The International Monetary Fund (IMF) has observed that Pakistan has responded positively to the Fund''s advice, but implementation of advice on some structural reforms, particularly tax reforms, is slow due to various considerations, including political constraints.
According to the IMF country report, "Pakistan: 2009 Article-IV consultation and First Review under the stand by agreement-Staff Report released on Tuesday, Pakistan would broaden the tax base across all sectors of the economy by reducing tax exemptions and zero-rating. The introduction of a "carbon tax" or a "gross asset tax", are also under discussion.
The IMF noted that the tax revenue-to-GDP ratio was low by international standards, and recommended to press ahead with reforms to increase revenue and enable a reduction in the fiscal deficit while allowing for higher spending on infrastructure and poverty alleviation. The authorities have generally responded positively to the Fund''s advice, but the implementation of advice on some structural reforms had been slow, said the report.
The IMF further said that Pakistani authorities had generally agreed with the Fund advice, but the implementation had been slow. In early 2008, the authorities started to adopt some of the policies recommended by the Fund to address Pakistan''s macroeconomic imbalances, including monetary tightening and a fiscal consolidation, particularly by reducing energy subsidies and capital spending. But, various considerations, including political constraints, slowed their implementation, especially on tax reforms.
In the fall of 2008, the authorities developed a home-grown adjustment programme, very much in line with Fund policy advice. The IMF further said that additional revenue from the petroleum development levy (PDL) largely compensated the shortfall in revenue from direct taxes, excises, and the sales tax on imports collected by the Federal Board of Revenue (FBR).
The authorities adopted a tax policy and tax administration action plan, which envisages the integration of the income tax and sales tax departments and the replacement of the current general sales tax with a broad-based Value-Added Tax (VAT).
A technical assistance mission from the Fund (scheduled for April) will help with the design of the VAT law, the revisions in the income tax legislation, and the possible introduction of a carbon tax. In the near term, the fiscal policy will be challenged by the shortfalls of revenue and external financing. The slowdown in economic activity is affecting the revenue base and is likely to result in a shortfall of the FBR collections relative to the original 2008-09 programme target.
The authorities indicated that they intended to limit this shortfall through administrative measures, including tax audits; additional revenues from the PDL and possibly the introduction of a carbon tax. To increase the revenue-to-GDP ratio by 0.6 percentage points in 2009-10, the authorities are also planning to broaden the tax base across all sectors of the economy, including by reducing the scope of tax exemptions and zero-rating.
However, the timing of these reforms will depend on the tax administration''s capacity to process refunds. Other revenue measures, such as the introduction of a carbon tax or a gross asset tax, are under discussion, but are yet to be approved, the IMF added. It is worth mentioning that the statement of the IMF staff representative in Pakistan has said that the tax revenue collections by the FBR slowed down in January-February, but the resulting revenue shortfall was largely offset by collections of the PDL.