4-5 percentage points: Additional GDP in additional tax revenues could be achieved

Interna-tional Monetary Fund (IMF) and Pakistan have agreed that additional 4-5 percentage points of gross domestic product (GDP) in additional tax revenues could be achieved by the end of the IMF programme, bringing Pakistan tax ratio in line with peer emerging markets. According to the IMF Staff Report on Extended Fund Facility (EFF) for Pakistan, a multi-year effort will aim to revamp tax policy and tax administration. With less than 1.5 million taxpayers filing tax returns and tax compliance generally very low, tax policy and tax administration measures will center on broadening the tax base while maintaining a low tax rate, aiming to ensure progressivity of the tax system.
Key measures included tax policy reforms. In the near term, measures include removing exemptions and preferential treatment to reduce distortions in the tax system and broaden the tax base. These include the removal of general sales tax (GST) exemptions and preferential rates, except for basic food and medicines, a measure that will significantly improve revenues.
Greater inter-provincial harmonisation and coordination of GST will also simplify filing procedures and increase compliance. Overtime, the authorities are committed to taking steps to transform the GST into a broad-based VAT and making the personal income tax (PIT) fairer and more progressive by raising the upper-end of the PIT structure and consider eliminating PIT tax credits and deductions for the higher income brackets. In addition, other tax policy measures included further strengthening taxation on real estate and on agricultural turnover or income by provinces; ensuring equivalent taxation of all sources of income and eliminating distortionary withholding taxes, it said.
The report said that the comprehensive fiscal reforms are critical to ensure fiscal sustainability. Adoption of the FY 2020 budget based on high-quality revenue measures is an important step in the right direction. Thereafter, reducing fiscal and quasi-fiscal deficits will require a multi-year revenue mobilisation strategy, and a strategy for cost recovery in energy and SOEs. The tax base needs to be broadened through well-balanced and equitable measures, including by removing privileges, tax exemptions, and special concessions. Higher revenue will not only allow public deficit and debt to fall, but will also open space for higher social and infrastructure spending that are critical for Pakistan's development. Lower public sector deficits will also permit more credit to the private sector for investment.
Despite the adoption of two supplementary budgets, the overall fiscal deficit (excluding grants) is expected to widen to over 7 percent of GDP against a budget target of 5.1 percent in FY 2018-19. This deterioration is largely driven by a significant revenue shortfall, equivalent to 1.4 percent of GDP relative to the budget target, and is mainly the result of the three-fold increase of personal income tax thresholds, stalled collection of withholding taxes on mobile services due to court decisions, losses from Petroleum Development Levy (PDL) and sales tax on petroleum products, and weaker domestic demand.
To rebalance inter-governmental relationships, the government has informed the IMF that in the context of the ongoing National Finance Commission (NFC), it has been engaged with provinces with a view to making progress on the following measures: passing on additional spending responsibilities from the federal to provincial governments, including additional contributions for higher education, health, social protection, agricultural subsidies, and regional public infrastructure investment; and creating a jointly funded contingency fund for economic shocks and natural disasters to reduce federal/provincial structural fiscal imbalances.
The provinces will take steps to increase own tax-collection efforts in sales tax on services, property tax, and agricultural income tax, and harmonise their tax system to eliminate fragmentation and reducing the scope of the divisible pool in the context of the ongoing NFC award and reforming the revenue sharing formula to improve inter-provincial equity for better horizontal equity, said the report.