The fiscal deficit may go to 6 percent of the GDP for the current fiscal year due to expected shortfall in revenue collection of the Federal Board of Revenue and possible failure by provinces to give 0.7 percent surplus budget, it is learnt.
Sources said the issues of farm tax, fiscal deficit and the FBR capacity to collect revenue were discussed in detail during the meeting of the Economic Advisory Council (EAC) here on Thursday. The EAC was of the view that it would be unlikely for the ministry of finance to achieve 5.5 percent fiscal deficit as it may not be possible for the provinces to give estimated 0.7 percent budget surplus in the prevailing economic situation and revenue collection may not exceed Rs 1530 to Rs 1535 billion in the current fiscal year against the revised target of Rs 1588 billion.
The EAC observed that Rs 1588 billion revised revenue target seems very ambitious and might not be achieved by the FBR. Analysts said that 6 percent fiscal deficit means increase in domestic borrowing for deficit financing would spike inflation that would burden the common man. The expansion in monetary policy to tame inflation would hurt the private sector, they added.
Sources said the EAC suggested that the government must not go for more taxation in the current fiscal year and take administrative as well as enforcement measures to increase revenue collection for the current fiscal year to contain the fiscal deficit at a reasonable level. The government was asked to take taxation measures in the next budget and also bring farm income into the tax net.
The meeting was held under the chairmanship of Dr Abdul Hafeez Shaikh, Minister for Finance and Revenue. Those who attended the meeting included Dr Hafiz A Pasha (Convenor EAC), former Finance Minister Shaukat Tarin, Deputy Chairman, Planning Commission, Minister of State for Finance and Economic Affairs, Governor, State Bank of Pakistan, Asrar Rauf Additional Secretary Revenue Division, senior officials, and members of the EAC including Dr Ijaz Nabi, Jahangir Khan Tareen, Salim Raza, Farooq Rahmatullah, Ali Habib, Nasim Beg, Shahnaz Wazir Ali, Farid Rehman, Hassan Ali Chaniho and Arshad Zuberi.
During the meeting, it was pointed out that the provinces are already empowered to collect tax from agricultural sector and have the authority to issue notices to the potential persons having agricultural land and liable to pay the tax. On the other hand, the federal government is empowered to collect tax on agri-trading as admissible under the law. This was also suggested that provincial finance ministers should also be included in the EAC for broader ownership of the budgetary decisions.
Member of the EAC, Jahangir Khan Tareen said that the FBR should conduct a detailed exercise for exploring the actual potential of taxation of the agricultural sector. For this purpose, he said the FBR could obtain the list of agriculturists having maximum holding of agricultural land from the respective Provincial Board of Revenue. The FBR can obtain details of such persons having land holdings to ascertain whether taxation of agriculture sector would be a liable option or not. The FBR should also compile lists of big farms across the country to ascertain the actual number of big farm owners liable to pay tax.
Some members of the EAC wanted firm assurance from the government that their recommendations would be incorporated in the budget 2011-12 and the exercise of previous year would not be repeated. A member said though the EAC was involved in the pre-budget exercise last year but its recommendations were not made part of the final budget document.
Meanwhile, a statement issued by the finance ministry said the finance secretary presented a detailed overview of the economic situation, including the performance of key sectors of the economy and the upcoming budget for FY12. The FBR gave a detailed briefing on the revenue collection and highlighted the recent measures undertaken to achieve the revenue target.
The presentation also outlined an enforcement plan, risk based audit, broadening of tax base and successful implementation of the fully automated refund system. The Planning Commission presented the government's new growth strategy based on improving productivity, governance and market reforms, urban management, connectivity and youth empowerment.
The EAC discussed the following important proposals; (i) Giving impetus to public sector enterprises (PSEs) reform through creation of a holding company of a transitional nature to undertake restructuring of the eight State Owned Entities (SOEs) under the reform programme and to also include several others in its ambit. The holding company to be led by a credible board of directors; (ii) EAC to be closely involved in the budget making process; (iii) EAC discussed the idea of taxing of all incomes irrespective of the source of origin including agriculture and service sector; (iv) Following the 18th Amendment, greater involvement of the provincial governments in policy making.
The EAC to interact with all the stakeholders; (v) The Austerity Plan and the Governance Plan approved by the EAC and the Cabinet should be implemented in letter and spirit; (vi) Reform of the Planning Commission for strengthening its role in the planning process; (vii) it was decided that the Planning Commission will chart a framework operationalise the conceptual framework of growth strategy for the EAC and subsequent implementation by the government; (viii) EAC set up working groups to formulate recommendations in key areas such as governance, energy, trade, taxation, capital markets, banking and agriculture among others; (ix) It was decided that the EAC would meet more frequently and the next meeting will be held before the end of April 2011 to finalise proposals for the budget.