Economy has shown signs of improvement but quick steps are needed to broaden the tax base to benefit from the growth in untaxed sectors, such as agriculture, the country's central bank governor said on Monday. Shahid Kardar, governor of the State Bank of Pakistan, told Reuters in an interview, that he was worried by a "structural shift" of incomes towards the untaxed sectors.
"(With) this shift of incomes away from the tax paying sectors to non-tax paying sectors, the tax-to-GDP ratio is structurally destined to be hovering around lower levels," Kardar said. Pakistan has one of the lowest tax-to-GDP (gross domestic product) ratio in the world, which is currently around 10 percent.
"The structural shift now needs to be addressed in the next budget. All sectors of the economy need to be taxpayers beyond a certain level of income irrespective of the source of income." Kardar, however, said the government realises the importance of increasing its revenue and cutting expenditure, and was moving in the right direction, albeit slowly. Last month, the government said it would slash its expenses by cutting government travel and petrol allowances and a hiring freeze.
It also announced a 15 percent one-time flood surcharge on income tax, a 150 percent increase in special excise duty and ending exemptions of sales tax on fertiliser, pesticides and tractors amongst others. "Some decisions, in terms of taxation measures that have been announced recently, ideally should have come earlier, but nevertheless they have been announced," said Kardar.
The government needs to build upon the temporary tax measures in the next budget and focus on including all sectors in the tax net, along with rationalising its expenditure as those would be more structural and sustainable measures, Kardar said.
BETTER GROWTH PROSPECTS Kardar said inflation, the budget deficit and the availability of credit for the private sector remained a concern. But he said with the large-scale manufacturing sector picking up and a favourable external accounts situation, the country might see a better-than-expected economic growth in the fiscal year 2010/11, which ends on June 30.
"I think at one stage we had been talking about 2.5 percentage points of GDP in real terms. I suspect it's likely to be closer to be 2.8 now," he said. The fiscal deficit, meanwhile, is expected at between 5.3 and 5.5 percent of GDP, though it could be wider if some of the external flows, including grants, don't come in quickly enough, he said.
The failure of the government to completely pass on the impact of higher global oil prices would also hurt revenue, he said. Pakistan raised fuel prices by up to 13 percent last week, but political parties were quick to reject the move that could stir fresh anger due to fears over sharply rising costs of living.
The fragile coalition led by President Asif Ali Zardari halved the increase in petroleum prices in February to mollify a key partner which quit the government in protest over the last fuel price hike in January. That earlier increase was reversed altogether.
RGST STILL ON Kardar, who expected yearly inflation to rise to around 15 percent by June, said he expected the country to remain in an International Monetary Fund (IMF) programme in the foreseeable future to ensure better fiscal management such as increased revenue collection and a cut in expenditure. He also emphasised that a reformed general sales tax programme (RGST) as agreed with the IMF, had not been shelved.
"RGST is not off the table. RGST is something that is very much on the agenda for the next budget," he said. "We are moving in that direction, it may not be good enough for the puritans, I accept that. But I repeat, RGST is not off the table when it comes for the budget for next year. It is very much there and hopefully it will be extended to the services sector as well." The IMF and Pakistan are likely to meet in mid April and continue their discussions.
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