IMF team reviews Pakistan's ailing tax system

Published: October 15, 2019
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PHOTO: REUTERS

PHOTO: REUTERS

PHOTO: REUTERS The FBR has already begun a drive to gradually withdraw tax exemptions and make remaining ones part of the tax laws aimed at ending people and company-specific tax exemptions. PHOTO: FILE

ISLAMABAD: A technical mission of the International Monetary Fund (IMF) on Monday began discussions with Pakistan to review the country’s ailing tax system aimed at enhancing revenue collection that had remained below par despite levy of Rs734 billion in additional taxes this year.

The IMF mission will particularly look into the income tax and sales tax exemption being enjoyed by the taxpayers.

Sources said the huge tax exemption was also on the radar of the Prime Minister’s Debt Inquiry Commission. The commission has sought details of the exemption given during the tenure of Pakistan Peoples Party (PPP) government from 2008-13 as well as the Pakistan Muslim League-Nawaz (PML-N) government from 2013-18.

On its first day, the IMF mission held meetings with the Federal Board of Revenue (FBR) and discussed sales tax and corporate income tax matters in detail, according to FBR officials. The mission will stay in Pakistan for two weeks and hold discussions with the federal and provincial tax authorities.

The technical assistance team on taxation matters will end its meetings on October 29, which is also tentatively the date for the start of the IMF review mission that will analyse Pakistan’s performance in the $6-billion loan programme for the July-September period.

Sources said the IMF technical mission would review all the aspects related to sales tax, which was the single largest revenue spinner and was contributing nearly 40% to the total tax collection by the FBR.

The mission’s focus will remain on sales tax expenditure, exemption and the reasons behind lower collection compared to the potential.

Pakistan lost a record Rs972.4 billion in tax exemption in the last fiscal year, which was higher by 80% or Rs431 billion compared to the preceding year, according to the Economic Survey of Pakistan.

The cost of income tax exemption in the last fiscal year was estimated at Rs141.6 billion, according to the survey.

About 61.5% of the total tax exemption was on account of sales tax. The cost of sales tax exemption, which stood at Rs281 billion in the fiscal year 2017-18, jumped to a whopping Rs597.7 billion by the end of the last fiscal year.

The FBR has already begun a drive to gradually withdraw the tax exemption and make remaining ones part of the tax laws aimed at ending people and company-specific tax exemption.

Sources said the FBR was in the process of finalising the cost of tax exemption given in the past 10 years for the Debt Inquiry Commission. The commission, originally mandated to look into the reasons behind the exponential increase in public debt from Rs8 trillion to Rs24 trillion in 10 years, has expanded its mandate to cover privatisation and taxation matters.

The IMF team would also review the corporate income tax and the exemption being given to big firms, said the sources. The second schedule of Income Tax Ordinance, which is full of tax exemption and concessions being extended to big businesses, judges, generals, and bureaucrats, will be discussed in detail by the IMF team.

The team also has a plan to review the customs duty structure and the reasons behind the low collection.

For the current fiscal year, the IMF has set an Rs5.503-trillion tax collection target for the FBR and to achieve this, the Pakistan Tehreek-e-Insaf (PTI) government imposed a record Rs734 billion in additional taxes in the budget.

To meet the goal, the FBR needs a 44% growth in tax collection over last year’s receipts of Rs3.829 trillion.

However, the FBR could collect Rs958 billion in the first quarter (July-September) at a growth rate of 15%, which did not commensurate with the additional heavy taxation.

The FBR missed the first-quarter target by Rs113 billion despite blocking exporters’ refunds and taking huge advances from banks and oil and gas companies.

In a joint statement, the five export-focused associations have claimed that the FBR has withheld Rs151 billion in a sales tax refunds for the July-September period of the current fiscal year. This is a huge amount, which casts doubt over the Rs958-billion collection figure for three months.

The Pakistan Apparel Forum, Pakistan Hosiery Manufacturers and Exporters Association, Pakistan Readymade Garments Manufacturers and Exporters Association and Pakistan Cotton Fashion Apparel Manufacturers and Exporters Association issued the joint statement last week.

Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh had given a personal commitment that the exporters’ refunds would be released as soon as they filed goods declarations. In the budget, the government had imposed 17% general sales tax on the manufacturing of textile, carpets, leather, surgical and sports goods – the five major export-focused areas – and promised to give refunds on the exported quantum.

Pakistan Apparel Forum Chairman Jawed Bilwani claimed that the FBR cleared only Rs236 million worth of refunds of the exporters.

Overall, the FBR cleared Rs30.1 billion in tax refunds in the first quarter, which included Rs10 billion in income tax refunds.

Sources said the FBR also took at least Rs60 billion in advances in the first three months of the current fiscal year. After excluding the blocked refunds as per claims of exporters and advances, the FBR’s first three-month collection would come down to nearly Rs750 billion.

Published in The Express Tribune, October 15th, 2019.

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