IMF asks Pakistan to hike power tariff, levy Rs1,115b more taxes
Recommends govt to generate Rs7,255b in tax revenue: Wants it to overhaul tax structure, withdraw subsidies and increase Petroleum Development Levy
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The International Monetary Fund released its country report on Pakistan.
According to the report, the global lender has suggested to Government of Pakistan to impose Rs1,115 billion additional taxes in the next fiscal year.
The Federal Board of Revenue has already started to withdraw exemption on income tax.
The Fund has recommended to give FBR a revenue target of Rs7,255 billion. It suggests to collect Rs2,711 billion in direct taxes.
In petroleum levy, it recommends to collect Rs406 billion; in sales tax Rs3,295 billion and in customs duties Rs843 billion.
The IMF report estimates that government would spend Rs1,586 billion on defence and Rs3,523 billion would be spent on payment of interests in the next fiscal. It projects total expenditures for the next fiscal would be hovered around Ra12,994 billion while country’s income is expected to be Rs10,272billion.
The Fund in its report says in view of recent developments, the government acknowledged the need to withdraw some fiscal stimulus and to resume efforts to broaden revenue mobilization. To this end, they agreed to pass a supplementary finance bill for FY 2022 that strikes a balance between addressing growing macroeconomic imbalances and sustaining growth.
The report says tax revenues are expected to increase by 1.2 percentage points of GDP from FY 2021, boosted by (i) revenue measures; (ii) reinforced tax administration efforts; and (iii) automatic stabilizers. The main additional tax measures are:
* Implementing the reform of General Sales Taxes (GST). Parliament will adopt the GST reform as part of the supplementary budget, in line with IMF recommendations, to broaden the GST tax base and eliminate about 2/3 of the tax expenditures on GST. This is achieved by undoing policy reversals that extended preferential treatment to numerous goods in the FY 2022 Finance Act; by moving most goods from zero-rating (Fifth Schedule) or reduced rates (Eighth Schedule) to the standard sales tax rate; by eliminating exemptions (Sixth Schedule) for most goods excluding basic food, live animals for human consumption, and health- and education-related goods; and by applying the standard rate to higher-end cellphone devices (previously under the Ninth Schedule).
* Increasing the Petroleum Development Levy (PDL). In early November, Pakistan government started to gradually increase the PDL in gasoline and diesel by PRs4 per liter, with a further PRs 4 per liter in December and will continue to increase the PDL by PRs 4 per liter per month until a maximum of PRs 30/liter is achieved, which was in place in the past.
* Provincial contributions. The provinces committed again to contribute to the federal government’s fiscal strategy via Memoranda of Understanding (MoU), targeting a surplus of about 0.5 percent of GDP in FY 2022, conditional on FBR tax collection. To achieve this, they will boost their tax revenues by at least 0.1 percent of their respective provincial GDPs relative to their FY 2021 performance and constrain the expenditure side, while protecting health and education spending.
* Financing. The government remain committed to relying on market sources (external borrowing and the domestic banking system) to finance the budget, whilst seeking to lengthen maturities to reduce rollover risks. The authorities intend to use up to US$2 billion from the recent SDR allocation (about US$2.75 billion) to complement other sources of vaccine finance and the remainder to reduce reliance on expensive T-Bills.
The IMF report further says that the SBP remains committed to maintaining a market-determined exchange rate and building reserves. IMF officials and Pakistani officials agreed that the current market-determined exchange rate remains appropriate to act as a shock absorber and that FX interventions should be limited to avoid disorderly market conditions (DMCs). However, the authorities noted that given the temporary component in the terms of trade shock, a role for interventions is also appropriate to smooth the depreciation trend.
The Fund says the energy sector is in a precarious situation because of long-standing deficiencies. It stressed that the regular implementation of tariff adjustments in line with established formulas is critical to lend credibility to the newly independent energy regulator, halt the accumulation of arrears, and implement the Circular Debt Management Plan (CDMP).
Reporter Waqas Azeem