Home Global Village IMF bailout requires steep tax measures

IMF bailout requires steep tax measures


News Desk |

Immunity from help of the International Monetary Fund (IMF) is going to need drastic measures from the government, in the months ahead. A credible source with extensive knowledge of the matter, the Fund has demanded Rs160 billion worth of new tax measures in the current fiscal year – which ends in June 2019 – in order to strengthen the fiscal outline.

Convincing steps will be required to boost the country’s tax-to-GDP ratio. This can be achieved according to the calculations of The Federal Board of Revenue (FBR), which states that the 1.1 percent increase alone estimates an additional Rs400-500bn, in tax revenue measures. If undertaken, the steps will lift the country’s tax-to-GDP ratio to 13.9pc by end June 2021. The government has set a fiscal deficit target of 5.6pc for 2018-19, whereas the IMF’s projection is slightly behind it.

The FBR admits that the new price mechanism may lead to an increase in the prices of oil but justifies it on the plea to raise additional revenue and also to control its consumption.

Stressing on a revenue target is a new approach towards achieving our goals for the IMF. Previously, fund programs were constructed while focusing on a fiscal deficit target, and the process reaching the target was controlled by the government, that is, through a combination of revenue increases and expenditure cuts.

This time around, as IMF is laying out specific revenue targets for each year of the proposed program, it is asking the government to commit to raising the tax-to-GDP ratio by 0.4pc of GDP by June 2019, followed by 1.1pc in FY20 and 1.2pc in FY21.

Programme unlikely before February; Rs160bn Fresh Taxes before June

In addition to these revenue measures, the Fund has also demanded the provinces to increase their revenue streams. In fact, the specific concomitant increases in provincial revenues stated are, from current 1.1pc of GDP to 1.5pc by end of the program.

Read more: IMF: The economic hit-man hunting poor countries? – Farid A Malik

According to earlier reports, the finance ministry has been asked by the tax department to approach the Supreme Court in order to find a way to restore taxes on prepaid mobile cards. The annual collection from these taxes on prepaid cards used to be around Rs80bn – this alone can help plug half of the revenue demand for the first year of the program.

In a separate proposal, the FBR has anticipated to fix sales tax on petroleum products with respect to volume instead of a percentage of the price, starting from January. According to the board, the prices of petroleum products in Pakistan are on the lower side as compared to the regional countries. The FBR admits that the new price mechanism may lead to an increase in the prices of oil but justifies it on the plea to raise additional revenue and also to control its consumption.

The IMF’s resident representative in Pakistan, Teresa Daban Sanchez, also commented that fiscal consolidation is required and that “the policies have to be on the revenue side.”

Sources say that these two measures could generate around Rs100bn for the government. However, this still leaves the government with a gap of Rs60bn before June and will still necessitate further tax measures.

Now, the government is looking to tax luxury consumption for the higher income bracket of the country in an effort to meet the conditions set by IMF. Moreover, FBR is expecting to raise around Rs30bn alone from sales tax evasion in the next half year of 2018-19. It has been implied that the difficulties being faced by the government in finalizing the IMF program are due to the steep revenue increases demanded by the Fund.

Read more: PM Khan, beware the IMF!

This time around, the government is only focusing on generating revenue for the IMF program, instead of cutting expenditures in the ongoing fiscal year. The IMF’s resident representative in Pakistan, Teresa Daban Sanchez, also commented that fiscal consolidation is required and that “the policies have to be on the revenue side.”