The IMF staff report released Monday revealed that Pakistani authorities have agreed to avoid the practice of issuing new preferential tax treatments or exemptions, and are conscious that the distortions erode the tax base, weaken fiscal discipline, and prevent a level playing field for firms.

The IMF has recommended the reform aimed at simplifying tax laws and regulations, in particular simplification of the corporate income tax and necessary further streamlining of exemptions and preferential rates related to sales tax on goods.

The reform should also create a simpler and more efficient distribution of tax bases between the federal government and provinces. In this context, the staff recommended establishment of a joint working group to provide recommendations on GST harmonization to be approved by the Council of Common Interests (CCI) by end-March 2020.

To build capacity on tax policy matters, a Tax Policy Unit will be established in the Ministry of Finance, it said.

Pakistani authorities have informed the IMF that a plan is under way to establish a new semi-independent national tax authority tasked with tax administration that will facilitate closer coordination between the federal and provincial governments.

To strengthen revenue mobilization and support the medium-term fiscal consolidation objectives, the authorities are advancing various reforms.

In October, the authorities issued licenses for the track-and-trace system for excise on cigarettes (end-September 2019), with a system rollout expected by end-March 2020.

Sales tax refunds are being expedited through the fully-automated sales tax e-refund (FASTER). To address past tax refund arrears and provide some liquidity to businesses, the staff recommended the authorities to use part of the government cash buffer to buy back up to Rs 30 billion of existing promissory notes to exporters that were issued in FY19 and FY20, the report said.

Provinces are meeting their commitments under the program by stepping up efforts to improve tax revenue collection and undertaking prudent spending, resulting in provincial tax revenue increasing by 18 percent YoY in the first quarter.

They also commenced coordination and consultation meetings between provincial sales tax administrations. The groundwork is being laid for tax policy reforms envisaged as part of the FY21 Budget.

Copyright Business Recorder, 2019