The government has promised the IMF to separate policy and administrative functions of the Federal Board of Revenue (FBR) within 100 days of its tenure and undertake a full-fledged effort for maximum recovery of over Rs. 2 trillion taxes and power sector dues. Currently the FBR policy makers tend to introduce policies that allow for easy revenue collection including up-warded revision of general sale tax and withholding tax rates, the brunt of is largely borne by the people of fixed income groups.
In a change of mind, the government has also planned to seek maximum financial support from the IMF to tied over its external account gap instead of earlier indications that it wanted smaller size of bailout to keep conditionalities of loans programme to bare minimum, although the renowned economist Dr. Asfaq Ahmad Khan who dealt with the IMF for 13 years had negated the perception of relaxation in conditionalities with a smaller size of the programme.
This time the IMF seems to be not inclined towards giving an escape rout of avoiding unpopular decisions out of political expediency on broadening the tax base, power sector circular debt and receivables and privitisation of losses incurring state entities. It sees more potential for revenue collection. Pakistan may have to make upward adjustment in its annual tax collection targets besides expanding the list of privitisation to qualify for a bailout package, according to the initial assessment of the global lender talks with Pakistani authorities. Harald Finger, the IMF Mission Chief, shared his initial assessment with Finance Minister Asad Umar on various sectors of the economy. As per the lender’s estimate of gross financing needs for this fiscal year, the resource gap was lower than that projected by the government. The lender agency has projected the financing gap in a single digit.
The main objection of the IMF was about the exclusion of 24 mega losses incurring state entities from government’s privitisation agenda. The Council of Common Interest (CCI) had approved a list 62 public sector enterprises for privitisation. Pakistan International Air Line (PIA) and Pakistan Steel Mill (PSM) eat up Rs 400 billion annually of taxpayers’ money and the accumulated loss of PIA alone has reached to Rs. 5 billion. The Economic Coordination Committee of the cabinet has approved a Rs. 17 billion bailout package for PIA and more such doses of throwing taxpayers’ money into the drain for supporting this sick state entity will follow. The IMF Mission was not impressed by government’s plan for restructuring loss making state enterprises as only PSM could be turned around in President Musharraf government. Its major concern is that there is no concrete plan to stop bleeding of these organisations during an interim period. The lender did not agree with the government plan of placing them in a Sovereign Wealth Fund Company. The state owned entities incur losses of R. 1.1 trillion annually.
The other critical issue was the Rs. 4.4 trillion annual revenue collection of the FBR. The IMF plea was that FBR should collect more in the wake of windfall gains after currency depreciation and increase in prices of goods. The fund assessment was that FBR current growth rate in revenue collection should be nearly doubled without introducing new measures. It suggested to the government to review its tax exemption regime and withdraw some tax exemptions. However, Pakistani authorities were of the view that only socially sensitive tax exemptions are left while other exemptions were withdrawn under the last IMF programme.
The IMF mission met again with power division officials to finalise a plan for addressing the circular debt issue and also discuss the tariff regime recently approved by the government. It is pertinent to mention that electricity purchase agreements made by the PPP government in its second tenure of 1993-96 with private power producers and the ones made by the last PML-N government are the major factors of massive circular debt accumulation. Moreover, the default of electricity bills to the tune of Rs.860 billion by political and business elite and government departments, both federal and provincial, is another factor of bulging circular debt which has reached to Rs. 1.1 trillion.
The PTI government is yet to unfold its vision of tax reforms. The last two governments can at least claim a semblance of vision for expanding the tax base. The PPP tried to advance the idea of value added tax to promote documentation of the economy and bring the retail and whole sale sector, which accounts for 20 percent of the GDP into tax net. The effort failed because the party was unable to get the vote for reformed general sales tax (RGST). The PML-N attempted to implement the active taxpayers’ list by imposing bank transaction charges on non-filers. However, it backtracked from its announcement of CNIC based tax profiling.
The present government relied on the faulty drive of Inland Revenue Services Department of the FBR to bring the tax dodgers into the tax net, which ended in fiasco at the very outset. There is a revenue shortfall of Rs.90 billion in the first quarter of the current fiscal year. As per announcement made in October, people expect massive and comprehensive tax reforms programme from the PTI government.