The State Bank of Pakistan says that increase in revenue collection is largely due to raising of rates and not due to expansion of base. In its quarterly report released on Friday, SBP says that even the rise in direct tax (Income Tax) can be traced to higher withholding tax rates, eg, increase in collection from mobile phone subscribers has contributed 34 percent to the increase in direct tax collections.
It came from a five percent point rise in the withholding tax rate during the quarter (rate of withholding tax on pre-paid and post-paid customers increased from 10 to 15 percent in the Federal Budget). While the collection performance has been encouraging so far, says SBP, tax receipts still need to grow by 30.3 percent in the remaining part of the year, to meet the full year target. SBP says: "this appears difficult". During last five years, average growth (between October and June) in FBR''''s revenues has been 14.1 percent. SBP says IMF has also flagged the need to avoid a further rise in GST or Income Tax rates to achieve a lower fiscal deficit, and to focus more on expanding the tax base by documenting the economy.
SBP says the swing factor in FY14 fiscal outcome is the disbursement of CSF during the 2nd Quarter of FY14 and the ground work to realise the 3G auction. Another positive for the government is the resolution of legal issues related to the Gas Infrastructure Development Cess (GIDC). Government is expected to collect Rs 125 billion under this head, estimates SBP. The downside risks to the full-year fiscal outcome include: below-target tax collections; re-emergence of the circular debt in the energy sector; higher interest payments in the second half of the fiscal year. On balance therefore, SBP expects the fiscal deficit to lie in the range of six to seven percent of GDP in FY14.
Along with enhancing tax revenues, the government needed to cut down expenditure as part of fiscal consolidation strategy. But ad hoc increment to government employees and in pensions recorded a 16.9 percent growth. Government ability to contain its expenditures, says the report, hinges on the level of subsidies and payments to settle the circular debt.
SBP fears that since the fiscal expenditures in Q1 FY14 were around 30.9 percent of the budget estimate for the year, and progressive spending during the course of the year, the fiscal authorities may find it difficult to contain spending within the annual target.
SBP says provincial fiscal position has improved during the quarter reviewed on account of 12.1 percent improvement in surplus. This improvement, says SBP, was the back of a 50 percent increase in revenue during Q1 FY14 over the same period last year. A major share of this increase came from Punjab due to sales tax collection on services. Rise in expenses in provinces was mainly due to ad hoc rise in salaries and pension. It was offset by a drop in development spending in all provinces, with the exception of Sindh, says the report. SBP report concludes by stating that a rise in domestic interest rates is not likely to boost capital inflows to the domestic bond market. And, in fact it discourages the external inflows to the equity market by negatively impacting the performance of domestic stock market.
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