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LOW Source:
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Pakistan Cases
0.85% positivity

ISLAMABAD: The mammoth issues of country's power sector will remain unresolved until the Power Division corrects the structural issues.

Speaking as a guest in "Paisa Bolta Hai" with Anjum Ibrahim on AAJ News, here on Sunday, energy expert and former managing director PEPCO Tahir Basharat Cheema said that the outstanding dues of K-Electric, Azad Kashmir, Balochistan tubewells, provincial entities, mismanagement, and governance issues had resulted in the growing circular debt.

The International Monetary Fund (IMF) for the last 20 years has been suggesting to the successive governments to keep the house in order and avoid losses, which is a reasonable demand of the Fund.

In order to balance the books, they proposed to raise the electricity tariffs for increasing revenue.

The structural faults in the system were never corrected in the past and the only option now left is to raise the electricity tariffs.

There are indications for raising further tariffs to reduce losses and tackle the issue of circular debt.

In circular debt there are many things, which cannot be corrected by raising tariffs.

For instance, there are dues of Rs168 billion outstanding against the government of Azad Jammu and Kashmir.

The AJK government is saying that that they should have special electricity tariff as promised at the time of the construction of Mangla dam.

There is progress on the issue, but it is not fully resolved, Cheema maintained.

There is another issue of tubewells of Balochistan where an amount of Rs250-300 billion is outstanding. Every year, there is an increase of Rs40 billion in it.

He said that the K-Electric had to pay an amount of Rs238 billion, which was increasing every year.

The KE has its own point of view that the Sindh government and the Karachi water sewerage board is not making payment, they cannot make payments to the NTDC. The Karachi Water and Sewerage Board do not collect bills from their consumers, and they do not pay the same to the K-electric.

On the other hand, a new multi-billion dollar project of K-4 is coming for supply of water to Karachi, but it is not clear how the payment system would work for this project.

He said that the Ministry of Energy is unable to correct the affairs in the absence of professionals and lack of expertise involving governance and management issues.

Keeping in view all these factors, the tariff is expected to be increased.

Cheema said that one of Pakistan's biggest taxpayers were electricity utility companies having significant tax components.

The interesting aspect is that the tax is being deducted on an "accrual basis".

The tax is being deducted at the time of issuance of bills and deposited to the FBR, despite the fact that the tax has been recovered or not.

The energy expert stated that the work has been started on the Muhammad Ali commission's inquiry report on Independent Power Producers (IPPs).

He said that the question arises whether or not the government should start negotiations with forthcoming IPPs in the next seven years.

Cheema added that the government is very serious about resolving the issues of the power sector, but the issues have not been resolved yet.

International tax expert Dr Ikramul Haq said that the current expenditure needs to be reduced along with the efforts of raising revenue collection. The basic tax structure has not been changed despite spending millions in past foreign funded tax administration reform programs. The entire tax structure needs to be seen holistically.

Out of three million taxpayers in the Active Taxpayer's List (ATL), around 1.5 million are nil-filers to avoid double payment of withholding taxes. Similarly, only 2,400 taxpayers fall under the highest slab of 6 million. If the tax rates are further raised, the FBR will face serious enforcement issues and business community would strongly react to higher tax rates. On the other hand, the privileged class has been given concessions in perquisites and pensions etc.

He stated that the iniquitous prescription of the IMF calling for more taxes, costly energy and high interest rates would not solve our problems.

The coalition federal and provincial governments of the Pakistan Tehreek-e-Insaf (PTI) in three provinces (asked to support the Centre by showing surplus) have failed to overcome fiscal deficit, and resultantly, the debt burden and the debt servicing are creating a daunting challenge coupled with an alarming debt-to-GDP ratio of 88 percent.

He stated that the fiscal deficit was 8.1 percent of the GDP in the last fiscal year against the target of seven percent.

In the first six months of the current fiscal year, the fiscal deficit reached Rs1.4 trillion.

The total expenditure of 10 percent of GDP (Rs4.9 trillion) against total revenue collection of 7.4 percent of GDP [taxes only 5.4 percent] is more than distressing. There is no will to end wasteful expenses and reduce tax expenditure that at federal level in two years was Rs2.1 trillion.

Dr Ikram stated during the first half of the current fiscal year from July to December 2020 out of total tax revenue collected by Federal Board of Revenue (FBR) of Rs2.2 trillion, Rs1,280 billion was transferred to the provinces under the 7th National Finance Commission (NFC) Award.

The net amount available with the federal government after including non-tax revenues of Rs861.6 billion, was Rs1.79 trillion that could not even meet the two major heads, debt servicing (Rs1,475 billion) and defence (Rs486.5 billion). All the facts and figures relating to the factor that even Rs171 billion were borrowed for defence needs.

It is also important to note that the debt servicing relief of US $2.7 billion (equivalent to one percent of GDP) provided to Pakistan under the G-20’s Debt Servicing Suspension Initiative (deferred for one year) has helped create expenditure space for Covid-related spending.

One of the reasons for the unprecedented borrowing by the PTI government is huge wasteful spending on inefficient state machinery and loss-bearing public sector enterprises.

On the revenue side, the only viable option is to replace the existing high rate and complex tax system, with low-rate taxes on broader base that is simple, pragmatic, and growth-oriented, the international tax expert suggested.

Copyright Business Recorder, 2021

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