This time International Momentary Fund (IMF) has suggested harsh measures before a loan programme is agreed for Pakistan. It is not clear whether the new measures of more revenue generation will be focused more on expanding the base of direct taxes or on the regressive indirect taxes, increases in power tariff and petroleum levies. The later recipe of revenue collection largely hurt the people of fixed income groups and daily wag earners.
The IMF has asked Pakistan to slap new taxes worth nearly. 160 billion including raising general sales tax rate (GST) to 18 percent, putting Pakistan Tehrik-i-Insag government in a difficult position as it has promised reduction in indirect taxes the brunt of which is borne on common man. But its drive to enhance the ratio of direct taxes in revenue collection by bringing non-filers into the tax net has not yielded the desired results.
After coming into power, the PTI government had reduced the FBR, s annual tax collection target to Rs. 4.398 trillion. In the first four months of the current fiscal year, it suffered a shortfall of Rs.68 billion despite announcing a mini-budget two months ago. It is not yet clear whether Rs. 160 billion additional taxes are aimed at increasing the overall target to Rs. 4.560 trillion or some of these measures will cover the shortfall. During a meeting with the Prime Minister, Imran Khan, the Finance Minister Asad Umar has talked about the possibility of new tax measures due to FBR, s failure to meet its targets. The IMF has been assured that FBR would be able to collect Rs. 45 billion through audit cases. Another Rs. 55 billion will be recovered by settling the cases in litigations. This is a sheer lollypop shown to the global lenders. The audit cases go to Commissioner Appeals Income Tax and taxpayer then submit an appeal with the Tax Tribunal against his decision. The order of the Tax Tribunal is then challenged in high Court and matter goes even to the Apex Court. Tax related cases 2011 are still under litigation. Previously, the Sales Tax department used to conduct the audit of business enterpriser and industries on annual bases. Under the new finance bill, the established procedure of annual audit has been abandoned and now the sale tax shall be conducted on three years basis. Interestingly, the auditors are told verbally not to carry out physical verification of stock and inventories of business and industrial enterprises.
The IMF is demanding that Pakistan should also increase income tax rates. However, there is little room for this as FBR has already tapped almost every possible avenue, except bringing new potential tax payers in the tax net. Direct tax collection is around 37 percent of the total tax collection including withholding tax. The government has promised to reverse the current taxation policy, which is not only regressive but is also hurting the poor more than affluent.
The FBR charges higher than the standard GST rate of 17 percent from unregistered people. The incremental levy is 3 percent over and above the one charged from registered entities. In case the government accepts the IMF demand the GST rated for unregistered firms will go up to 21 percent. If the global lender’s demand of jacking GST rate to 18 percent is accepted it will fetch a minimum Rs. 75 to 80 billion in additional revenue. In the remaining period of the current fiscal year, the 1 percent additional GST could fetch around Rs. 40 billion. The IMF is asking for a steep fiscal adjustment to see the budget deficit around 3.5 percent of the GDP at the end of its programme. The authorities are mainly relying on tax efforts to cut the budget deficit as there little room on the side of expenditure.
All the previous governments and including the present one as well have not been inclined to impose agriculture income tax, brokers’ tax, capital gains tax and profession tax on practicing lawyers, medical practitioners and chartered v accountancy firms. These untapped sources can generate billions of rupees in direct taxes. Will the incumbent government show some spine and tap these sources of revenue collection?