ISLAMABAD: The shortfall in tax collection has widened to a record Rs345 billion in the first ten months of this fiscal year amid differences between Pakistan and the International Monetary Fund (IMF) over a strategy to achieve the tax target for the next fiscal year.
Despite a steep shortfall in tax revenues, the federal government on Tuesday surprisingly reduced the General Sales Tax (GST) rates on all petroleum products for the next five days. The government’s action may also antagonise the IMF, raising prospects for the reversal of the decision in the coming days.
The government cut the GST rate on petrol from 17% to 2%, on high speed diesel from 17% to 13%, on kerosene oil to 8%, and on light diesel oil to 9%. The step was taken after the federal cabinet referred the matter of increase in petroleum prices to its Economic Coordination Committee (ECC).
From July through April of this fiscal year, the Federal Board of Revenue (FBR) has provisionally collected Rs2.993 trillion in taxes as against Rs3.35 trillion ten-month target, according to the FBR officials.
It missed the 10-month target by a record shortfall of Rs345 billion at least, FBR officials said. The collection may jump by few billions once the final collection figures are available by next week, they added.
Overall, the 10-month tax collection was higher by mere Rs70 billion or 2.4%. The rate of increase in tax collection was far below the nominal Gross Domestic Product (GDP) growth rate of 12.5%, which is quite worrisome.
During the July-April period of the last fiscal year, the FBR had collected Rs2.923 trillion, according to data of the State Bank of Pakistan.
The 10-month collection was equal to 68% of the annual downward revised target of Rs4.4 trillion. Former finance minister Asad Umar told the IMF the FBR may pool Rs4.1 trillion. It seems this too will be an uphill task now.
The FBR has provisionally sustained Rs52 billion shortfalls in April alone. It could collect only Rs288 billion against the monthly target of Rs340 billion, according to the officials. The collection in April was negative Rs7 billion or 2% when compared with the same month in the corresponding period last year.
It was for the second time in this fiscal year that the monthly collection target for customs duties has been missed. Against the monthly target of Rs61.7 billion, the FBR provisionally collected Rs55 billion in custom duties in April.
As against the full year revised target of Rs735 billion, the customs authorities are now projecting to collect only Rs685 billion by June – despite the currency devaluation. The FBR collects nearly 45% of its total revenues at the import stage and the import compression policies have adversely affected collection of income tax, sales tax at import stage and the custom duties.
The FBR has formally asked the finance ministry to further downward revise its annual target to Rs4.1 trillion, although this figure also appears unrealistic until the government gives a tax amnesty scheme. The scheme is under preparation and could be announced by mid of May.
The FBR’s collection is also affected because of non-payment of tax dues by the power distribution companies due to chronic circular debt. The Pakistan International Airlines is also not making payments for the last three months, according to the FBR officials.
The dividend payments have also started shrinking, as many companies have stopped dividend payments. The SBP is also not allowing overseas repatriation of profits due to the weak position of official foreign currency reserves.
The widening gap between tax collection and the targets is likely to make Pakistan’s case difficult in the eyes of the IMF. The IMF delegation is in the town – for the second time in five months – to conclude a staff level agreement for a $6.5 billion bailout package.
So far, the IMF and Pakistani authorities have held three rounds of discussions on the tax matters. The IMF has been suggesting to the tax authorities to take the policy measures for achieving the next fiscal year’s tax collection target, said sources.
The tax collection target could be around Rs5.4 trillion, depending upon the actual collection in this fiscal year. But this will require 36% growth in revenue collection over an estimated Rs4 trillion collection in this fiscal year. Historically, the FBR has never posted more than 22% annual growth.
The FBR’s view point was that instead of relying heavily on policy measures, which could slowdown the economy, the focus should also be given to the enforcement mechanism, the sources added. The tax authority says that all the policy measures may not yield the desired results, as has happened in the past.
The Pakistani authorities wanted that policy measures should not be more than 1.3% of the GDP or nearly Rs600 billion. But the IMF wanted that all the tax efforts should be solely based on the policy measures, the sources said.
The IMF wanted a directional change in Pakistan’s tax policy with an aim to abolish all the concessionary income tax, sales tax and custom duties rates, the sources said. The IMF was also against the prohibitive trade measures and has suggested their withdrawal, the sources said.
The talks between the IMF and FBR would continue in the coming days as well.
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