IMF seeks time-frame for withdrawal of tax breaks

The International Monetary Fund expresses concern over the proposed phase-wise implementation of tax reforms.

ISLAMABAD: The International Monetary Fund (IMF) has expressed concern over the proposed phase-wise implementation of tax reforms, as a two-tier plan does not give the time-frame for withdrawing tax exemptions on local sales of five export-oriented sectors.

In its first comments on the recent tax reforms-related developments, the Fund was not happy with the government’s decision of gradually implementing the reforms, finance ministry sources said. The reservations were aired in a video conference held on Friday.

The government had informed the IMF that in the first phase the provincial and federal governments would prepare a draft bill by October 22 for levying sales tax on services.

The Centre and the provinces have agreed to impose sales tax on all services through provincial legislation. The Centre would collect tax on four services, financial services, advertising, construction and franchise and then distribute it among the provinces.

Punjab will get 60.39 per cent of total collection on services by the Centre, Sindh 50 per cent, Khyber-Pakhtunkhwa 15.62 per cent and Balochistan 10 per cent, bringing the total figure to 136.01 per cent. The Centre would pay the additional 36 per cent from its own pocket.

Pakistan informed the Fund that the draft bill of the reformed GST would be tabled in the cabinet after October 22 and the whole exercise of getting the approval from parliament would be completed by mid-November.

In the meantime, the government would start gradually withdrawing tax exemptions on sales of fertiliser, tractors and certain other goods. The withdrawals would fetch Rs27 billion during the course of the year, said the sources.

The government was also contemplating to reconsider ex-factory price of sugar at which sales tax was calculated, they added. It calculates the tax at Rs28 per kg at a time when the commodity is sold for Rs80 per kg in the market. By considering the price of Rs28 per kg, Rs2 billion is lost in taxes every year, they added.

However, the government did not give any date for the withdrawal of tax exemptions on domestic sales of five export-oriented industries which were textile, leather, sports goods, surgical instruments and carpets.

The IMF has also sought a clear timeframe for levying the sales tax, as it apprehends that the zero-rated regime may be left untouched due to the influence of the trade community, the sources said.

In order to review the draft bill of reformed GST, an IMF team would visit Pakistan after October 22. The team would also review the possibility of reviving the suspended $11.3 billion bailout programme for another six months to June 2011 and sanctioning a new arrangement from next year.

Owing to the suspension because of the government’s inability to impose tax on services, Pakistan had remained unable to get the last two loan tranches of $3.4 billion.

The World Bank and the Asian Development Bank have also stopped giving loans. Finance ministry sources said during the first quarter (July-September), Pakistan received a net $30 million in budgetary support, thanks to the IMF’s $450 million in flood relief assistance.

Published in The Express Tribune, October 10^th, 2010.