Pakistan likely to miss IMF's tax refund condition

This comes despite IMF incentive of softening primary deficit target

ISLAMABAD: Pakistan is set to miss the International Monetary Fund's (IMF) condition to refund Rs75 billion to taxpayers in the first quarter despite an incentive by the global lender that will soften the tough primary budget deficit reduction target if the country performs better in tax refunds.

Under the $6 billion IMF loan deal, Pakistan is required to reduce the primary budget deficit - calculated by excluding interest payments - to Rs276 billion in the current fiscal year 2019-20 from last year's level of Rs1.350 trillion.

According to the IMF, the first quarter's primary budget deficit target is Rs102 billion, which can be relaxed to an extent if the government pays more than Rs75 billion in tax arrears.

Against the quarterly target of reducing the tax arrears by Rs75 billion, the Pakistan Tehreek-e-Insaf (PTI) government has so far cleared Rs22 billion of the arrears, which are only 30% of the targeted amount, according to figures released by the Federal Board of Revenue (FBR) this week.

Sources said if the government released the remaining Rs53 billion, it would adversely hit the challenging quarterly revenue target of Rs1.071 trillion, also given by the IMF. The FBR has set Rs1.111 trillion target for the July-September quarter.

The key reason behind the low disbursement of tax refunds was a highly ambitious annual revenue collection target of Rs5.5 trillion. Despite setting a relatively low target of Rs644 billion, the FBR could collect only Rs580 billion in July and August, missing the two-month goal by Rs64 billion.

Sources said the FBR's plan was to release a certain amount of refunds through promissory notes that it issued at a fixed rate of 10%. They said the promissory notes could not be issued at a faster pace due to the banks' reluctance to accept these notes as collateral.

The State Bank of Pakistan (SBP) was also unwilling to treat these notes as part of the statutory liquidity ratio of banks, said the sources.

The SBP's view was that these notes could not be treated as a debt due to certain legal obstacles, according to the FBR sources. They said the FBR was trying to clear the exporters' refunds out of its daily collection while the arrears can only be cleared against the promissory notes due to steep revenue targets.

Both the targets of enhancing revenues and clearing refunds were contradictory in nature for the FBR, which has shown inflated collections on many occasions by blocking refunds.

Sources said this week Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh held meetings with FBR officials aimed at knowing the status of tax refunds and the possibility of collecting Rs5.5 trillion.

The initial assessment was that there was no possibility of collecting more than Rs4.8 trillion in the given economic conditions, said the sources.

FBR's Member Inland Revenue Policy Dr Hamid Atiq Sarwar told the National Assembly Standing Committee on Finance last week that the FBR may collect Rs4.8 trillion to Rs5.2 trillion in taxes.

"Total outstanding refunds stand at over Rs500 billion," a top FBR official told The Express Tribune a few days ago. The figure has been compiled on the basis of individual reports received from all field formations.

However, sources said the FBR had not shared the Rs500 billion arrears with the IMF. It has shared only the processed refunds, which have also not yet been finalised.

In the upcoming review of the IMF programme, Pakistan and the IMF will again discuss the refund payment target as the government's understanding is that the current year's refund payments should only be according to the current year's flow of refunds.

But the IMF indicative target required the government to return Rs75 billion to the taxpayers in the first quarter and then Rs57.5 billion in each of the remaining three quarters.

The IMF staff-level report has shown that the global lender has linked the refund payments with the primary budget deficit target. The ceiling on the general government primary budget deficit will be adjusted downwards by the full amount of any excess in the cumulative flow of tax refund arrears of the respective indicative programme targets, according to the technical Memorandum of Understanding agreed between Pakistan and the IMF.

If the government releases more than Rs75 billion in refunds before September 30, the primary budget deficit target of Rs102 billion will be relaxed by the same amount. However, it seems the government has missed the opportunity of providing relief to the industrialists by not taking advantage of this incentive.