The monthly Economic Update and Outlook was uploaded on the Finance Division website on 28 November 2024 with the tax collection data for the month not included.
This is in spite of credible reports that appeared three days later on 2 November citing Federal Board of Revenue (FBR) projection of a shortfall of 321 billion rupees during the first six months’ (July-December 2024) from what was budgeted and agreed with the International Monetary Fund (IMF) – a report that has not been refuted by the Board to this day.
The July-October shortfall was 103 billion rupees therefore the shortfall projection for November and December is as high as 218 billion rupees or in other words the shortfall during November and December would be higher by 212 percent compared to the first four months of the current year.
There is a widespread perception in the country that this shortfall was one of the reasons for the International Monetary Fund (IMF) mission’s arrival on 11 November for five days. This was denied by Julie Kozack, Director of the Communications Department, IMF, on 21 November when she was specifically asked the reason for the visit: “why there was a staff visit at this point, under Pakistan’s EFF, the reviews are only taking place semi-annually. So that’s twice a year. In some cases, we have programs where reviews take place quarterly.
In Pakistan’s case, it’s semi-annual. And it’s very customary to have a short staff visit in between those two semi-annual review missions. So, this is a standard procedure.”
Be that as it may, the short press statement uploaded on the Fund website on 15 November, the usual practice on the last day of a mission, lends some credence to the perception that one of the reasons for the mission may have been the revenue shortfall: “we agreed with the need to continue prudent fiscal and monetary policies, revenue mobilization from untapped tax bases, while transferring greater social and development responsibilities to provinces.”
This concise sentence is seen by many as Fund concerns on three counts: (i) revenue mobilization from untapped tax bases, a concern based on the failure of the government to implement the Tajir Dost Scheme, launched in March this year, and the recent capitulation by FBR on all counts to Tajir demands; (ii) the Punjab government’s 630 billion rupee budget surplus pledge for the fiscal year, which necessitated a readjustment of the Ministry of Finance books to show a 40 billion rupee Punjab surplus on 14 November that has fuelled scepticism on the amended amount; and perhaps as a quid pro quo the Punjab assembly’s passage of the Agriculture Income tax amendment bill on 15 November, amid strong opposition from the Pakistan Peoples’ Party, a bill which was to be passed by January 2025 under the agreement with the IMF and implemented from 1 July next year; and (iii) the federal government’s demand for provincial support to the Benazir Income Support programme or transferring greater social responsibilities to the provinces remains unimplemented to date.
Cries of an imminent mini-budget announcement are increasingly being voiced by the government’s detractors though the new terminology is implementation of contingency measures that the country’s economic team leaders – Muhammad Aurengzeb, Minister for Finance, and Jameel Ahmed, Governor State Bank of Pakistan – agreed to implement when the staff level agreement was reached and announced on 12 July 2024.
The contingency measures agreed are contained in the memorandum of economic and financial policies as follows: “should the 3-month rolling average revenue collection fall short of the projected target by 1 percent, in consultation with IMF staff, we will evaluate the adoption of one or more of the following contingency measures: (i) increase advance income tax on import of machinery by 1 percentage point, expected collection of PRs 2 billion per month; (ii) increase advance income tax on import of raw materials by industrial undertakings by 1 percentage point, expected collection of PRs 3.5 billion per month; (iii) increase advance income tax on import of raw materials by commercial importers by 1 percentage point, expected collection of PRs 1 billion per month; (iv) increase withholding tax on supplies by 1 percentage, expected collection of PRs 1 billion per month; (v) increase withholding tax on services by 1 percentage point, expected collection of PRs 0.5 billion per month; (vi) increase withholding tax on contracts by 1 percentage point, expected collection of PRs 0.5 billion per month; and (vii) increase FED on aerated and sugary drinks by 5 percentage point, expected collection PRs 2.3 billion per month.”
July-November FBR provisional collections were 4,295 billion rupees against the target of 4,639 billion rupees set and agreed with the IMF – or a shortfall of 344 billion rupees. For the same period last year FBR had collected 3,483 billion rupees against the target of 3,450 billion rupees, exceeding the target by 34 billion rupees while the collection for the same period 2022-23 was 2,688 billion rupees.
Two observations are critical: (i) in percentage terms the July-November figure for the current year against the same period last year is an increase of 23.3 percent, an increase which domestic economists had argued was doable albeit would reduce the quality of life of the general public unless structural changes were implemented in the tax structure - from existing reliance on indirect taxes whose incidence on the poor is greater than on the rich - to direct taxes, rather than the 33 percent target that was set; and (ii) the target for 2023-24 was met even though it constituted 29 percent increase mainly because the damage done to the economy during the finance portfolio held by Ishaq Dar (October 2022 till his policies were overruled by the Prime Minister and the Stand By Arrangement agreed with the IMF during the last week of June 2023) led to negative 0.17 percent growth rate which, in turn, had a negative impact on tax collections.
To conclude, there is nothing to-date to suggest that structural reforms have been implemented, which remains the need of the hour. And that needs to change not only to meet IMF conditions but more importantly to convince the general public that the source of tax collections is not the common man, as the heavy reliance on indirect taxes suggests, but the rich.
Copyright Business Recorder, 2024
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