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Tax collection target under IMF plan and CPEC investment

Many studies revealed that the impact of taxation on economic growth, given that the problem of taxation and economic growth are at the heart of macroeconomic strategies. Presently the Government of Pakistan has enjoyed some economic growth, mainly on the back of the China-Pakistan Economic Corridor (CPEC), while security has enhanced and more reliable power supply should aid investment. But the deep-seated problem is tax avoidance in the country.

Different experts recorded that the Government of Pakistan and IMF have been unable to sort out differences over the fiscal policy due to the latter’s demand that the federal tax collection be raised to about 13 percent of the size of Pakistan’s economy within a year. Sources revealed that if the Government of Pakistan agreed International Monetary Fund (IMF) demand, a tax collection target of around Rs5.4 trillion would have to be set for FY2019-20. Under the current conditions and an extremely poor situation in the outgoing fiscal year, the FBR would be unable to collect more than Rs4.9 trillion in the next fiscal year starting from July. The disagreement over the FBR’s collection target is also undermining a deal on the budget deficit target for the next fiscal year.

Unluckily Pakistan’s most endemic economic problem is harder to crack – the failure of almost everyone, including a majority of the officials, to pay taxes. Feeble tax revenues are at the root of most of Pakistan’s other problems, not least a growing budget deficit. Successive governments have been well aware of this, but have lacked the backbone – or, having begun to act, the stamina – to fix it.

For the FY2018-19, statistics also showed that the present government had set Rs4.4 trillion tax collection target for the Federal Board of Revenue (FBR). However, looking at the board’s performance in the first 9 months, it is improbable to collect over Rs4 trillion. The FBR declined short of the target by approximately Rs318 billion and could rake in only Rs2.68 trillion. The Rs4 trillion tax collection target is equal to 10.6 percent of the GDP and to raise it to 13 percent, the FBR would have to generate an extra amount of Rs1.45 trillion. This would require a 36 percent growth rate, which is impossible to achieve. The FBR has so far posted an average growth of 2 percent in revenue from July to March. After taking into account the optimistic impact of the nominal GDP rate of almost 12 percent, the FBR would still need to take unprecedented initiatives. To attain a tax collection target of Rs5 trillion, the government would have to impose extra taxes of almost Rs500 billion for FY2019-20.

 

Sources said that the IMF may eventually agree to a target of approximately Rs5 trillion, which would be equal to 12 percent of the next year’s GDP size. The present government had believed that the rise in inflation and exchange rate adjustments would have an optimistic impact on tax collection. However, it failed to attain the desired consequences by the end of the ninth month of FY2019.

Sources also recorded that the Government of Pakistan was keen to raise the FBR’s tax-to-GDP ratio by 1.1 percent of the GDP in the next fiscal year 2019-20, followed by 0.9 percent of the GDP in FY2020-21. During the last fiscal year, the FBR’s tax-to-GDP ratio reached at 11.2 percent. According to the researchers, the basic purpose of a tax system is to increase enough revenue to finance essential expenditures on the goods and services offered through the government. If a state wants to develop, it requires collecting tax revenue to amount larger than 10-15 percent found in many developing states. It is also important to note that taxation is one of the best tools to raise the potential for public sector performance, to finance the social insurance program and for the repayment of public debt. It is also believed that a state’s revenue generation basically relies on its sufficient capacity to tax more in both economic and administrative term.

Pakistani experts also recorded that the next fiscal year would not be easy for the present government also for the citizens. The present government officials plan a crackdown against tax evasion, mainly in the real estate sector, under invoicing of imports and offshore taxation. Statistics also showed that the general sales tax (GST) effective rate is approximately 7.25 percent against the standard rate of 17 percent due to various tax exemptions and special tax regimes. An integrated value-added tax system could enhance the effective rate but that would also require a massive withdrawal of exemptions.

The discussions are going on between Pakistan and IMF. Meanwhile, the IMF has demanded an increase in tax collection. Sources stated that Pakistan had offered extra Rs600 billion tax target to IMF officials during discussion. In this regard, it is anticipated that the government could increase GST by 1 percent to 18 percent and the Federal Excise Duty imposed on several products could also be raised. Moreover, import duties on luxury products are also predicted to rise. A further rise in regulatory, withholding tax (WHT) and custom duty is also being anticipated. Financial burden on non-tax filers may also swell. Moreover, alterations in salary slabs of government officials are also predicted and subsidies can be reduced.

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