New set up is also seems to
have bowed down before IMF pressure and so implementing tax reforms decided during the
From SHAMIM AHMED
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
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,
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
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