Fiscal deficit, increasing tax collection: government to assuage IMF Concerns

The government will assuage primary concern of International Monetary Fund (IMF) over the burgeoning fiscal deficit by committing to take all possible measures to decrease expenditure and increase revenue collection, official sources told Business Recorder on Tuesday.
The fiscal deficit remains the single most critical issue in the upcoming talks between the government and the IMF, and the government is expected to identify specific budgetary expenditure items that would be reduced (estimated at around 20 billion rupees) and specific taxes that would be imposed or enhanced, sources said.
The government is expected to point out that reduction in the size of the cabinet was the first step in its attempt to reduce current expenditure. Another proposal under consideration is reduction of the 50 percent increase in salaries of Grades 16 and above officials, announced in the budget, to 25 percent. Critics argue that this is unlikely to make too much of a difference, with only four months remaining in the current fiscal year.
In addition, the government has constituted boards of power distribution companies under power sector reforms, though here too there are concerns over the integrity and competence of selected candidates.
"Our tax revenue collections for the current year were budgeted at 1667 billion rupees and the revised revenue collection target of Rs 1630 billion is premised on the implementation of the levy of special excise duty (SED) and income tax surcharge. In case of failure to implement these additional revenue measures, exclusive of the proposed ''''reformed general sales tax'''' (RGST), that have been tabled in parliament and have yet to be approved, collections would be Rs 1600 billion," officials from the Federal Board of Revenue (FBR) said.
The Finance (Amendment) Act, 2010, envisaging amendments in the Income Tax Ordinance 2001 and Federal Excise Act, 2005, seeking imposition of income tax surcharge and a rise in the special excise duty (SED) rate from one percent to two percent is still pending before the National Assembly.
A saving of Rs 10 billion is proposed from international flood relief assistance of Rs 70 billion for rehabilitation of flood affectees, and Rs 31 billion through imposing flood related taxes, notably a 10 percent flood surcharge and federal excise duty increase from one percent to two percent from March 2011.
The economic managers expressed confidence that these measures would help contain fiscal deficit to around 5.1 percent. An official said that the budget deficit is likely to remain higher than targeted even if all these measures are adopted because of the likely shortfall in foreign inflows attributed to failure to comply with IMF conditions as well as the threat of US aid suspension under the Kerry Lugar bill due to continued detention of Raymond Davis. In addition, the non-materialisation of 500 million dollars euro bonds included while estimating financing of budget deficit would compromise the 5.1 percent ambitious deficit target.
"We don''''t have any choice, and have to take measures to increase revenue and cut expenditure to achieve a sustainable fiscal deficit," said another official. Analysts told Business Recorder that the FBR has no legal authority to change the tax rates, without prior approval of Parliament. The Sales Tax Act 1990, Federal Excise Act 2005, Income Tax Ordinance 2001 and Customs Act 1969 do not permit the tax authorities to increase sales tax or duties without approval from Parliament.
In case the RGST and the Finance Amendment Bill 2010 is not implemented, the only option left with the government is to either issue a Presidential Ordinance or withdraw exemptions granted through the statutory regulatory orders (SROs) with the approval of Ministry of Finance. The Presidential Ordinance is valid for a period of three months.
An Ordinance may increase the rate of special excise duty (SED) from one percent to two percent and other taxation measures where increase in the tax rate is required. Extension of the Presidential Ordinance beyond three months would require the passage of a resolution by the National Assembly or Senate as per 18th Amendment.
Sources further said that the FBR has drafted an alternative plan of taxation measures in case the government and the opposition parities do not develop consensus on the proposed revenue generating package. Under the alternative ''''Plan-B'''', the FBR has proposed an increase in the rate of federal excise duty (FED) on different items. However, this increase in tax rates would also be possible through a Presidential Ordinance for a period of three months and any further extension would require approval from Parliament.