Talks with IMF delegation focused on fiscal adjustments

Government plans to introduce fiscal adjustments in the form of a mini-budget

Mehtab Haider

February 06, 2020

ISLAMABAD: Pakistan and the visiting International Monetary Fund (IMF) delegation continued their talks on Wednesday to work out a revised budgetary estimate on the exact extent of fiscal adjustments needed to stay on track with commitments, reported The News.

The government plans to introduce the fiscal adjustments in the form of a mini-budget through which it will adopt additional taxation measures that will be implemented by the Federal Bureau Revenue (FBR). It also reportedly plans to revise upward the non-tax revenue target.

“One possibility is the addition of more items into the Third Schedule of the Sales Tax Act as it will help the FBR collect GST at the retail price stage,” sources privy to the talks told The News.

In the last budget, the FBR had placed certain revenue-generating items in the Third Schedule so the possibility exists that the list of items may be further expanded through the mini-budget.

There is also a possibility that the IMF may insist that Pakistan take additional taxation measures to increase revenue collection. These may include hiking the GST rate by one per cent from 17 to 18 per cent.

“The IMF mission has given indication for putting the GST rate hike as one option on the negotiation table,” top official sources said.

However, Pakistani authorities opposed this proposal tooth and nail at this stage and argued that any hike in GST rate would be counterproductive as it would be highly inflationary.

The headline inflation has already touched 14.6 per cent, so an increased GST rate would definitely fuel inflationary pressures, they argued.

The sources also confirmed that the possibility of reducing Regulatory Duty (RD) and Additional Customs Duty (ACD) is also in the cards as it will help contribute to growth through the import of raw material, machinery and intermediary goods.

There is also the possibility of hiking GST rates for petroleum products instead of the standard rate of 17 per cent on petrol and diesel and other products.

However, the consumption of petroleum products has declined so FBR high-ups fear that hike in tax rate might result in a further reduction in consumption. But there is a counter-argument that states that some sectors have achieved increased production volumes (based on the recent increase in dispatches from the cement and steel sectors) and the increased production will help support the desired revenue collection at increased GST rates.

Official data shows that the economic slowdown has touched an inflexion point and the production of some industries will start picking up as economic activities rebound, so revenue collection will also improve, it has been argued.

The FBR high-ups have also argued against hiking withholding tax rates. Talks have just begun on these matters as the government is also trying to increase non-tax revenue target.

The FBR has so far collected Rs2,407 billion in the first seven months and still has to collect Rs2,831 billion in the remaining five months (February-June) to meet the revised target of Rs5,238 billion on June 30, 2020.

With the existing pace on the basis of monthly collections, this target is impossible to achieve, so a combination of further downward revision, along with additional revenue measures, will be in the cards for reaching a staff-level agreement with the IMF.

Meanwhile, the FBR in its official statement on Wednesday stated that the Board has collected a record Rs2,407 billion in the first seven months, showing an increase of 17 per cent over last year’s collection of Rs2,062 billion.

This increase has been registered despite a $5 billion compression in imports. Last year, the FBR had collected income tax, sales tax and customs duty at the import stage, totalling Rs1,005 billion which has only grown by six per cent to Rs1,066 billion this year consequent to the tremendous negative impact on Customs Duty and Income Tax collected at import stage.

On the other hand, domestic collection has increased from Rs1,066 billion last year to Rs1,341 billion this year showing an unprecedented increase of 27 per cent.