New set up is also seems to have bowed down before IMF pressure and so implementing tax reforms decided during the ousted govt

From SHAMIM AHMED RIZVI, Islamabad
Nov 08 - 14, 1999

The new Finance Minister, Mr. Shaukat Aziz, during his negotiations with IMF authorities in Washington before leaving for Pakistan, has reportedly been told that fulfillment of Funds Conditionalities were vital for release of the withheld tranche of $280 million. The payment of this amount which was due in March last is being delayed despite the fact that 97 per cent of conditions laid down by the donor have already been met.

Levy of 15 per cent GST on retailers, services and utilities including gas, electricity and petroleum products and resolution of lingering dispute with Independent Power Producers (IPPs), specially the Hubco, are the only three conditions left to be fulfilled.

The ousted government, under pressures from trading community has imposed a 75 per cent development tax on turnover of retailers instead of GST and was reluctant to cause any increase in the prices of electricity and petroleum because of harsh public reaction and political backlash.

It, however, appears that the new Finance Minister has bowed to IMF pressure as on the third day of his arrival in Pakistan, after a series of meetings with officials of Ministry of Finance and the Central Board of Revenues (CBR) the government decided to introduce GST across the board. This decision was taken at a high level meeting chaired by Finance Minister Shaukat Aziz. The marathon meeting in the Central Board of Revenue covered the whole gamut of tax and revenue matters, by holding point-by-point presentations on 45 items. Moeen Afzal, Secretary General Finance, and other concerned officials also attended this meeting.

"The meeting has decided to introduce across the board GST, "in letter and spirit," stated Iqbal Farid, Chairman of the Revenue Board, after the meeting. This decision has been taken in principle, and its imposition would be subject to the final approval of the Chief Executive. Farid said that the minister has instructed the CBR to prepare the plan within two weeks for its final approval.

This value added mode of sales tax (VAT) would be introduced in all the sectors, including services, retail and agriculture. Introduction of a VAT mode of sales tax was being recommended by all the economists and international financial institutions (IFIs) as a key step towards self-reliance and resource mobilization. However, no government of the past was able to impose this tax due to political considerations.

The Central Board of Revenue in its presentation proposed that instead of going for rate increase, broad-basing of the sales tax net was required to check evasion and distortions.

According to a thumb rule of tax men, across the board imposition of GST can easily generate revenues of around 5 to 6 per cent of the gross domestic produce (GDP) at current rate of 15 per cent. According to the proposed extension, CBR expects Rs 55 billion additional GST collection, from Rs.120 billion to Rs.175 billion.

About IPPs issue, the Finance Minister is reported to have reached some understanding during his negotiations with IMF and World Bank in Washington. On arrival in Pakistan he said that most of the problems with IPPs had already been solved and remaining would be sorted out shortly. Wapda has already given an assurance to the World Bank that dispute with HUBCO would be settled amicably. This assurance was given by Wapda Chairman Lt Gen Zulfiqar Ali Khan to a two-man World Bank mission at a meeting held at the Wapda House on Monday last week.

The meeting discussed in detail different aspects of the dispute between Wapda and Hubco and the progress so far made for resolving the dispute. The Wapda Chairman told the World Bank team that the dialogue with Hubco was continuing as he had again invited its chief for talks to settle the dispute. He said it was in the interest of both the parties to reach an agreement as early as possible. There are reports that Mr. Shaukat Aziz has devised a new formula to resolve the crucial issue of IPP and their row with WAPDA and his formula has been approved in principle by the World Bank and the IMF. Reports that both these international financial institutions are more open to proposals by the new government are indicative of some change of heart brought about by the manner in which the new set-up in Islamabad is tackling the issue.

It is very encouraging sign and efforts should be made to resolve this issue as early as possible as it has caused enough damage to the national interests. In the case of row with IPPs, the previous government's political agenda was allowed to override economic common sense and this is one of the reasons why the matter has dragged on for so long. A distinct line should have been drawn between politics and the economic interests of the country.

There is likelihood that the Fund management may ask for a fresh review, depending on the official strategy, in the wake of recent changes. "We may have to go for a short review', said knowledgeable sources. They asserted that a lot would depend on the approach of the new economic team, as far as direction of the reforms and process and need of fresh consultations were concerned.

The IMF programme was delayed when the deposed government failed to introduce agreed reform measures in the economy. These measures were relating to broad-basing of the sales tax net to energy sector and POL prices. Retail prices of petroleum products were also required to be deregulated to absorb the impact of international price hike.

The IMF programme is based on quarterly reviews and monitoring. Within the existing programme parameters, a fresh review is due for the first quarter, July-September 1999.

Since the arrival of Finance Minister Shaukat Aziz and the Secretary General Finance, Moeen Afzal, authorities are busy in preparing a broad outline for the macro-economic strategy. Policies are being reviewed and analyzed to accommodate them in the new financial model. Apparently there are two main options: (i) implement everything that was agreed by the previous administration to qualify for the next tranche with minimum possible discussions on new policies; and (ii) go for complete new look policy measures.

In the second case, it may take a bit longer to frame everything into a specified programme format. However, sources in the international financial institutions (IFIs) expect that "upfront implementation of tough reforms measures particularly on the sales tax side, would help the authorities in convincing the Fund management for an early release". This would also justify the action of October 12, observed the sources.