The International Monetary Fund (IMF) has asked Pakistan to impose income taxes worth around Rs225 billion, while questioning the sustainability of the revenue performance due to a shift in policy to curb imports.
The IMF plan seeks to reduce the number of income tax slabs and withdraw income tax exemptions currently given under the second schedule of the Income Tax Ordinance that also include pensioners, according the government sources.
The Fund has also asked for withdrawal of sales tax exemptions to those whose revenue impact is in addition to Rs225 billion, the sources said, adding that the final decision to accept or reject the demands would be taken during the policy level talks with the IMF set to begin in Washington on October 13.
During four days of the technical talks, the IMF has pressed Pakistan hard to increase the electricity prices on account of annual and quarterly adjustments in tariffs, as it termed the measures to contain circular debt insufficient, the government sources told The Express Tribune.
The demand for increasing taxes was surprising, particularly after the FBR exceeded its first quarter tax collection target by a margin of Rs187 billion, which has positioned it to achieve the annual target of Rs5.829 trillion.
The sources said that the IMF has asked Pakistan to increase the personal income tax rates for the salaried and individuals by scaling down the numbers of tax slabs and also urged the authorities to withdraw the sales tax exemptions. Majority of the salaried individuals were paying taxes, which according to the IMF were below their income levels, the sources said.
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Responding to a question from The Express Tribune whether the IMF had asked for imposing personal income tax, FBR Chairman Dr Mohammad Ashfaq said that “it is an upfront issue and we are discussing it with the IMF”.
When press further whether these tax measures would be taken immediately, the FBR chairman replied that the matter was still under discussion and “our view is that if it needs to be done, it should be done from July next year”.
According to a commitment by Pakistan given in April, the government was supposed to reduce the number of income tax slabs to around five and rationalise the income tax rates for salaried and business individuals from July this year.
However, Finance Minister Shaukat Tarin had then refused to accept this demand. The sources said that the IMF was not convinced with the quality of the FBR tax collection and doubted that the healthy trend would continue due to curbing the imports.
Pakistani authorities projected that despite reducing imports, the annual import bill would still be around $72 billion. The IMF was of the view that the curbs might reduce the bill to $60 billion, they added.
The FBR showed a 44% growth in sales tax collection in the July-September period due to heavy reliance on import taxes. It collected Rs624 billion in sales tax in three months, up Rs190 billion or 80%.
However, almost entire increase came at the import stage, as the domestic sales tax collection remained almost flat. The FBR collected Rs200 billion in domestic general sales tax (GST) compared with Rs198 billion last year, after adjusting for refunds.
The IMF is urging Pakistan to immediately take revenue measures, while the Pakistani authorities are seeking time.
The IMF technical level talks will conclude on Friday (today) and the outstanding issues will now be decided during Finance Minister Shaukat Tarin visit to Washington, where policy-level talks will be conducted between October 13 to 15.
Tarin will leave Pakistan on Monday as finance minister but when he will return on October 24 his status will be reduced to adviser on finance, because the government could not get him elected senator within six months constitutional term.
Tarin had been appointed as ad-hoc Finance Minister for six months as he is not an elected member of the parliament.
Power Sector review
The IMF shared its initial assessment of the power sector that did not paint a good picture, according to people familiar with these negotiations.
The sources said that the IMF asked Pakistan to honour its commitment and increase pending annual tariffs for the month of June and July.
The Fund also asked for implementing the remaining quarterly adjustments after the government increased electricity prices by Rs1.69 per unit last week. The sources said that there was possibility the that in addition to increase in annual base tariff, the government will have to pass on 85 paisa per unit quarterly adjustment somewhere around December-January.
But the Fund was looking for immediate increase in tariffs on account of annual base tariff adjustment. The IMF also got an update on the subsidy rationalisation plan.
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Last month, the National Electric Power Regulatory Authority (Nepra) approved the first part of three-phased subsidy rationalisation plan, envisaging creation of four new tariff slabs and a slight expansion in the definition of lifeline consumers to 100 units per month for gradual reduction of subsidies.
The new slab mechanism would lead in the next and third phase to the imposition of higher electricity rates and surcharges in a gradual manner or subsidy payments to the lowest income groups through the Ehsaas cash cards. The IMF has been informed that the second phase of subsidy withdrawal will be enforced from the next fiscal year.
The sources said that the IMF was also not happy with the performance of the power distribution companies. It argued that the structural plan for Discos did not deliver the desired results and these companies could not disconnect the electricity connection of the defaulters.
The IMF was of the view that the impact of formulation of new board of directors and appointment of chief executive officers were also not producing the results that could stem the losses being incurred by these companies.
The bottom line of the IMF’s assessment was that the pace of the power sector reforms was slow and it was not enough to stem the losses, they added. But the energy ministry officials were of the view that some power distribution companies have shown improvement in curtailing losses and in January 2023 new targets on technical and distribution losses would be given by the Nepra.
The IMF also asked for expediting the work on privatisation of the power sector. In spite of significantly increasing electricity prices, the circular debt has almost doubled within three years to Rs2.28 trillion due to the government’s failure to stem systemic losses, an energy ministry report showed.
When the Pakistan Tehreek-e-Insaf (PTI) came to power, the circular debt was Rs1.148 trillion that has doubled within three years. The PTI had promised to bring the circular debt to zero by December 2020 but the numbers showed that there was an increase in both the flow and stock of the circular debt compared with June 2018.
The power distribution companies’ uncontrolled losses added another Rs67 billion to the circular debt – up by 59% over the preceding year. This shows that the PTI government has failed in bringing improvement in governance of these power distribution companies, nor it could privatised them.
The IMF was informed that the issues of K-Electric and Azad Jammu and Kashmir electricity tariffs will be addressed by January next year. This will help reduce the circular debt by Rs170 billion.