IMF, Pakistan tax estimates vary

ISLAMABAD:

The International Monetary Fund (IMF) has identified over Rs1 trillion gap against next fiscal year's proposed tax target of Rs14.3 trillion, leaving Pakistan with the challenge to largely fill it through new taxes or present credible and convincing enforcement measures.

The gap identified by the IMF is almost double the amount Pakistani authorities had worked out for taking new tax measures. According to the authorities' assessment, the government may need to take about Rs560 billion worth of new tax measures to reach the target for fiscal year 2025-26, said the sources.

The IMF and Pakistan have agreed on a Rs14.307 trillion target for the next fiscal year, which is 16%, or Rs2 trillion, higher than this year's downward-revised goal. The authorities believe that due to next year's projected economic growth and inflation, there will be nearly Rs1.5 trillion, or 12%, addition to this year's collection.

The IMF does not fully agree with this, said the sources. The IMF was of the view that Pakistan can at best collect Rs13.3 trillion in taxes without new policy measures, they added.

This leaves the government with a gap of little over Rs1 trillion, which has to be filled either through new measures or convincing the IMF that the enforcement measures can yield a significant part of the target.

The enforcement measures mean the government will collect additional money from the existing tax base while the new policy measures mean there will be changes in four tax laws to put extra burden on people for raising more revenues.

During this week's meeting, the government reviewed the possibility of taking around Rs560 billion worth of new measures to achieve the target, said the sources.

In the last budget, the government had slapped Rs1.3 trillion worth of new taxes, but it still failed to even reach closer to this year's original target of Rs12.7 trillion. The target has already been revised downward.

The IMF has set the new target on the basis of a primary budget surplus target of 1.6% of GDP, or a little over Rs2 trillion.

Pakistani authorities said that about Rs600 billion could still be collected in the next fiscal year through the enforcement measures. Such claims were also made in the current year, which proved incorrect.

Sources said that due to the unreliability of Federal Board of Revenue's (FBR) estimates, which often result in two-thirds less collection on account of new taxes, the government has engaged the World Bank. World Bank people are sitting in the FBR and analysing the projected revenue impact of the proposed measures for the next fiscal year, they added.

FBR's senior officials said that the revenue board chairman's transformation plan could start positively contributing from the next fiscal year. They said that the transformation plan included value chain digital transformation, introduction of tracking technology, implementation support for digital transformation and value chain implementation support.

In addition, 37 new anti-smuggling check posts are being set up along the Indus River, Hub and in Balochistan. Out of these 37 posts, 24 will be established on the Indus River, in Hub and the surrounding areas to work as a protective wall.

These posts will be supported by three mobile enforcement units. Additionally, 10 posts are to be set up at strategic checkpoints in Balochistan.

The Customs tracking system will be integrated with the existing databases, which will be important for identifying and targeting persons or vehicles involved in transporting smuggled goods on which duties and taxes have not been paid.

The FBR is again betting on getting revenues from the positive settlement of court cases. It had assured the IMF that at least Rs150 billion would be recovered from such cases in March and April but it did not happen.

Total recoveries from court cases for this fiscal year had been estimated at Rs400 billion, as announced by the prime minister. But the actual recoveries so far remain around Rs34 billion.

The IMF sees that as against the FBR's assessment of collecting Rs600 billion through enforcement in the next fiscal year, the figure may not even cross Rs400 billion, said the sources.

But there is a group of officers in the FBR who believe that the government should not take any new policy measures to achieve 16% growth over this fiscal year's collection. They said that fiscal year 2024-25 budget was unrealistic and required 40% growth.

Pakistani authorities were also trying to convince the IMF that tax rates had already increased to a point where these were stifling economic growth and also causing low collection. Due to the unjustifiable high taxation on the dairy industry and beverages, the industries are facing 20-40% decline in sales.

The government remains unable to tax the retailers and even wind up the Tajir Dost scheme in the budget without having a credible alternative. It may divert people's attention towards wholesalers and distributors.