The Interna-tional Monetary Fund (IMF) has said that the preparations for a wholesale tax policy reform envisaged as part of the fiscal year (2020-21) budget need to start early to ensure timely implementation.
This has been mentioned in the IMF's "First Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criteria" issued here on Monday.
The IMF said the fiscal reforms to support revenue mobilization and medium-term fiscal consolidation are necessary to place debt on a downward path. First quarter (2019-20) domestic tax revenue growth rates were strong, it said.
It said the focus going forward needs to remain on implementing high-quality tax measures, including the elimination of tax exemptions and loopholes. The introduction of new exemptions would undermine base-broadening efforts and lead to a less equitable distribution of the adjustment.
With 34 percent nominal growth compared to Q1 FY 2019, total revenue over-performed programmed projections by 0.2 percent of GDP, the report said.
The report said that the tax revenue performance was driven by three main factors: (i) tax policy measures; (ii) import developments; and (iii) one-off events. On account of tax policy measures implemented at the beginning of FY 2020, the domestic component of tax revenue collected by the FBR recorded a robust growth of 25 percent y-o-y. Growth was particularly strong in sales and direct taxes, where most measures were targeted (including removal of tax exemptions, zero and reduced rates).
At the same time, taxes collected at the import stage were impacted by substantial import compression, with a decline in all revenue categories except of sales tax. Given that more than 40 percent of total tax revenue in Pakistan is collected at the import stage, this shortfall had a notable impact on overall tax revenue performance-0.2 percent of GDP lower than programmed.
One-off tax revenue inflows (around Rs 30 billion) also contributed to the overall result and are related to tax advances and tax amnesty receipts that were not collected at the end of FY 2019 but were realized in Q1 FY 2020 instead. Tax revenues collected at provincial level were also strong, increasing by 18 percent y-o-y.
Tax revenue is now expected to be 0.5 percent of GDP lower than originally expected: while domestic collection is envisaged to remain strong, growing by over 25 percent y-o-y over FY 2020, growth in trade-related tax revenues is expected to remain subdued as declining imports continue to weigh on collections.
On the other hand, non-tax revenue is expected to be 0.8 percent of GDP higher than originally expected due to some one-off revenues (originally envisaged in FY 2019) and higher central bank profits, more than offsetting the shortfall in tax revenue.
Primary spending is on track, although some budgetary reallocations are envisaged to spur growth, including greater development spending and PRs 10 billion to facilitate subsidized financing to boost the export sector. Staff stressed that this support must take place within the agreed budgetary envelope so as to not jeopardize the achievement of targets, it added.
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