Under-achievement: Tax collection shortfall incoming

Think tank predicts Rs200 billion deficit in target.

ISLAMABAD:

The federal government is likely to miss a key condition of the $6.7-billion International Monetary Fund (IMF) programme as the budget deficit could remain far higher than the permissible limit due to a Rs200 billion shortfall in tax revenues, according to a report of an independent think tank.

There could be a shortfall of almost Rs200 billion from the original target of Rs2.475 trillion, which will pose a risk to this financial year’s budget deficit target of 5.8% of Gross Domestic Product, states the report of Institute of Policy Reforms (IPR). The federal government has already downward revised the collection target to Rs2.345 trillion.

The report has been authored by Dr Hafiz A Pasha, former finance minister of Pakistan. The IPR claims to be a non-partisan think tank established to bridge the gap between challenges faced by the country and policy responses to them.

For the current fiscal year, the IMF set the budget deficit target – gap between national income and expenses − at 5.8% of the total size of the economy. In case Pakistan remains unable to achieve the target, it will have to seek a waiver from the Executive Board of the IMF.

The IPR report noted that during the first half of the fiscal year the government did a good job and restricted the budget deficit to the permissible limit. But it cautioned the trend will reverse in the second half of the fiscal.

The IPR’s forecast of revenue collection appears alarming, as the Rs200 billion shortfall in collection has been projected for the first time in any report.

The IPR’s projection may come true, as the Federal Bureau of Revenue (FBR) is already spreading news that due to the appreciation of the rupee against the US dollar, it will suffer a revenue loss of minimum Rs40 billion.

In the first eight months of the fiscal year, the FBR could post only 17.7% growth in revenue collection against the required rate of 28%, necessary to achieve the Rs2.475 trillion tax target.

The anticipated shortfall in revenue collection underscores the inefficiency in the FBR machinery and also puts a question mark on government’s claims of posting honest officials in the FBR at key positions. The federal government’s policy of giving tax breaks to industrialists is said to be one of the reasons behind falling revenues.

Finance Minister Ishaq Dar has himself admitted to
accepting 26 demands of the business community after the Parliament had approved the budget.

Caving in to yet another demand, the FBR on Tuesday exempted the auto industry vendors from the levy of 2% additional sales tax on the supplies of auto parts, accessories, tyres and tubes and storage batteries to the assemblers of cars. The vendors had met the finance minister last week and convinced him to withdraw the levy.

The IPR report observed that higher debt servicing and higher power subsidies due to re-emergence of circular debt could also pose challenge to the official budget deficit target.

“The State Bank of Pakistan expects the fiscal deficit to range from 6% to 7% of GDP and we concur with the projection”, said to the IPR report. The critical analysis of the report shrugs off criticism against Dr Pasha. There has been a criticism that the PML-N’s Punjab leadership has asked Dr Pasha to refrain from criticising the party’s economic policies – a charge Dr Pasha vehemently denied.

For the second half of the fiscal year 2013-14, the report has also projected a mixed performance with economic growth rate at below 4%, inflation at 9.5% and precarious foreign currency levels.

The report stated that the current account deficit in the current fiscal year will remain in the range of 1.2% to 1.5% of GDP. According to data released by the SBP on Tuesday, the current account deficit remained at 2.2 billion or 1.2% of the GDP during the first eight months of the fiscal year.

Published in The Express Tribune, March 19^th, 2014.

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