion tax collection from the farm sector, the federal government may ask the provinces to hand over this task to the Centre. The tax collected from each province as a result would not be part of the divisible pool and could be directly transferred to the respective province.

According to the proposed plan, there may be a merit in reverting back to the pre-18th Amendment arrangement on the collection of GST on services, where the provinces agreed that tax could be collected by the federal government but the revenue would be transferred directly to the province from where it originated.

However, Sindh is likely to oppose the move.

The government may also announce the harmonisation of the tax code and integrate tax processes through digitisation and process automation.

The sources said the government planned to enact a law to ensure that no tax exemption was allowed through a notification without an independent estimate of its cost by the tax department as well as the ministry concerned. The cost would be made public before the exemption is notified.

The government would also review all existing exemptions to eliminate as many as possible. It would ensure that all exemptions, existing or newly proposed, had a sunset clause.

The government is likely to publish a list of all government-owned enterprises availing exemptions/concessions in any way along with the quantification of the tax expenditure. The federal government is also considering simplifying tariff rates.