Pakistan, IMF discuss options for fiscal adjustments

ISLAMABAD: Pakistan and the visiting IMF mission on Wednesday continued parleys for finalising revised budgetary estimates as both sides were still busy in number crunching for making agreement on exact requirement of ‘fiscal adjustments’.

Fiscal adjustments may come in the shape of mini-budget through taking additional taxation measures on the FBR front as well as revising upward the non-tax revenue target can pave the way for reaching consensus on staff-level agreement between Pakistan and the visiting IMF mission.

“One possibility is expansion of more items into Third Schedule of Sales Tax Act as it will help the FBR to collect GST at retail price stage,” top official sources told The News here on Wednesday. In the last budget, the FBR had placed certain revenue generating items into Third Schedule so possibility exists that the list of items may be further expanded through the mini-budget.

There is also possibility that the IMF might also insist upon Pak authorities for taking additional taxation measures for increasing revenue collection including hiking the GST rate by 1 percent from 17 to 18 percent.

“The IMF mission has given indication for putting hiking GST rate as one option on the negotiation table,” top official sources said, however, Pakistani authorities opposed this proposal tooth and nail at this stage and argued that any hike in GST rate would be counterproductive as it would be highly inflationary.

The headline inflation had already touched 14.6 percent so increased GST rate would definitely fuel inflationary pressures.

However, official sources confirmed that the possibility of reducing Regulatory Duty (RD) and Additional Customs Duty (ACD) is also on cards as it will help FBR increase revenue collection but can also contribute to spur growth through import of raw material, machinery and intermediary goods.

There is also possibility of hiking GST rates for petroleum products instead of standard rate of 17 percent on petrol and diesel and other products.

A top official who is part of ongoing parleys with the IMF team told The News in background discussions that the GST hike in totality does not give results as they estimate because the IMF team estimated effect of increase at all stages of value chain keeping in view Value Added Tax (VAT) in their minds whereas the increase in GST rate became effective at first stage and mostly on imports stage. The rest becomes neutral due to increase input tax adjustments. But the IMF technical team has been found unable to comprehend it, added the official.

The consumption of petroleum products have declined so the FBR high-ups fear that hike in tax rate might result into further reduction in consumption. But there is another argument that some sectors achieved increased volumes as in recent months the dispatches of cement and steel sector have gone up so the increased production would also help achieving the desired revenue collection with increased rates.

Official data showed that the economic slowdown had touched its saturation point and now the production of some industries would start picking up as the economic activities would rebounding so the revenue collection would also improve.

The FBR high-ups also argued that there was no possibility for hiking withholding tax rates. Talks have just begun as the government is also trying to increase non-tax revenue target so let’s see where both sides agree on the FBR’s tax revenue target by end of the ongoing parleys.

There is much room for improvement on Income Tax side as the companies are not paying their full taxes but there is no focus on income tax side. The FBR has so far collected Rs2,407 billion in first seven months and they will have to collect Rs2,831 billion in remaining five months (Feb-June) for displaying the revised target of Rs5,238 billion on June 30, 2020. With existing pace on basis of monthly collection, this target is impossible to achieve so combination of further downward revision as well as additional measures will be on cards for satisfying the Fund staff and for reaching staff level agreement with IMF.

Meanwhile, the FBR in its official statement on Wednesday stated that the Board has collected a record Rs2,407 billion in first seven months showing an increase of 17 percnet over last year’s collection of Rs2,062 billion.

This increase has been registered despite a $5 billion compression in imports. Last year, the FBR collected income tax, sales tax and customs duty at import stage amounting to Rs1,005 billion which has only grown by 6 percent to Rs1,066 billion consequent to the tremendous negative impact on Customs Duty and Income Tax collected at import stage.

On the other hand, domestic collection has increased from Rs1,066 billion last year to Rs1,341 billion this year showing unprecedented increase of 27 percent. It is evident that the aforementioned tremendous growth has been made possible by untiring efforts of FBR despite economic slowdown and without adopting any coercive measure.