After the completion of the second review of implementation of economic reforms attached with its extended fund facility, IMF may ask for bringing a minibudget loaded with additional taxes, mostly of regressive nature. The visiting mission of the multilateral donor agency is holding discussion with government team to take measures to stem increasing revenue shortfall by imposing additional taxes and increasing the rates of existing ones in addition to squeezing the same lemon of nontax sources of revenue. Additional taxes worth Rs.200 billion are likely to be levied to bridge the widening resource gap between the revenue and expenditure.
The revenue generation measures that are likely to be taken will include increasing the rate of sales tax from 17 percent to 18 percent instead of plugging the loopholes in its collection. FBR had decided to install 17,500 point of sales systems for the retail trade at big shopping malls. However, no authentic data is available to tell how far the sales tax automation campaign has succeeded. It is matter of common observation that majority of restaurants charge sales tax from their customers but proper bills bearing sales tax registration numbers are not given to the clients unless and until they insist for it. These leakages in the sales tax collection system need to be plugged. If the rate of sales tax is raised from 17 percent 18 percent then the end consumer will bear 90 percent burden of this this tax as it is collected at the same rate from manufacturers, distributers, whole sellers and retail traders. The decrease in consumption of goods by consumers will affect business activity, in turn impacting the production. It explains the current phase of acute stagflation in the economy. The decline in the industrial production will result in reduced tax collection. Will FBR be able to collect additional sales tax of Rs.200 billion in the remaining five months of the current fiscal year? The answer is not in affirmative if past experience is any guide about the inelastic nature of this tax for generating the estimated revenues.
Another source of easy revenue generation is jacking up prices of gas and electricity, which fuels inflation and adversely affect production and trade. In the previous government interest rate was less than 6 percent but the availability of easy credit did not help boost investment and lower cost of production due to high tariffs of energy inputs. Knowing the negative impact of IMF front loaded economy stabalisationprogramme, Lahore Chamber of Commerce and Industry had suggested lowering of electricity and gas prices plus facilitation of modern technology induction to make industrial products competitive and innovative. But the suggestions of business leaders were not heeded to therefore flight of capital and shifting of textile industry to other countries with favourable economic environment started. Banks are overloaded with cash but entrepreneurs are shy of investment because of high rate of interest. Two independent economists, who later left Prime Minister’s Economic Advisory Council, were not in favour of availing the frontloaded IMF loan programme. One of them vehemently criticised the rushing of stabalisation measures in one go in a talk show of a private TV Channel.
The most worrying phenomenon is the increasing fiscal deficit, which seems difficult to be brought down to the limit suggested by the IMF. The reason may be the failure of the FBR failure to achieve the tax collection target and short fall may reach Rs.750 billion as government has restricted civil expenditure at Rs.183 billion in the first half of current fiscal year. Government will be then compelled to slash development expenditure and in this exercise allocations for social sector development are often axed. Minibudget largely based on indirect taxes and increasing utility prices has neither produced the desired results in the past nor will it achieve the intended one at present.
