IMF to dictate next budget: official

[Naveed Yaseen]

By Khalid Mustafa
ISLAMABAD: Pakistan is to receive the dictations from International Monetary Fund (IMF) for making the budget for 2009-10 during the Dubai meeting on May 4-11 where in the second review of the IMF loans and thirds review of the ongoing fiscal would also be discussed in detail, a senior official told The News.

Right now the chief economic manager, Secretary Finance and Additional Secretary Budget, are not in the country while the budget announcement is due in first week of June.

The budget making process has not even kicked off. All this shows that the main decisions on budget making will be taken in Dubai meeting with IMF.

However, despite many attempts The News failed to contact Asif Bajwa, spokesman of the Ministry of Finance to know the government side of the story.

Pakistan mortgaged economic sovereignty and its right to make the budget after accepting conditions of the IMF programme under which 23 months Stand By Arrangement of $7.6 billion bailout package was extended to Islamabad.

The official delegation of Fiscal Affairs department of IMF, which were earlier scheduled to arrive in Pakistan for finalizing the Tax Action Plan will not land, rather they will also hold discussion over the subject with Pakistan authorities in Dubai. Fiscal Affairs department of IMF took the decision because of the advisory against travelling to Pakistan in the wake of rising law and order situation in the country.

The IMF is most likely to ask authorities in Pakistan to levy taxes on services, real estate and bourses sector to increase the tax to GDP ratio by 0.6 percent.

However, for next two year agriculture sector may not be bring into the tax loop. To a question the official said chances are bright that the government will increase the central excise duty on cigarette.

During the Dubai talks the proposal of merger of general sales tax and Income tax would be finalised for implementation. Pakistan will be asked to broaden the tax base across all sectors of the economy by reducing tax exemptions and zero-rating, the official said.

The Dubai meeting will also help design the (value added tax) VAT law, under which the revisions in the income tax legislation, and the possible introduction of a carbon tax would be introduced. In the near term, the fiscal policy will be challenged by the shortfalls of revenue and external financing.

The modalities, to levy the “carbon tax” or a “gross asset tax” are to be finalized in talks for next budget, will also be figured out.

The IMF experts will exert pressure on Pakistan to increase tax revenue-to-GDP ratio which is at the lowest ebb in Pakistan as per international standards, will stress on fast implementation of reforms to increase revenue and enable a reduction in the fiscal deficit while allowing for higher spending on infrastructure and poverty alleviation.

However, when contacted Dr Ashfaq Hasan Khan, Dean of Economics Department in NUST who was earlier the Special Secretary in Finance Ministry said that Pakistan at this point in time should not bring more areas in the tax net, rather it should increase the tax compliance rate in the existing tax base, as 44 percent people in the existing tax net are paying the taxes and 56 percent are not complying with and the 44 percent compliance rate should be increase to 80 to 90 percent in certain time period. And if the said potential in the existing tax base gets exploited, Pakistan will easily be able to generate Rs300 to Rs400 billion.

Khan said that this exercise should be embarked upon in the fist phase that should be 3 to 4 years time bound. However after completing this phase, government should broaden the tax base by including more areas in the tax net.

The international community is too much worried about the pace of implementation of tax reforms in FBR and World Bank has already conveyed its dismay saying that it has never seen in the whole world such a poor tax system, which exists in Pakistan.

IMF has also been exerting pressure on the government to strengthen its tax audit system. However FBR has appointed a Tax Audit Member but with two member staff which is not enough to carry out the audit of the whole taxation system. For example the universal assessment scheme has fizzled out in the wake of the non-existence of the tax audit system.

To a question Ashfaq Hasan Khan said that there are estimates that Pakistan can generate over Rs100 to Rs150 billion revenue in addition to the existing tax base if the major chunk of tax exemption get withdrawn.

He said that this year 17,000 corporate entities filed their tax returns out of which 13,000 showed losses while 4,000 came up with incomes in their tax returns.

http://www.thenews.com.pk/daily_detail.asp?id=175291