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May 8, 2021

ICAP for more direct taxes on exports

 
May 8, 2021

KARACHI: Scope and quantum of taxation needs to be widened to those segments from where no or insignificant taxes are generated to bring in the required revenue, a professional accountancy body said.

The Institute of Chartered Accountants of Pakistan (ICAP) said the share of agriculture and wholesale trade in total direct taxes is around 1.5 percent, although these sectors make up 42 percent in aggregate of the real GDP. Similarly, exports 10 percent of the GDP but only contribute 1 percent in direct taxes.

“There is an urgent need to tap the potential of these sources for their optimum contribution towards national exchequer which will not only remove inequities in tax regime; but will also provide the much-needed additional revenue to the government,” ICAP said in in budget proposals to the minister of finance and economic affairs.

ICAP termed the conditions set for the next 6th review of the IMF program as unrealistic due to negative per capita GDP growth and high inflation with low increase in wages.

“Attaining a tax collection target in the range of Rs5.9 trillion to Rs6 trillion for the next fiscal year will be challenging given the third wave of the deadly disease that affected many sectors of the economy,” ICAP said. “The challenge for the new economic team will be to ensure fiscal stabilization and economic revival at the same time, with an aim to keep the IMF program on track.”

IMF and Pakistan have reached a staff-level agreement under International Monetary Fund (IMF) extended fund facility which revived Pakistan’s ‘suspended’ IMF program. The plan envisages FBR’s tax collection target of Rs6 trillion for 2021/22 which would be 21 percent higher compared to Rs4.9 trillion (revised target of Rs4.3 trillion) for 2020/21, and 26 percent (27.6 percent when compared to revised target) higher than IMF’s revised target for the same period.

The target seems unlikely to achieve in view of projected GDP at 4 percent and inflation at 8 percent. The realistic target, therefore, may not be more than Rs5.2 trillion. The collection of remaining Rs735 billion is still possible but only if strong and radical regulatory actions are taken.

Three years ago, Pakistan’s growth rate of GDP per capita was 1.1 percent, which was slightly positive in fiscal year 2018/19 but turned negative during the last fiscal year. In three years, the Real GDP growth rate has also slowed down from 5.5 percent in 2017/18 to a projected 2 percent by lenders and around 3 percent by the State Bank of Pakistan.

The economic activity has remained depressed lately due to COVID-19 related containment measures but earlier because of economic stabilization policies adopted by the government to check both the current account deficit that widened to $19 billion in 2018 and the self-inflicted wound of budget deficit by increasing interest rates to 13.25 percent during most of the period of last fiscal year. We believe that the government shall pursue the approach where economy is leading the taxation rather than the other way round.

ICAP further said fulfilling IMF’s condition of standard general sales tax rate of 17 percent, which is expected to add Rs326 billion to revenue, may prove counter-productive and fuel inflation.

The government should move to outsource the maintenance and operation of digitized data from FBR (as prevalent in Turkish model). “The idea is to shift the focus to broadening the tax base in order to keep the system as an asset in the long run rather than a liability.”

“The federal government has estimated the annual budget deficit of Rs3.4 trillion for the fiscal year 2020-21 which is 7.54 percent of the projected GDP. In 2021-22, the deficit is expected to rise to Rs3.5 trillion. Keeping in view the IMF’s projected GDP growth for Pakistan at 4 percent in 2021/22, the budget deficit would marginally decrease to 7.52 percent of GDP,” said ICAP.