ISLAMABAD: Pakistan has agreed with the IMF to undertake key reforms on taxation side to jack up tax to GDP ratio one per cent each year for obtaining $6.6 billion under 3-year Extended Fund Facility (EFF).
Moreover by end-December 2013, the government will also implement a new gas levy that will increase tax revenue by 0.4 per cent of GDP or over Rs120 billion on annual basis.
According to agreement with the IMF, the initial consolidation effort relies mainly on the revenue side given the chronically low tax revenue-to-GDP ratio.
The government is taking a series of measures aimed at strengthening tax revenues by over 1 per cent of GDP on an annualised basis. The tax measures, contained in the 2013 Finance Bill, seek to increase revenues by 0.75 per cent of GDP, and include: (i) an increase in the GST rate; (ii) an increase in the corporate minimum tax rate; (iii) higher personal income tax rates for the top income brackets; (iv) higher excises on cigarettes; (v) increases in several withholding rates; (vi) introduction of several withholding rates; (vii) imposition of new levy on movable assets.
On the expenditure side, the government has initiated a plan to phase out electricity subsidies over the life of the programme. The federal government, with support of the provinces, has approved an energy policy entailing periodic increases in the average tariff, aiming at eliminating the tariff differential subsidy for all consumers except the very lowest over the next three years.
The first adjustments to commercial, industrial, bulk and large consumers reduced subsidies by 0.75 per cent of GDP on an annual basis. However, for the first year, the government will maintain tariffs for consumers between 0-200 kWh consumption. For the second and third years, the subsidies will be further reduced by roughly 0.4 per cent of GDP per year to reach a maximum of 0.3 per cent of GDP thereafter.
Tax administration reforms will gradually deliver further improvements in revenue collections as an initiative to incorporate 300,000 new taxpayers into the income tax net was launched in July.
The 2013 Finance Bill also grants the FBR access to bank information enhancing the scope and quality of information in its databases. The first step has been taken with the issuance of ten thousand notices based on large potential fiscal liabilities by the end of July, and will be followed by a provisional assessment, collection procedures and penal as well as prosecution proceedings.
The income tax initiative will be complemented with initiatives to enhance revenue administration for sales, excises and customs and will be launched by end-December 2013. These efforts will be further assisted by increasing the number of risk-based tax audits to 4.2 per cent of declarations (from 2.2 per cent). The government will also continue to seek technical assistance on tax administration from the international partners.
To ameliorate risks to the programme, several contingent measures have been identified and will be implemented in case the expected fiscal adjustment falls short of objectives.
These measures include reduced expenditure allocations in the first 9 months of the year compared to the budget to create a reserve against any shortfall and use of reserves built into the capital expenditure budget if needed. These could yield savings amounting to 0.5 per cent of GDP. In addition, the government stands ready to take any other measures needed to assure compliance with the fiscal target.
Beyond the current fiscal year, further revenue and expenditure measures will be implemented to achieve a sustainable deficit of around 3.5 per cent of GDP by 2016/17. This will require further fiscal consolidation of about 1.5 per cent of GDP per year in the coming 2 fiscal years. Roughly half of the adjustment could come from the revenue side, mainly through further widening of the tax base with some contribution from improved tax administration.
According to an official said, “Among the initiatives to widen the tax base, we will finalise a comprehensive plan to separate existing statutory regulatory orders (SROs) either by eliminating those granting exemptions or concessions through SROs by end-December this year. We will introduce the remaining to FY14/15 finance bill by end-June 2014. The government has already stopped issuing any new tax concessions or exemptions (including customs tariffs) through SROs except by an act of the parliament, and will also approve by end-December 2015 legislation to permanently prohibit the practice.”
He further said that the govt would also quantify the remaining tax expenditures and publish a detailed list in the budget in future years, adding that these steps would facilitate gradually moving the GST to a full-fledged integrated modern indirect tax system with few exemptions and to an integrated income tax by 2016.
On the expenditure side, further reductions in untargeted subsidies would be undertaken in 2014/15 and 2015/16, along with steps to streamline wage and salary costs via civil service reforms, he added.
