Higher rates resulted in less tax revenue, IMF told

ISLAMABAD: Pakistan’s tax authorities have strongly presented their case before the visiting IMF Mission and argued that the increased tax rates for different sectors of the economy resulted in shrinking revenue collection.

However, both sides including the Ministry of Finance and the visiting Fund Mission might explore an option to hike the Petroleum Levy (PL) and jack up the rate from existing Rs70 to Rs80 per liter under the law. Currently, the government is charging PL at rate of Rs60 per liter but in the wake of revenue slippages, hiking of PL could be one of the options.

The IMF also decided to convene all four provinces on coming Thursday and Friday for reviewing the latest Fiscal Pact signed by the Center and provinces. The IMF might raise a question that why the biggest provinces especially Punjab failed to generate the desired revenue surplus in the first quarter.

According to the Ministry of Finance announcement on Tuesday, the IMF visiting mission visited the Ministry of Finance (Q Block) Pak Secretariat and held a meeting with Minister for Finance Mohammad Aurangzeb.

Minister of State for Finance Ali Pervez Malik, Secretary Finance Imdad Ullah Bosal, governor SBP, chairman FBR, and other high-ups participated in the meeting. It was just a “meet and greet” meeting that lasted for almost 30 minutes in which the minister for Finance extended a welcome to the IMF Mission Chief Nathan Porter and other team members. The IMF’s Resident Chief Esther Perez Ruiz also participated in the discussions as it would be her last few meeting before departing from Pakistan after completing her designated term. The IMF’s new resident chief will assume charge soon.

The sources say that the FBR is making last ditch efforts to avoid further increasing the tax rates especially withholding taxes on imports including raw material and machinery and jacking up FED on aerated and sugary drinks.

If the PL is increased further it will help to discourage consumption of fuel which is being imported into the country by utilizing foreign exchange reserves. The government has fetched Rs261 billion through PL during the first quarter against IMF estimates of Rs1066 billion for the whole current fiscal year.

The IMF mission led by Nathan Porter preferred to listen more during the initial days. The IMF is all set to discuss external financing gap faced by Pakistan during the current fiscal year on Wednesday (today).

The IMF will come up with its prescription in the wake of expected revenue shortfall of Rs321 billion in first half (July-Dec) and another Rs300 billion in the second half (Jan-June) period totalling shortfall of the FBR might exceed Rs600 billion for the current fiscal year.

The FBR Chairman Rashid Mehmood Langrial presented the case strongly and argued that the tax machinery fetched the additional Rs11 billion from retailers, wholesalers and distributors during the first three months of the current fiscal year along with Income Tax returns under section 236G and 236H of Income Tax Law. The retailer scheme known as Tajir Dost Scheme (TDS) was just an instrument and not the objective as the FBR established a deterrence and 0.4 million retailers/wholesalers and distributors came into tax net during the current fiscal year. The FBR further argued that there were some wrong revenue projections incorporated in the last budget for 2024-25 and cited an example that the IMF asked for imposition of Federal Excise Duty (FED) on acetate tow at rate of Rs44,000 for tobacco industry. The IMF has estimated that it will yield revenues of Rs125 billion during the current fiscal year. However, the FBR has fetched only Rs240 million during the first quarter of the current fiscal year. So wrong estimation caused revenue losses, said the official.

On property, the FBR high-ups argued that the transaction of the properties were not occurring so the FBR could fetch only Rs6 to 7 billion because no one was doing registry after witnessing massive hikes in tax rates of withholding taxes under 236C and 236K on seller and purchaser of plots as well as increased rates on gain tax.

Thirdly, the FBR could not fetch the desired tax under Tajir Dost Scheme but the increased filers to the tune of 0.4 million retailers/wholesalers and distributors contributed Rs11 billion additional tax along with filed returns so far. The FBR’s argument was based upon convincing the IMF for reducing the tax rates and broadening of tax base and the chairman FBR went on saying that if rates are reduced the collection can go up from tobacco, properties and retailers. The inability of the provinces to generate the desired revenue surplus also became a bone of contentions as Punjab did not show the desired results. When contacted to Advisor to KP government on Finance Muzammil Aslam on Tuesday, he said that they generated the revenue surplus but Punjab government could not perform up to the agreed level of the IMF so far.