Fresh IMF loan turns dearer as SBP doubts FBR can do the job

The Federal Board of Revenue (FBR) is unlikely to achieve even the revised tax collection target of Rs 2.191 trillion for the current fiscal year.
“Achieving the end-year tax collection target (of Rs 2.381 trillion) would be a formidable task for FBR,” observed the central bank in its second quarterly report for FY13. The federal government for fiscal year 2012-2013 had set a revenue collection target of Rs 2.381 trillion. The outgoing PPP-led coalition government, however, had to make a downward revision of this fiscal target cutting it to Rs 2.191 trillion. “Achieving this target may also be challenging,” the SBP said about the revised targeted tax money.
Given the fact that the fast-shrinking foreign exchange reserves are pushing the electioneering Pakistan towards a fresh IMF bailout package to avoid an ultimate default on the balance of payment account, the SBP’s view, if proved true, would make it harder for the new democratically-elected government to convince the International Monetary Fund (IMF) to doll out afresh package of billions to the dollar-hungry Pakistan.
According to the central bank, although the country’s total revenue collection grew by 28.8 percent during first half of FY13, H1FY13, the growth in tax collection was only 12.0 percent.
“The major reason for this was the slowdown in federal tax revenue collection which grew by just 8.6 percent in H1-FY13,” the bank said.
This, it said, was compared to 25.0 percent in the corresponding period of last year. Even this growth, the SBP said, was supported primarily by the receipts from the Petroleum Development Levy (PDL) as the growth in the FBR’s tax collection was even lower. The provisional numbers for the FBR’s taxes showed a growth of only 5.7 percent in H1FY13 compared with 27.1 percent in FY12. Under these circumstances achieving the end-year tax collection target would be a formidable task for the FBR, said the State Bank.
This task, it said, would be even more challenging given the slowdown in sales tax and direct tax collections.
The sales tax, the single largest source of revenue for the funds-starved government, grew by only 1.7 percent in H1FY13 compared with 36.0 percent in last year’s corresponding period.
“Apart from the inability to introduce a broad-based value added tax, tax collection was undermined by the number of exemptions granted to various industries; tax evasion, and fake claims for refunds and rebates,” the central bank observed.
Surprisingly, it said, the FBR had recently cut tax rates on certain products, including beverages, cement, and sugar that had been important sources of revenue in the past. The tax collectors also removed the one percent withholding tax on manufacturing entities, further affecting overall tax collection, the SBP said.
Moreover, the banking regulator said, sluggish growth in the domestic production of sugar, consumer electronics, auto products and a fall in imports had also adversely impacted revenue collection of the federal government. “One must also realize that FBR no longer collects sales tax on services, which has been devolved down to the provincial governments,” the bank reminded the economic managers.
Sindh had started collecting sales tax on services in FY12 and Punjab launched it in FY13. The other important source of revenue collection for the government was direct taxes. Growth in direct tax collection declined from 30.9 percent in H1FY12 to 5.9 percent in the same period this year.
The State Bank cited FBR’s failure to bring more people into the tax net, rationalization of the income tax brackets to benefit small taxpayers and the doubling of taxable limit on cash withdrawals from banks to Rs 50,000 as major reasons for this contraction. “As a result, there was a shortfall of about Rs 154 billion in tax collection during the first half of the year,” the bank said.
Referring to seasonal trend, the State Bank said 44.4 percent of annual tax revenues were usually collected in the first half of a year. “However, this year tax collection was 38.6 percent of the target,” it added. This shortfall was, however, more than offset by non-tax revenues mainly due to the receipt of Coalition Support Funds amounting to $ 1.8 billion.
Given Islamabad’s failure to comply with the IMF’s consistent demand of broadening the local tax net through imposition of a Reformed General Sales Tax (RGST) one can aptly surmise about how much a daunting task it would be for the Pakistani side to persuade the IMF on a fresh bailout package. Pakistan with its 10 percent tax-to-GDP-ratio stands among the countries where the payment of tax rate is the lowest.