. .

IMF unhappy over budget 1999-2000

15 per cent GST on services sector not announced in the budget

From Shamim Ahmed Rizvi, Islamabad 
June 28 - July 04,1999

  1. Privatization of PTCL
  2. National savings ratio to GDP declines
  3. Solar power project in Balochistan
  4. IMF unhappy over budget 1999-2000
  5. Increase in salaries of Govt employees

The review mission of the International Monetary Fund which stayed in Islamabad for over two weeks helping government of Pakistan in preparation of budget 1999-2000 on the Mission Lines, has left Islamabad conveying their displeasure over the decision of government not announcing in the budget the imposition of 15 GST on the services sector as agreed with them. While leaving, the Mission's chief has indicated that if GST is not imposed on the agreed lines there may be difficulties in disbursement of $100 million next tranche in July/Aug 1999.

A five-member Review Mission of the IMF headed by Ms Sena Etken held a meeting with the Finance Minister who assured the mission that 15 per cent general sales tax (GST) will be stretched to the services sector during the next fiscal year in order to improve the declining revenue collection position. The Minister also assured the Mission that there would be no more revenue slippages in 1999-2000 as were witnessed during the 11 months of the current financial year. He, however, tried to convince the IMF that it would not be possible to impose gst on the entire services sectors in one go. It is seeking Fund's permission to implement the scheme in piecemeal without, however, affecting the overall revenues.

According to the latest report, the CBR has been able to collect only Rs. 259 billion up to May 31, 1999. It will be a real achievement if the CBR succeeds in collecting Rs 41 billion in the month of June to touch the figure of Rs 300 billion against the target of Rs 354 billion.

Informed sources told Page that Mr. Dar assured the review mission that the government would get tough against tax dodgers and that the number of tax payers would certainly be increased from 1.4 million to 1.8 million during 1999-2000. He said that the government would firmly abide by its commitment to recover 15 per cent GST from the services sector from Aug/Sep. 99.

Reportedly the GST will be imposed as agreed with Mission on electricity and gas bills besides professional service as engineers, chartered accountants, lawyers and doctors. The government expects to have additional revenues of about Rs. 50 billion i.e. Rs. 20 billion on gas, Rs. 28 billion on electricity and Rs. 2 billion from professionals. It is believed that the Prime Minister is hesitant to extend GST to services sectors on political considerations. He had said during a couple of meetings before the presentation of the budget that his government could not afford to levy tax on the services sector as it would eventually create many political problems for him. The Prime Minister said that levying GST on gas and power will make the life of a common man further difficult who had not been given any relief during the last more than two years. Rather, he reportedly said, general public faced the problems of price hike and other pressing issues including that of the law and order. The Ministry of Finance is, however, trying to persuade him to have this bitter pills in view of the revenue position and insistence of the IMF.

We all know it for certain that Pakistan is today heavily indebted both to the donors as well as to the local lenders. Total debt comes close to the entire GDP of Pakistan. Because of this asymmetric public debt, Pakistan has to pay this year a sum of Rs. 287 billion as debt servicing. This amount comes to almost the total revenue of the federal government. Because of this situation, the country is now in the grip of the IMF and the World Bank. The donors want their debts be repaid. Pakistan has to do so as otherwise it will be declared a "defaulter country" with all its dire consequences. The introduction of GST on the service sector is just one of the measures to mobilize the needed funds to meet both the external and domestic obligations.

The country is now confronted with a big crisis. The tragedy, however, is that the burden of taxes has come at a tine when the economy is already found in deep recession. The per capita income has almost stopped increasing and the expenditure side at the private household and corporate sector level is continuing to shoot up. Realizing the desperate need to honour foreign obligations, it seems imperative that the people must be prepared to make financial sacrifices. This is the only reason why the CBR has lately been obliged to explore new ways to levy taxes. The GST on the services sector is just one of these measures. In order to help the country at this critical juncture, the people of Pakistan will have to support the government by paying more taxes. As such, the privileged classes which have so far successfully maneuvered to remain outside the tax net should voluntarily help the government to avoid any serious crisis emerging on the financial front.

The above situation has arisen on account of the gross mismanagement of the public outlays particularly the external loans. Now a situation has emerged where new and innovative measures need to be introduced to meet the challenge. It is true that the Paris Club has agreed to the rescheduling of certain debts until the year 2001. But this doesn't mean any permanent solution. The backlog likely to be rescheduled will once more be added to the total debt servicing once the rescheduling ends. One of the sources reveals that the government has been quite successful in increasing the revenue by levying 15 per cent GST on trade and manufacturing sector. The sources further disclosed that the above GST has already become the main source of CBR revenue. Under a bailout package, it is reported that it has agreed to the IMF's proposal for imposition of 15 per cent GST on the services sector from July 1, 1999.

It may be true that the levying of GST on services has now become indispensable in view of the declining revenues. But it would be now criminal to exempt farm income out of tax net. Besides the levying normal rate of income tax on farm income, effective measure should be undertaken to check tax evasion rampant in different forms and recover outstanding amounts from bank defaulters. In view of present economic crises every body must pay what is due from him to the state or be prepared to go to jail and get exemplary punishment.