Increased tax revenue target looks ambitious

Reforms being delayed, industry output weak, says SBP.

KARACHI: The State Bank has said that the task of achieving a 27 per cent increase in tax revenues during financial year 2010-11 has begun to look ambitious in the wake of delays in tax reforms and weak industrial production.

In the current fiscal year 2010-11, the government has set a tax revenue target of Rs1,667 billion compared with collection of around Rs1,327 billion in the previous fiscal year ended June 30, 2010. The target for the last fiscal was Rs1,380 billion.

Although the government has announced some measures to increase its capacity to raise revenues and contain inflationary borrowings from the central bank, it may take some time before the benefits of such important steps begin to have their impact, the SBP said in its monetary policy statement released on Monday.

These measures include widening of the tax net through introduction of the Reformed General Sales Tax (RGST) with other steps, containing power sector subsidies and amendment in the SBP Act including limits on borrowings from the bank which is in final stages of legislation. “These could potentially address the problem, in the medium term, of stubbornly high inflation expectations, reduce the cost of borrowing and hence pave the way for long-term economic growth,” said the central bank.

The State Bank said that pressing flood-related expenditures and shortfalls in external financing of the budget have increased reliance of the government on domestic sources. A seasonal increase in working capital credit requirements of the private sector during the second quarter is also higher due to an increase in input prices. These have mounted pressure on the banking system and interest rates.

In order to further encourage the private sector, the State Bank said, fiscal authorities need to demonstrate greater resolve in implementing their strategy to contain the fiscal deficit through fundamental structural reforms and their commitment to restrict inflationary central bank borrowings.

Published in The Express Tribune, November 30^th, 2010.