IMF deal envisages Rs700b taxes in next fiscal

Global lender asks govt to reduce number of income tax slabs

ISLAMABAD:

Pakistan will take additional revenue measures equal to 1.4% of the size of its economy or over Rs700 billion to achieve a tax collection target of around Rs6 trillion in the next fiscal year under the International Monetary Fund deal.

The revenue measures will include increasing income tax burden of the salaried and business individuals and the corporate sector, finance ministry sources told The Express Tribune. The salaried class, particularly falling in higher income brackets, will face greater brunt in the next fiscal year.

“The government will also withdraw around Rs360 billion or 0.7% of the Gross Domestic Product worth of sales tax exemptions from July this year,” they added.

“Both the sides have also agreed to reduce the Rs4.963 trillion tax collection target of the Federal Board of Revenue by around Rs250 billion for this fiscal year,” said the sources.

The downward revised tax collection target will be around Rs4.71 trillion for this fiscal year ending June 30, they added.

“The FBR had proposed Rs4.550 trillion revised tax target, which the IMF did not accept,” said the sources. The Rs4.71 trillion tax collection will be equal to 10.3% of the GDP.

Pakistan and the IMF on Tuesday announced reaching a staff level agreement aimed at reviving the stalled $6 billion programme.

Subject to the approval of its executive board, the Fund also announced disbursement of $500 million third tranche -- $1.7 billion less than the original schedule.

The IMF board is expected to meet before the end of next month to approve Pakistan’s four pending reviews and release the next loan tranche.

In its hand-out, the IMF said that the programme’s “targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent”.

The sources said that as part of the deal for the next fiscal year 2021-21, the FBR’s target will be over Rs6 trillion or 28% higher than the revised target of this fiscal year.

The FBR will need to collect an additional Rs1.3 trillion in the next fiscal year, including over Rs700 billion through additional revenue measures. The remaining about Rs600 billion are expected to be collected through its existing revenue base.

The IMF was demanding Rs6.6 trillion tax target for the next fiscal year, which the government did not agree. The slightly over Rs6 trillion target is still lower by Rs2 trillion than what the IMF had suggested under the original agreement of July 2019 for the next fiscal year.

Pakistan’s economy is recovering from a slow pace of growth and it will be an uphill task for the FBR to chase the goal.

In order to get the next fiscal year’s collection target, the sources said, it has been agreed between Pakistan and the IMF to take additional revenue measures equal to 1.4% of Gross Domestic Product. This translates into over Rs700 billion taxation measures in fiscal year 2021-22.

The reply of the spokesman of the Ministry of Finance was awaited on the question whether Pakistan’s economy sustain the burden of additional revenue measures equal to 1.4% of the GDP at a time when the economy just recovered from the Covid pandemic.

The sources said that half of the additional taxation measures will be taken by withdrawing sales tax exemptions.

Some main principles have been agreed between Pakistan and the IMF to tax personal income. The IMF has asked Pakistan to revise the current income tax exemption threshold of Rs400,000 for business individuals and Rs600,000 for the salaried class, terming the slabs higher as compared to the international standards.

The global lender has also asked the government to reduce the number of income tax slabs from the current eight for the business class and 12 for the salaried class to around five. The reduction in the numbers of the slabs will increase the tax burden of the people falling in higher income brackets.

The sources said another major demand of the IMF was to end current different income tax rates of interest income, dividends and professional income taxes and charge these heads like a regular income of a person.

This will significantly increase the tax burden of the people as the current rates were very low compared to normal tax rate being paid by a salaried person on its gross income.

The sources said that about four-dozen various income and sales tax exemptions will be withdrawn through legislation.

The sources said that during the negotiations, the IMF team was of the view that Pakistan’s current high debt-to-GDP ratio of over 87% and very low FBR’s tax-to-GDP ratio of less than 10% was unsustainable.

During the first year of the IMF programme, the government had introduced over Rs735 billion taxation measures to achieve the Rs5.5 trillion tax target. But the measures did not help the government achieve its target despite putting additional burden on the people.