IMF, government mulling new taxes

[Naveed Yaseen]

ISLAMABAD: New revenue measures such as the introduction of a carbon tax or a gross asset tax, are under discussion with Pakistani authorities but are yet to be approved, International Monetary Fund (IMF) has said in its Article IV Consultation report.

According to the official sources, Carbon Tax may replace Petroleum Development Levy and gross asset tax, which would be levied on gross assets of the companies mentioned in their balance sheets at 0.5 percent to one percent in the next budget 2009-10.

Article IV Consultation report released on Tuesday said that the decline in activity levels has had a negative impact on revenues; particularly linked to lower volumes of traded goods. Nonetheless, the end-period deficit target was achieved by careful management of spending by the Ministry of Finance, as well as additional revenues from the Petroleum Development Levy. Following a conference held in Lahore in December with key stakeholders-including the business and academic communities, and senior federal and provincial officials-a plan to significantly raise the tax-to-GDP ratio was approved by the government. This involves a thorough revamp of the tax administration, with assistance from the World Bank. Difficult decisions to establish a functional administration for the Federal Bureau of Revenue (FBR), merging the separate income and sales tax administrations have been taken, and the implementation of an Inland Revenue component of the FBR launched.

The Government also intends to proceed with an ambitious tax reform agenda based on the full implementation of the VAT, and reform of the income tax. However, a full VAT with minimal exemptions, to be implemented by the FBR, will involve agreement with the provinces concerning the treatment of services, which have been assigned to them under the Constitution. Options in this regard are being examined, drawing on international experience. Additional taxes are also under consideration, including a possible Carbon Tax for environmental purposes.

The Fund-supported programme clearly had an impact on business confidence, and as described in the staff report, the market determined exchange rate has been broadly stable. Gross reserves have increased, inflation has fallen, and T-bill rates have tended downwards. There has been a strong response to T-bill auctions and the Government has retired some of the stock of its debt to the State Bank of Pakistan. The removal of the floor on the stock market in mid-December led to an expected correction, but there was no massive capital outflow as had been feared by some. Indeed, the stock market index has risen since then, albeit with some volatility as explained by staff.

"Pakistan needs additional external assistance to reduce risks, and provide for greater development and social spending. The upcoming donor meeting provides an important opportunity for mobilising additional assistance," The IMF Deputy-Managing Director, Murilo Portugal said.

Banks have weathered the crisis well, but need to continue to be monitored carefully as the worsening macroeconomic environment may affect banks' asset quality and profitability. The SBP's contingency planning will help detect and address emerging risks.

The exchange rate has been broadly stable, enabling the SBP to nearly double its gross reserves since late 2008. Inflation has been falling more rapidly than expected and the external current account deficit has been narrowing. The Executive Board also approved Pakistan's request for a waiver for the non-observance of the continuous performance criterion on non-imposition or intensification of exchange restrictions, on the basis of the authorities' plan to reverse the intensification by end-June.

Directors noted the increased risks stemming from the subdued global outlook and slower domestic activity. Weaker demand for exports and uncertainty about workers' remittances entail important risks for the external position, while tight domestic credit and dim external private financing prospects could constrain growth.

http://www.dailytimes.com.pk/default.asp...2009_pg5_7