Staff level agreement with IMF: Govt may hike tax rate, cut exemptions

Highlights

• The PTI economic managers may hike tax rate and cut exemptions to strike IMF deal
• This massive fiscal adjustments on the IMF demand will be the biggest challenge for the government

ISLAMABAD: The government is left with no option but to explore the possibilities of hiking tax rates, especially the GST, removing exemptions and slashing down expenditures in budget 2019-20 for striking a staff level agreement with the IMF, The News has learnt.

The massive fiscal adjustments on the IMF demand will be the biggest challenge for the government, as it could cause an upheaval on the political front in the aftermath of the upcoming budget. The PTI government enjoys a thin majority in Parliament and it is not known how it will be able to sell such difficult and unpopular decision among the masses, as the people have already started bearing the brunt of increased inflationary pressures and inflated utility bills.

The IMF is known for its policy prescription of “one-size-fits-all” where it advocates for increasing tax to GDP ratio through the Value Added Tax (VAT). In order to bridge the yawning gap on the revenue front for the current fiscal year, the government is relying heavily upon the amnesty scheme expecting to generate Rs125-Rs150 billion additional tax collection within the remaining period of the current fiscal year.

“The value added tax (VAT) is the desire of the IMF so they will ask the government to place at least uniform collection mechanism for GST on goods and services in order to build a harmonized system,” top official sources confirmed to The News, Thursday.

On the demand of FBR’s increased collection target, the government is exploring options to raise the GST rate but independent economists termed it a recipe for disaster for economy in the wake of existing slowdown. Pakistan’s major revenue spinners are imports and large scale manufacturing. The FBR used to collect over 40 percent taxes on import stage and the import compression has already done substantial loss to this revenue base.

The POL products witnessed a sharp decline in quantity during the current fiscal, as these dropped by 35 percent and crude petroleum by negative 11.2 percent during the first eight months of the current fiscal year.

On the other hand, the large scale manufacturing has been witnessing negative growth in the current fiscal year so the tax collection base is totally in disarray and shattered. The IMF policy is not going to work here in Pakistan as the taxation policy of hiking rates, especially on front of GST, will further hike inflationary pressure and could be political havoc for the incumbent regime. Talking to The News, renowned economist and former finance minister Dr Hafiz A Pasha said taxation target should be based upon realistic assumptions.

He said the economy was slowing down and the desired target of Rs5.4 trillion could be simply termed impossible for materializing at the time of slowdown. He said nominal growth and innovative taxation measures should be the strategy to boost up revenues. He proposed rationalization of the current expenditures including abolishing ministries/divisions and departments which were devolved through the 18th Amendment. He opposed the move of slashing down only development expenditures because it further resulted into choking running wheel of the economic activities.

“The salaries of top bureaucrats could be frozen at existing levels because they got major relief through jacking up taxable ceiling limit in the last budget,” he concluded.