ISLAMABAD: The International Monetary Fund (IMF) and the government have developed differences over the proposed value added tax (VAT), raising fears not only of the fiscal deficit surging during the current and next year but also about the completion of a $11.3 billion standby arrangement programme.
According to sources, the IMF estimates that the VAT will increase the country’s revenue by 0.8 per cent of the GDP next year, but the finance ministry fears that the collection will drop by Rs35-45 billion because tax collection authorities are not fully prepared to take full benefit of the new measures.
Pakistan has so far drawn about $6.5 billion of the $11.3 billion standby programme which should be completed by December.
The sources said that besides the fact that the taxpayers not been sufficiently educated about the new tax and its benefits, the tax collection authorities were not fully geared to meet the challenge because of their lack of understanding of the new measures and an ongoing tug of war among various occupational groups of the taxation set-up after the creation of a new revenue service.
They said a trust deficit between Pakistan and the IMF had widened over recent days, leading the government to reconsider the proposal to increase electricity tariff by over six per cent in April as agreed with multilateral creditors.
The IMF has also delayed approval of its next $1.2 billion tranche of the programme which was scheduled to be released during the last week of the current month. A decision about increasing the power tariff has to be taken before March 31.
However, finance ministry officials are hopeful that the country will be able to complete IMF’s current programme and possibly graduate to the next programme, notwithstanding current difficulties.
The sources said that the government would need additional revenue to meet current expenditure in view of a rising debt burden and continued higher expenses on security.
The pressure on the fiscal position would build further if the VAT did not yield revenue as forecast by the IMF, they said.
As a result, the government will either have to take additional revenue measures in a difficult political environment or increase fiscal deficit and let inflation rise.
The finance ministry had told the IMF that the authorities did not have enough time to disseminate information about VAT among taxpayers and that the reform programme could not be expected to yield desired results with a preparation of six months or a year, the sources said.
However, the IMF said the government had been working on the VAT mode since 1999.
The sources said the IMF believed that if the government was allowed a relaxation in introducing VAT this year, the move would become even more difficult next year because of political pressures as the next general elections would be nearer.
It was against this background that the IMF delayed the disbursement of the fifth tranche till a VAT legislation was introduced in all the provincial assemblies, they said.
The pressure will be on new Finance Adviser Dr Abdul Hafeez Shaikh to go ahead with the scheme of things already announced by his predecessor Shaukat Tarin and face the political repercussions. “The introduction of VAT would take place now or never,” an official said.
The government and the IMF had agreed last month to increase the target of fiscal deficit to 5.1 per cent from 4.9 per cent.
The sources said that if the government did not increase electricity tariff by six per cent, the deficit would exceed 5.5 per cent of the Gross Domestic Product by the end of the year.
The deficit target for the first half of the current financial year was missed by a wide margin mainly because of higher security expenditure and subsidies.
The State Bank has also warned about uncertainty caused by a weak fiscal position that has taken its toll on the Public Sector Development Programme and people’s income levels.
Revenue collection has remained significantly short of targets, although the loss has been partially offset by increased windfall on oil imports and better sales tax collection on petroleum products and electricity.
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