The International Monetary Fund (IMF) has demanded that Pakistan fix next fiscal year’s tax collection target at Rs7.25 trillion, which will require imposition of additional taxes of around Rs300 billion, including withdrawal of agriculture tax exemptions and increase in burden on the salaried class.
The target is nearly Rs350 billion higher than what tax authorities believe can be generated in fiscal year 2022-23 without imposing new taxes. The Rs7.25 trillion tax collection target will be Rs1.15 trillion, or 19%, higher than this year’s revised target of Rs6.1 trillion.
Finance Minister Miftah Ismail on Tuesday visited the Federal Board of Revenue (FBR) headquarters and discussed the revenue collection position in the ongoing fiscal year and the possibility of fixing the next financial year’s target at around Rs7 trillion.
FBR Chairman Asim Ahmad informed the minister that the collection may remain around Rs6 trillion in the current fiscal year, nearly Rs100 billion less than the target agreed with the IMF by the previous government.
The IMF had asked for taking more tax measures to bridge the gap, which was not feasible in the present political circumstances.
The FBR chairman shared the mitigation measures with the finance minister, in case the collection fell further below expectation due to import compression.
The FBR assured the minister of meeting the shortfall through various administrative measures like ensuring collection in the disputed tax matters.
The meeting took place close on the heels of discussions in the Ministry of Finance where the authorities discussed the potential revenue measures and the tax target for the next fiscal year.
The government is also scheduled to begin face-to-face talks with the IMF next week, subject to its ability to withdraw fuel subsidies from the middle of current month.
Sources said that the IMF was asking Pakistan for the Rs7.25 trillion tax target in addition to fulfilling the commitments made by the previous government of Pakistan Tehreek-e-Insaf to withdraw the tax exemptions and revise the tax slabs for the salaried individuals.
The rationalisation of tax slabs will almost double the tax burden on the middle and upper middle-income groups, although the finance minister has already said that the tax burden on the salaried individuals will not be increased.
The last IMF report on Pakistan stated that there was a need to remove exemptions to include fertilisers and tractors, which constitute 23% of the current GST expenditure and whose removal was under consideration as a 2023 budget measure.
But it may not be politically feasible for the PML-N led coalition government to increase the cost of agricultural production.
Sources said that the finance minister asked the FBR to consider taking revenue measures in the range of Rs250 billion to Rs300 billion. But the FBR is said to have told the minister that there was not much room for any policy measures and it was advisable to fix the new target in the range of Rs6.8 trillion to Rs6.9 trillion.
“The minister reiterated that all avenues must be explored and meaningful budget proposals presented before the government to maximise tax collection without creating any additional burden on the common man,” said an FBR statement.
The FBR has collected Rs4.86 trillion in taxes during the first 10 months of current fiscal year, leaving itself with a task to collect another Rs1.24 trillion in just two months to achieve the revised annual target.
Tax authorities now need to collect taxes at an average of Rs20.4 billion a day during May and June to achieve the target.
The FBR’s performance has remained largely dependent on imports that contributed nearly 52% to the total tax collection, which camouflaged the weaknesses in the domestic sales tax collection that remained negative.
The finance ministry is projecting 9.5% inflation and 5.5% economic growth for fiscal year 2022-23, which could increase the revenue collection by around Rs900 billion in the next fiscal year without resorting to additional revenue measures.
The FBR is of the view that the next budget should be prepared by solely relying on the nominal GDP growth rate of around 15% and making efforts for additional Rs200 billion revenue collection through administrative measures. However, the IMF never accepts the administrative measures as a solid strategy to achieve the target.
Unlike the economic theories that talk about increase in tax collection proportionate to the nominal GDP growth rate, the FBRs’ performance in the last 10 months suggested that its sales tax collection at the domestic stage fell by 10% despite average inflation rate of 11%.